Rekor Systems, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS REKOR SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share amounts) (Unaudited) September 30, 2021 December 31, 2020 ASSETS Current assets Cash and cash equivalents $ 35,102 $ 20,595 Restricted cash and cash equivalents 1,063 412 Accounts receivable, net 2,434 1,038 Inventory 1,822 1,264 Note receivable, current portion 340 340 Other current assets, net 2,156 469 Current assets of discontinued operations 1 2 Total current assets 42,918 24,120 Long-term assets Property and equipment, net 8,614 1,047 Right-of-use lease assets, net 6,256 426 Goodwill 49,860 6,336 Intangible assets, net 22,768 7,038 Investments in unconsolidated companies - 75 Note receivable, long-term 1,105 1,360 SAFE investment 1,000 - Other long-term assets 127 - Total long-term assets 89,730 16,282 Total assets $ 132,648 $ 40,402 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 6,492 $ 1,772 Notes payable, current portion 994 - Loan payable, current portion 911 517 Lease liability, short-term 101 253 Contract liabilities 2,738 1,126 Other current liabilities 3,478 2,126 Current liabilities of discontinued operations 129 124 Total current liabilities 14,843 5,918 Long-term Liabilities Notes payable, long-term - 980 Loan payable, long-term 46 469 Lease liability, long-term 9,994 188 Contract liabilities, long-term 978 958 Deferred tax liability, long-term 34 24 Long-term liabilities of discontinued operations - 5 Total long-term liabilities 11,052 2,624 Total liabilities 25,895 8,542 Series A Cumulative Convertible Redeemable Preferred stock, $ 0.0001 par value; authorized: 505,000 shares authorized at September 30, 2021 and December 31, 2020; issued and outstanding; 0 and 502,327 shares issued and outstanding at September 30, 2021 and December 31, 2020 - 6,669 Commitments and contingencies Stockholders' equity Common stock, $ 0.0001 par value; authorized; 100,000,000 shares; issued: 43,948,281 , shares at September 30, 2021 and 33,013,271 at December 31, 2020; outstanding: 43,967,642 shares at September 30, 2021 and 33,013,271 at December 31, 2020 4 3 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, 2021 and December 31, 2020, respectively - - Series B Cumulative Convertible Preferred stock, 0.0001 par value; authorized: 240,861 shares authorized at September 30, 2021 and December 31, 2020; issued and outstanding; 0 and 240,861 shares issued and outstanding at September 30, 2021 and December 31, 2020 - - Treasury stock, 19,361 and 0 shares as of September 30, 2021 and December 31, 2020, respectively ( 319 ) - Additional paid-in capital 169,944 68,238 Accumulated other comprehensive income 6 - Accumulated deficit ( 62,882 ) ( 43,050 ) Total stockholders equity 106,753 25,191 Total liabilities and stockholders equity $ 132,648 $ 40,402 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share amounts) (Unaudited) Three Months ended September 30, Nine Months ended September 30, 2021 2020 2021 2020 Revenue $ 2,615 $ 2,126 $ 11,105 $ 6,399 Cost of revenue, excluding depreciation and amortization 1,402 979 4,705 2,745 Operating expenses: General and administrative expenses 6,813 2,676 16,094 7,518 Selling and marketing expenses 1,125 560 3,044 1,356 Research and development expenses 2,000 781 4,741 2,143 Depreciation and amortization 930 497 2,169 1,386 Operating expenses 10,868 4,514 26,048 12,403 Loss from operations ( 9,655 ) ( 3,367 ) ( 19,648 ) ( 8,749 ) Other income (expense): Loss on extinguishment of debt - ( 3,081 ) - ( 3,281 ) Interest expense ( 21 ) ( 218 ) ( 72 ) ( 2,468 ) Gain on the sale of business - - - 3,631 Other income 66 6 103 27 Total other income (expense) 45 ( 3,293 ) 31 ( 2,091 ) Loss before income taxes ( 9,610 ) ( 6,660 ) ( 19,617 ) ( 10,840 ) Income tax provision ( 3 ) ( 7 ) ( 10 ) ( 20 ) Equity in loss of investee - - ( 150 ) - Net loss from continuing operations ( 9,613 ) ( 6,667 ) ( 19,777 ) ( 10,860 ) Net loss from discontinued operations - ( 2 ) ( 4 ) ( 215 ) Net loss ( 9,613 ) ( 6,669 ) ( 19,781 ) ( 11,075 ) Comprehensive loss: Net loss from continuing operations ( 9,613 ) ( 6,667 ) ( 19,777 ) ( 10,860 ) Change in unrealized gain on short-term investments 3 - 6 - Total comprehensive loss from continuing operations ( 9,610 ) ( 6,667 ) ( 19,771 ) ( 10,860 ) Total comprehensive loss $ ( 9,610 ) $ ( 6,669 ) $ ( 19,775 ) $ ( 11,075 ) Loss per common share from continuing operations - basic and diluted ( 0.23 ) ( 0.26 ) ( 0.52 ) ( 0.52 ) Loss per common share discontinued operations - basic and diluted 0.00 ( 0.00 ) ( 0.00 ) ( 0.01 ) Loss per common share - basic and diluted $ ( 0.23 ) $ ( 0.26 ) $ ( 0.52 ) $ ( 0.53 ) Weighted average shares outstanding Basic and diluted 41,938,863 26,907,069 38,357,167 22,781,807 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) (Dollars in thousands, except share amounts) (Unaudited) Shares of Common Stock Common Stock Shares of Treasury Stock Treasury Stock at Cost Shares of Series B Preferred Stock Series B Preferred Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total Stockholders Equity (Deficit) Balance as of June 30, 2021 41,012,766 $ 4 ( 19,361 ) $ ( 319 ) - $ - $ 148,754 $ 3 $ ( 53,269 ) $ 95,173 Stock-based compensation - - - - - - 694 - - 694 Exercise of warrants related to series A preferred stock 1,213 - - - - - 1 - - 1 Shares issued as part of the Waycare Acquisition 2,784,474 - - - - - 20,287 - - 20,287 Issuance upon exercise of stock options 130,380 - - - - - 208 - - 208 Issuance upon vesting of restricted stock units 19,448 - - - - - - - - - Change in unrealized gain on short-term investments - - - - - - - 3 - 3 Net loss - - - - - - - - ( 9,613 ) ( 9,613 ) Balance as of September 30, 2021 43,948,281 $ 4 ( 19,361 ) $ ( 319 ) - $ - $ 169,944 $ 6 $ ( 62,882 ) $ 106,753 Balance as of June 30, 2020 22,942,546 $ 2 - $ - 240,861 $ - $ 22,180 $ - $ ( 33,044 ) $ ( 10,862 ) Stock-based compensation - - - - - - 202 - - 202 Issuance of common stock pursuant to Exchange Agreement 4,349,497 - - - - - 17,325 - - 17,325 Exercise of cashless warrants in exchange for common stock 171,522 - - - - - - - - - Exercise of warrants in exchange for common stock 625,000 - - - - - 463 - - 463 Issuance of common stock pursuant to at the market offering, net 4,677,595 1 - - - - 27,752 - - 27,753 Exercise of warrants related to series A preferred stock 16,214 - - - - - 17 - - 17 Issuance upon exercise of stock options 129,480 - - - - - 398 - - 398 Preferred stock dividends - - - - - - - - ( 115 ) ( 115 ) Accretion of Series A preferred stock - - - - - - ( 220 ) - - ( 220 ) Net loss - - - - - - - - ( 6,669 ) ( 6,669 ) Balance as of September 30, 2020 32,911,854 $ 3 - $ - 240,861 $ - $ 68,117 $ - $ ( 39,828 ) $ 28,292 Balance as of December 31, 2020 33,013,271 $ 3 - $ - 240,861 $ - $ 68,238 $ - $ ( 43,050 ) $ 25,191 Stock-based compensation - - - - - - 2,600 - - 2,600 Exercise of cashless warrants in exchange for common stock 62,921 - - - - - - - - - Exercise of warrants in exchange for common stock 54,235 - - - - - 307 - - 307 Exercise of warrants related to series A preferred stock 97,805 - - - - - 101 - - 101 Public underwriting 6,126,939 1 - - - - 70,124 - - 70,125 Shares issued as part of the Waycare Acquisition 2,784,474 - - - - - 20,287 - - 20,287 Conversion of series A preferred stock 899,174 - - - - - 7,775 - - 7,775 Conversion of series B preferred stock 517,611 - - - ( 240,861 ) - 179 - - 179 Issuance upon exercise of stock options 195,782 - - - - - 434 - - 434 Issuance upon vesting of restricted stock units 196,069 - - - - - - - - - Shares withheld upon vesting of restricted stock units - - ( 19,361 ) ( 319 ) - - - - - ( 319 ) Preferred stock dividends - - - - - - - - ( 51 ) ( 51 ) Accretion of Series A preferred stock - - - - - - ( 101 ) - - ( 101 ) Change in unrealized gain on short-term investments - - - - - - - 6 - 6 Net loss - - - - - - - - ( 19,781 ) ( 19,781 ) Balance as of September 30, 2021 43,948,281 $ 4 ( 19,361 ) $ ( 319 ) - $ - $ 169,944 $ 6 $ ( 62,882 ) $ 106,753 Balance as of December 31, 2019 21,595,653 $ 2 - $ - 240,861 $ - $ 19,371 $ - $ ( 28,408 ) $ ( 9,035 ) Stock-based compensation - - - - - - 539 - - 539 Issuance of common stock pursuant to Exchange Agreement 4,349,497 - - - - - 17,325 - - 17,325 Exercise of cashless warrants in exchange for common stock 214,740 - - - - - - - - - Exercise of warrants in exchange for common stock 1,180,000 - - - - - 874 - - 874 Issuance of common stock pursuant to at the market offering, net 5,216,562 1 - - - - 29,929 - - 29,930 Exercise of warrants related to series A preferred stock 74,177 - - - - - 77 - - 77 Issuance upon exercise of stock options 281,225 - - - - - 640 - - 640 Preferred stock dividends - - - - - - - - ( 345 ) ( 345 ) Accretion of Series A preferred stock - - - - - - ( 638 ) - - ( 638 ) Net loss - - - - - - - - ( 11,075 ) ( 11,075 ) Balance as of September 30, 2020 32,911,854 $ 3 - $ - 240,861 $ - $ 68,117 $ - $ ( 39,828 ) $ 28,292 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Nine Months ended September 30, 2021 2020 Cash Flows from Operating Activities Net loss from continuing operations $ ( 19,777 ) $ ( 10,860 ) Net loss from discontinued operations ( 4 ) ( 215 ) Net loss ( 19,781 ) ( 11,075 ) Adjustments to reconcile net loss to net cash used in operating activities: Bad debt expense 24 36 Depreciation 431 270 Amortization of right-of-use lease asset 209 139 Provision for deferred taxes 10 - Share-based compensation 2,600 539 Amortization of financing costs 14 653 Amortization of intangible assets 1,529 977 Loss due to change in value of equity investments 150 - Unrealized gain on short-term investments ( 6 ) - Loss on extinguishment of debt - 3,281 Gain on sale of AOC Key Solutions - ( 2,619 ) Gain on sale of TeamGlobal - ( 1,012 ) Changes in operating assets and liabilities: Accounts receivable ( 936 ) ( 226 ) Inventory ( 558 ) ( 289 ) Other current assets ( 1,537 ) ( 186 ) Other long-term assets ( 127 ) - Accounts payable and accrued expenses and other current liabilities 4,275 940 Contract liabilities 1,596 646 Lease liability ( 218 ) ( 149 ) Net cash used in operating activities - continuing operations ( 12,321 ) ( 7,860 ) Net cash used in by operating activities - discontinued operations ( 4 ) ( 3,884 ) Net cash used in operating activities ( 12,325 ) ( 11,744 ) Cash Flows from Investing Activities Cash paid for Waycare acquisition, net ( 40,699 ) - SAFE Investment ( 1,000 ) - Capital expenditures ( 1,618 ) ( 544 ) Proceeds from sale of AOC Key Solutions - 3,400 Proceeds from sale of TeamGlobal - 2,300 Investment in unconsolidated company ( 75 ) ( 75 ) Net cash (used in) provided by investing activities - continuing operations ( 43,392 ) 5,081 Cash Flows from Financing Activities Proceeds from public offering 70,125 - Proceeds from PPP loans - 874 Payment of notes payable ( 29 ) - Proceeds from notes receivable 255 600 Payment of stock issuance costs associated with the Note Exchange transaction - ( 73 ) Repayments of notes payable - ( 7,266 ) Net proceeds from exercise of options 434 640 Net proceeds from exercise of warrants 307 874 Net proceeds from exercise of warrants associated with the Series A Preferred Stock 101 77 Net proceeds from at-the-market agreement - 29,930 Repurchases of common stock ( 319 ) - Payment of debt modification costs - ( 300 ) Net cash provided by financing activities - continuing operations 70,874 25,356 Net provided by financing activities - discontinued operations - 4,171 Net cash provided by financing activities 70,874 29,527 Net increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations 15,161 22,577 Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations ( 4 ) 287 Net increase in cash, cash equivalents and restricted cash and cash equivalents 15,157 22,864 Cash, cash equivalents and restricted cash and cash equivalents at beginning of period 21,009 1,866 Cash, cash equivalents and restricted cash and cash equivalents at end of period $ 36,166 $ 24,730 Reconciliation of cash, cash equivalents and restricted cash: Cash and cash equivalents at end of period - continuing operations $ 35,102 $ 24,154 Restricted cash and cash equivalents at end of period - continuing operations 1,063 573 Cash and cash equivalents at end of period - discontinued operations 1 3 Cash, cash equivalents and restricted cash and cash equivalents at end of period $ 36,166 $ 24,730 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Table of Contents REKOR SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of September 30, 2021, the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity (deficit) and unaudited condensed consolidated statements of cash flows for the three and nine month periods ended September 30, 2021 and 2020. On August 18, 2021, the Company completed its acquisition of Waycare Technologies Ltd. (“Waycare”) by acquiring 100% of the issued and outstanding capital stock of Waycare, which is now a wholly owned subsidiary of the Company. Since the acquisition of Waycare occurred on August 18, 2021, the results of operations for Waycare from the date of acquisition have been included in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2021. The financial data and other information disclosed in these notes are unaudited. The results for the three and nine months ended September 30, 2021, are not necessarily indicative of the results to be expected for the year ending December 31, 2021. 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, 2020. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year's presentation. Beginning in the third quarter of 2021, depreciation and amortization is presented separately from cost of revenue, general and administrative expenses, selling and marketing expenses and research and development expenses on the unaudited condensed consolidated statements of operations, whereas in prior periods these amounts were included together with the aforementioned financial statement captions. Additionally, as of September 30, 2021, the Company began to present other current liabilities separately from accounts payable and accrued expenses. Other current liabilities primarily consist of payroll and payroll related accounts. Amounts for the three and nine month period ending September 30, 2020 and the period ended December 31, 2020, have been reclassified to conform to the current year’s presentation. Dollar amounts, except per share data, in the notes to these unaudited condensed consolidated financial statements are rounded to the closest $1,000. Rekor is a provider of roadway intelligence through intelligent infrastructure. The Company delivers integrated solutions, actionable insights, and predictions that increase roadway safety with its disruptive technology. With a global footprint across 65 countries, the Company provides actionable and real-time insights to commercial clients, as well as government entities. Rekor’s capabilities appeal to businesses and governmental entities in solving a wide variety of real-world mobility and infrastructure-related operational challenges. Currently, customers use the Company’s solutions for a multitude of applications, including roadway safety and incident management, traffic and infrastructure analytics, sustainability and green initiatives, public safety and contactless compliance. 8 Table of Contents 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. Actual amounts may differ from these estimates. On an on-going basis, the Company evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. Reclassifications Certain amounts in the prior year's financial statements have been reclassified to conform to the current year's presentation. Beginning in the third quarter of 2021, depreciation and amortization is presented separately from cost of revenue, general and administrative expenses, selling and marketing expenses and research and development expenses on the unaudited condensed consolidated statements of operations, whereas in prior periods these amounts were included together with the aforementioned financial statement captions. Additionally, as of September 30, 2021, the Company began to present other current liabilities separately from accounts payable and accrued expenses. Other current liabilities primarily consist of payroll and payroll related accounts. Amounts for the three and nine month period ending September 30, 2020 and the period ended December 31, 2020, have been reclassified to conform to the current year’s presentation. Liquidity For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, if necessary, the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period. The Company has generated losses since its inception and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, proceeds from the private sale of the Company’s non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support cashflow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the nine months ended September 30, 2021, the Company had working capital of $ 28,203,000 and a comprehensive loss from continuing operations of $ 19,771,000 . The Company’s cash increased by $ 15,157,000 for the nine months ended September 30, 2021 primarily due to the net proceeds of $ 70,125,000 from the completion of the Public Offering (see NOTE 10 - STOCKHOLDERS’ EQUITY for details on the Public Offering). This amount was offset by the net cash outlay of $ 40,699,000 in connection with the acquisition of Waycare (see NOTE 2 – ACQUISITIONS for details on the Waycare acquisition). 9 Table of Contents Management believes that based on relevant conditions and events that are known and reasonably knowable, its current forecasts and projections for one year from the date of the filing of the unaudited condensed consolidated financial statements in this Quarterly Report on Form 10-Q, indicate the Company’s ability to continue operations as a going concern for at least that one-year period. The Company is actively monitoring its operations, the cash on hand and working capital. Should access to funds be unavailable, the Company will need to seek out additional sources of funding. Furthermore, the Company has contingency plans to reduce or defer expenses and cash outlays should operations weaken in the look-forward period or additional financing, if needed, is not available. Goodwill The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. As if September 30, 2021 the Company has not completed its annual impairment assessment. During the nine months ended September 30, 2021 and 2020, we have not recognized any impairment to goodwill from continuing operations. Equity Method Investments Investments in the common stock of entities other than the Company’s consolidated subsidiaries are accounted for under the equity method in accordance with the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 323, Investments – Equity Method and Joint Ventures . Under the equity method, the initial investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses, including consideration of basis differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets. The difference between the carrying amount of the investment and the underlying equity in net assets is primarily attributable to goodwill and other intangible assets. When the fair value or income information is not readily determinable, the Company has elected to apply the measurement alternative, and report the investment at cost, less impairment. Treasury Stock Treasury stock is recorded at acquisition cost. Upon disposition of treasury shares gains and losses are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings. Fair Value of Financial Instruments The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value as of September 30, 2021 and December 31, 2020, 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 September 30, 2021 and December 31, 2020, 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. 10 Table of Contents 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 note receivable and Simple Agreement for Future Equity (“SAFE”) investment to be Level 3 investments and that the fair value approximates the carrying value. There were no changes in levels during the nine months ended September 30, 2021. Note Receivables In connection with the sale of TeamGlobal in June 2020, the Company received a $ 1,700,000 , five and a half year promissory note due December 2025, that carries an interest rate of 4.0 % and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note began in January 2021. Based on general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates current market rates. Interest income recognized for the three and nine months ended September 30, 2021 was $ 15,000 and $ 48,000 , respectively, and is included as part of other income on the unaudited condensed consolidated statements of operations. Interest income recognized for the three and nine months ended September 30, 2020 was $ 19,000 and $ 31,000 , respectively. Revenue Recognition The Company derives its revenues primarily from Software as a Service (“SaaS”), subscriptions, customer support services, contactless compliance solutions, implementation services, perpetual license sales and the sale of hardware in connection with its software solutions. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. The Company determines the amount of revenue to be recognized through application of the following steps: ● Identification of the contract, or contracts, with a customer ● Identification of the performance obligations in the contract ● Determination of the transaction price ● Allocation of the transaction price to the performance obligations in the contract ● Recognition of revenue when, or as, performance obligations are satisfied The following table presents a summary of revenue (dollars in thousands): 11 Table of Contents Three Months ended September 30, Nine Months ended September 30, 2021 2020 2021 2020 Recurring revenue $ 1,233 $ 964 $ 3,142 $ 2,876 Product and service revenue 1,382 1,162 7,963 3,523 Total revenue $ 2,615 $ 2,126 $ 11,105 $ 6,399 Revenues Recurring revenue Recurring revenue is defined as the Company’s SaaS revenue, licensing and subscription revenue, eCommerce revenue, and customer support revenue. The Company generates recurring revenue from contracts with customers that include fixed recurring revenue or contracts that are automatically invoiced on a monthly basis. The Company’s recurring revenue is driven by the Company’s go-to-market model, which includes a combination of direct sales, partner-assisted sales, and eCommerce sales. SaaS revenue represents software products and solutions that provide customers with the right to access the Company’s solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services may vary at the customer’s discretion. The Company's contracts with customers are generally for a term of one to five years. The payment for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement. These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such we recognize revenue for these solutions ratably over the term of the contractual agreement. Subscription revenue includes providing, through a web server, access to the Company’s proprietary vehicle recognition software, a self-managed database, and a powerful cross-platform application programming interface. The subscription arrangements with 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 software or services over the contractual period. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Accordingly, the fixed consideration related to recurring revenue is generally recognized 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. The Company's contracts with customers are generally for a term of one month with an automatic renewal each month. The Company invoices and receives fees from its customers monthly. Customer support revenue is associated with perpetual and subscription arrangements. 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 software. Customer support consists primarily of technical support. Customer support for perpetual and term licenses is renewable, generally on an annual basis, at the option of the customer. Customer support for subscription licenses is renewable concurrently with such licenses for the same duration of time. 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. Revenue for customer support is recognized ratably over the contract period based on the start and end dates of the maintenance term, in line with how the Company believes services are provided. Product and service revenue Product and service revenue is defined as the Company’s contactless compliance revenue, implementation revenue, perpetual license sales and hardware sales. 12 Table of Contents Contactless compliance solutions revenues reflect arrangements to provide traffic safety systems to several municipalities in North America. These systems include hardware that identifies red light and school safety zone traffic violations and software that captures and records forensic images and analyzes the images to provide data and supports citation management services. In the first quarter of 2021, the Company launched a new service offering for the State of Oklahoma to support its Uninsured Vehicle Enforcement Diversion (“UVED”) Program. Rekor provides hardware, software and services to identify uninsured motor vehicles, notify owners of non-compliance and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of citations collected by the relevant municipality. Implementation revenue is incurred when the Company provides pilot programs to customers. Pilot programs may involve a one-time fee for a defined period in which the customer can use the Company’s software in connection with a previously installed camera network or connected vehicle data. At the end of the pilot program, the customer can convert from a pilot program to a subscription model which has a typical term between one and five years. The Company’s pilot program revenue is recognized at various stages of completion. In addition to the recurring software sales, the Company will recognize revenue related to the sale of perpetual software licenses. The Company sells perpetual licenses which provide customers the right to use software for an indefinite period in exchange for a one-time license fee, which is generally paid at contract inception. The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and have significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer. The Company generates revenue through the sale of hardware through its partner program distribution channels. The Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon transfer of control of the hardware to its customers. The Company offers hardware installment to customers which ranges from one to six months. The revenue related to the installation component is recognized at various stages of completion. Revenue by Customer Type The following table presents a summary of revenue by customer type (dollars in thousands): Three Months ended June 30, Six Months ended June 30, 2021 2020 2021 2020 Government customers $ 1,548 $ 1,254 $ 4,186 $ 4,047 Commercial customers 1,067 872 6,919 2,352 Total revenue $ 2,615 $ 2,126 $ 11,105 $ 6,399 Performance obligations The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some contracts include performance obligations for several distinct services. For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation. When the Company recognizes revenue due to the sale of hardware or perpetual software licenses, the impact on the overall unsatisfied performance obligations is relatively small as the Company satisfies most of its performance obligations at the point in time that the control of the hardware or software has transferred to the customer. Where performance obligations for a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, the unsatisfied portion is to be recognized as revenue in the future. As of September 30, 2021, the Company had approximately $ 23,845,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately 36.0 % of this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized over the next two to four years thereafter. 13 Table of Contents Unbilled accounts receivable The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the unaudited condensed consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the unaudited condensed consolidated balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days, but typically no longer than over the next twelve months. Unbilled accounts receivables of $ 425,000 and $ 600,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, 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 nine months to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the nine months ended September 30, 2021 were not materially impacted by any other factors. Contract liabilities as of September 30, 2021 and December 31, 2020 were $ 3,716,000 and $ 2,084,000 , respectively. During the nine months ended September 30, 2021, $ 920,000 of the contract liabilities balance as of December 31, 2020 was recognized as revenue. The services due for contract liabilities described above are shown below as of September 30, 2021 (dollars in thousands): 2021 $ 1,068 2022 1,839 2023 474 2024 234 2025 82 Thereafter 19 Total $ 3,716 Costs to Obtain and Fulfill a Contract Practical Expedients Election ‒ Costs to Obtain and Fulfill a Contract ‒ The Company’s incremental costs to obtain a contract consist of sales commissions. The Company elected to use the practical expedient election to expense costs to obtain a contract as incurred when the amortization period would have been one year or less. In connection with the Company’s services for Oklahoma’s UVED program, the Company installs hardware and software at no additional charge to the end customer. The costs associated with the hardware and software installations are expected to be recouped by the Company over the course of the estimated contract period and thus are capitalized as a cost to fulfill a customer contract and amortized over the estimated contract period. As of September 30, 2021 the Company has capitalized $ 218,000 of such fulfillment costs, of which $ 196,000 are presented as part of property and equipment, net in the unaudited condensed consolidated balance sheets. As of December 31, 2020 costs incurred to fulfill contracts in excess of one year had been immaterial. Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents The Company considers all highly liquid debt instruments, including U.S. Treasury Bills purchased with a maturity of three months or less, to be cash equivalents. Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of September 30, 2021 and December 31, 2020 were $ 1,063,000 and $ 412,000 , 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. 14 Table of Contents Concentrations of Credit Risk The Company deposits its temporary cash investments with highly rated quality financial institutions that are located in the United States and Israel. The United States deposits are federally insured up to $ 250,000 per account. As of September 30, 2021 the Company had deposits from continuing operations totaling $ 36,165,000 in three U.S. institutions and one Israeli financial institution. As of December 31, 2020 the Company had deposits from continuing operations totaling $ 21,007,000 in one U.S. financial institution. The Company has a market concentration of revenue and accounts receivable from continuing operations related to its customer base. Customer A accounted for less than 10.0 % of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer A accounted for 19.0 % and less than 10.0 % of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively. Customer B accounted for less than 10.0 % of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer B accounted for 13.0 % and less than 10.0 % of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively. Customer C accounted for less than 10.0 % and 17.0 % of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer C accounted for less than 10.0 % and 20.0 % of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively. Customer E accounted for 13.0 % and less than 10.0 % of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer E accounted for less than 10.0 % of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, accounts receivable from Company A and Company D totaled 18.0 % and 14.0 % of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2020, Company A and Company B accounted for 43.0 % and 20.0 %, respectively, of the unaudited condensed consolidated accounts receivable balance. No other single customer accounted for more than 10.0 % of the Company’s unaudited condensed consolidated revenues for the three and nine months ended September 30, 2021 and 2020 or the unaudited condensed consolidated accounts receivable balance as of September 30, 2021 and December 31, 2020. Significant Accounting Policies 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, 2020. New Accounting Pronouncements Effective in the Nine months ended September 30, 2021 In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted this guidance in the first quarter of 2021. The adoption of ASU 2020-01 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes. 15 Table of Contents In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) : Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 eliminated previously allowed exceptions and clarified existing guidance in the accounting for income taxes, including in the areas of franchise taxes, the tax basis of goodwill and interim period effects of changes in tax laws. The Company adopted this guidance in the first quarter of 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes. New Accounting Pronouncements Effective in Future Periods In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. Upon adoption of the new standard, the Company will begin recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to the Company’s financial assets. Due to the nature and extent of the Company’s financial instruments (primarily accounts receivable and a note receivable) currently within the scope of ASU 2016-13 and based on the Company’s analysis of ASU 2016-13 and the historical, current and expected credit quality of the Company’s customers, the Company does not expect ASU 2016-13 to have a material impact on its unaudited condensed consolidated statements of operations and balance sheets. The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standards discussed above, could have a material effect on the accompanying unaudited condensed consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances. NOTE 2 – ACQUISITIONS On August 18, 2021, the Company completed its acquisition of Waycare by acquiring 100.0 % of the issued and outstanding capital stock of Waycare. The aggregate purchase price for the shares of Waycare was $ 61,100,000 , less the amount of Waycare’s debt and certain transaction expenses and subject to a customary working capital adjustment. The purchase price was comprised of $ 40,813,000 of cash and 2,784,474 shares of the Company’s common stock, valued at $ 20,287,000 . As a result of the transaction, Waycare has become a wholly-owned subsidiary of the Company. The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition of Waycare occurred on August 18, 2021, the results of operations for Waycare from the date of acquisition have been included in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2021. The table below shows the breakdown related to the preliminary purchase price allocation for the acquisition (dollars in thousands): 16 Table of Contents Cash paid $ 40,813 Common stock issued 20,287 Total consideration $ 61,100 Assets Cash and cash equivalents $ 25 Restricted cash and cash equivalents 89 Accounts receivable 472 Other current assets 150 Property and equipment 72 Acquired technology 17,255 Total assets acquired 18,063 Liabilities Accounts payable and accrued expenses 451 Contract liabilities 36 Total liabilities assumed 487 Fair value of identifiable net assets acquired 17,576 Goodwill $ 43,524 The technology acquired by the Company as part of the acquisition has an estimated useful life of seven years and presented as part of intangible assets, net on the unaudited condensed consolidated balance sheets. During the three and nine months ended September 30, 2021, $ 260,000 of revenue was attributed to Waycare, which was reported in the consolidated income statement. Operations of Combined Entities The following unaudited pro forma combined financial information gives effect to the acquisition of Waycare as if it was consummated as of January 1, 2020. 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, 2020 (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, 2021 2020 2021 2020 (Dollars in thousands except for per share data) (Dollars in thousands except for per share data) Total revenue from continuing operations $ 2,834 $ 2,499 $ 13,050 $ 7,491 Net loss from continuing operations ( 10,186 ) ( 4,347 ) ( 21,629 ) ( 11,840 ) Basic and diluted loss per share continuing operations $ ( 0.23 ) $ ( 0.27 ) $ ( 0.54 ) $ ( 0.59 ) Basic and diluted number of shares 44,723,337 29,691,543 41,141,641 25,566,281 NOTE 3 – INVESTMENTS Investments in Unconsolidated Companies In February 2017, the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business to Global Public Safety (the “GPS Closing”). After the GPS Closing, the Company continues to own 19.9 % of the units of Global Public Safety. This equity investment does not have a readily determinable fair value and the Company reports this investment at cost, less impairment. As of September 30, 2021 and December 31, 2020 the investment in Global Public Safety had a value of $ 0 . 17 Table of Contents In June 2020, the Company announced a joint venture in which the Company would have a 50 percent equity interest in Roker Inc. (“Roker”). In the third quarter of 2020 and the first quarter of 2021, the Company contributed $ 75,000 for its 50 percent equity interest for a total investment of $ 150,000 . This investment is accounted for under the equity method. During the three and nine months ended September 30, 2021, the Company recognized a loss in its unconsolidated investments of $ 0 and $ 150,000 , respectively. The carrying amount of the Company’s investments are included as part of investments in unconsolidated companies in the unaudited condensed consolidated balance sheets. There were no distributions or earnings received from either investment in the three or nine months ended September 30, 2021 and 2020. Roker SAFE In April 2021, in exchange for $ 1,000,000 the Company entered into a SAFE with Roker (the “Roker SAFE”). The Roker SAFE allows the Company to participate in future equity financings of Roker, through a share-settled redemption of the amount invested (such notional being the “invested amount”). Alternatively, upon the occurrence of a change of control or an initial public offering (other than a qualified financing), the Company has the option to receive either (i) cash payment equal to the invested amount under the SAFE, or (ii) a number of shares of common stock equal to the invested amount divided by the liquidity price set forth in the Roker SAFE. The Company’s investment in the Roker SAFE is recorded on the cost method of accounting and included under SAFE investment on the unaudited condensed consolidated balance sheets and is shown as long-term, as it is not readily convertible into cash. If the Company identifies factors that may be indicative of impairment the Company will review the investment for impairment. NOTE 4 – DISCONTINUED OPERATIONS During the first quarter of 2020, in connection with the Company’s plan to concentrate on its Technology segment, the Company determined that all of the historical Professional Services segment should be classified as discontinued operations. As part of this plan TeamGlobal, AOC Key Solutions and Firestorm were classified as discontinued operations and presented as part of discontinued operations. AOC Key Solutions Sale On April 2, 2020, the Company entered into a Stock Purchase Agreement (the “AOC Key Solutions Purchase Agreement”) by and among the Company, AOC Key Solutions, and PurpleReign, LLC, a Virginia limited liability company owned by the members of AOC Key Solutions management (the “AOC Key Solutions Buyer”), by which the Company agreed to sell AOC Key Solutions, to the AOC Key Solutions Buyer. The AOC Key Solutions Buyer agreed to purchase all of the outstanding equity interests of AOC Key Solutions for a purchase price of $ 4,000,000 , comprising (i) $ 3,400,000 in cash, and (ii) a subordinated promissory note (the “Subordinated Note”) in the initial principal amount of $ 600,000 . As of December 31, 2020, the AOC Key Solutions Subordinated Note had been paid in full by the AOC Key Solutions Buyer. TeamGlobal Sale On June 29, 2020, the Company entered into a Stock Purchase Agreement (the “TeamGlobal Purchase Agreement”) by and among the Company, TeamGlobal, and Talent Teams LLC, a Texas limited liability company owned by the members of TeamGlobal’s management (the “TeamGlobal Buyer”), pursuant to which the Company agreed to sell TeamGlobal to the TeamGlobal Buyer. Subject to the terms and conditions of the TeamGlobal Purchase Agreement, the TeamGlobal Buyer agreed to purchase all of the outstanding equity interests of TeamGlobal for a purchase price of $ 4,000,000 , comprising (i) an aggregate of $ 2,300,000 in cash, and (ii) a secured promissory note (the “Secured Note”) in the initial principal amount of $ 1,700,000 , with such Secured Note secured by a Pledge and Security Agreement with respect to all the outstanding shares of TeamGlobal being acquired by the TeamGlobal Buyer. 18 Table of Contents The dispositions of AOC Key Solutions and TeamGlobal are the result of the Company’s strategic decision to concentrate resources on the development of its Technology Segment and will result in material changes in the Company’s operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of TeamGlobal, AOC Key Solutions and Firestorm as discontinued operations, including for all prior periods reflected in the unaudited condensed consolidated financial statements and these notes. Pursuant to ASC Topic 205-20, Presentation of Financial Statements - Discontinued Operations , the results of operations from TeamGlobal, AOC Key Solutions and Firestorm for the three and nine months ended September 30, 2021 and 2020 have been classified as discontinued operations and presented as part of loss from discontinued operations in the accompanying unaudited condensed consolidated statements of operations presented herein. The assets and liabilities also have been classified as discontinued operations under the line captions of current and long term assets discontinued operations and current and long term liabilities discontinued operations in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020. The assets and liabilities classified as discontinued operations in the Company’s unaudited condensed consolidated financial statements as of September 30, 2021 and December 31, 2020 are shown below (dollars in thousands): September 30, 2021 December 31, 2020 ASSETS Cash and cash equivalents $ 1 $ 2 Current assets of discontinued operations 1 2 Total assets of discontinued operations $ 1 $ 2 LIABILITIES Accounts payable and accrued expenses $ 30 $ 31 Lease liability, short term 99 93 Current liabilities of discontinued operations 129 124 Lease liability, long term - 5 Long-term liabilities of discontinued operations - 5 Total liabilities of discontinued operations $ 129 $ 129 The major components of the discontinued operations, net of tax, are presented in the unaudited condensed consolidated statements of operations below (dollars in thousands): Three Months ended September 30, Nine Months ended September 30, 2021 2020 2021 2020 Firestorm Firestorm Firestorm Global AOC Key Solutions Firestorm Total Revenue $ - $ - $ - $ 10,510 $ 3,392 $ 5 $ 13,907 Cost of revenue - - - 9,190 1,866 - 11,056 Gross profit - - - 1,320 1,526 5 2,851 Operating expenses: General and administrative expenses - 2 - 1,341 1,284 ( 2 ) 2,623 Selling and marketing expenses - - 4 79 131 - 210 Operating expenses - 2 4 1,420 1,415 ( 2 ) 2,833 Income loss income from operations - ( 2 ) ( 4 ) ( 100 ) 111 7 18 Other (income) expense: Interest expense - - - ( 166 ) ( 74 ) - ( 240 ) Other expense (income) - - - 5 2 - 7 Total other (income) expense - - - ( 161 ) ( 72 ) - ( 233 ) Net income (loss) from discontinued operations $ - $ ( 2 ) $ ( 4 ) $ ( 261 ) $ 39 $ 7 $ ( 215 ) 19 Table of Contents NOTE 5 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Supplemental disclosures of cash flow information for the nine months ended September 30, 2021 and 2020 were as follows (dollars in thousands): Nine Months ended September 30, 2021 2020 Cash paid for interest - continuing operations $ - $ 1,211 Note received as part of TeamGlobal Sale - 1,700 Paid-in-kind interest transferred from accrued interest to the principal balance of the 2019 Promissory Notes - 1,283 Increase in accounts payable and accrued expenses related to purchases of property and equipment 2,479 - Fair market value of shares issued in connection with the acquisition of Waycare 20,287 - Non-cash Note Exchange transaction Exchange of accrued interest and stock issuance costs - ( 226 ) Debt extinguishment costs - ( 2,484 ) Exchange of the net principal balance of the 2019 Promissory Notes - ( 14,688 ) Issuance of common stock - 17,325 Cash impact of Note Exchange transaction - ( 73 ) Financing activities: Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock ( 1,005 ) - Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock ( 6,770 ) - Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock ( 179 ) - New Leases under ASC-842 Right-of-use lease asset 6,039 132 Lease incentive recognized in property and equipment, net 3,833 - Lease liability $ ( 9,872 ) $ ( 132 ) NOTE 6 – OPERATING LEASES We have operating leases for office facilities in various locations throughout the United States and Israel. The Company’s leases have remaining terms of one to four years. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments. Operating lease expense from continuing operations for the three months ended September 30, 2021 and 2020 was $ 105,000 and $ 72,000 , and for the nine months ended September 30, 2021 and 2020 was $ 278,000 and $ 175,000 , respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. Cash paid for amounts included in the measurement of operating lease liabilities from continuing operations was $ 245,000 and $ 168,000 for the nine months ended September 30, 2021 and 2020, respectively. In the third quarter of 2021, the Company entered into a lease agreement for its new headquarters. As part of the lease agreement there were $ 3,833,000 in lease incentives provided to the Company which were used to update and the structure of the leased space and furnish the leased space. Supplemental balance sheet information related to leases as of September 30, 2021 was as follows (dollars in thousands): 20 Table of Contents Operating lease right-of-use lease assets from continuing operations $ 6,256 Current portion of lease liability $ 101 Long-term portion of lease liability 9,994 Total lease liability from continuing operations $ 10,095 Weighted average remaining lease term - operating leases from continuing operations 9.80 Weighted average discount rate - operating leases 9.0 % 2021 $ 33 2022 525 2023 1,618 2024 1,579 2025 1,596 Thereafter 11,443 Total lease payments $ 16,794 Less imputed interest 6,699 Maturities of lease liabilities $ 10,095 NOTE 7 – INTANGIBLE ASSETS Intangible Assets Subject to Amortization The following summarizes the change in intangible assets from December 31, 2020 to September 30, 2021 (dollars in thousands): December 31, 2020 Additions Amortization September 30, 2021 Intangible assets subject to amortization from continuing operations Customer relationships $ 362 $ - $ ( 25 ) $ 337 Marketing related 159 - ( 51 ) 108 Technology based 5,361 17,255 ( 1,089 ) 21,527 Internally capitalized software 1,156 4 ( 364 ) 796 Intangible assets subject to amortization from continuing operations $ 7,038 $ 17,259 $ ( 1,529 ) $ 22,768 The following provides a breakdown of identifiable intangible assets as of September 30, 2021 (dollars in thousands): Customer Relationships Marketing Related Technology Based Internally Capitalized Software Total Identifiable intangible assets $ 461 $ 327 $ 24,465 $ 1,452 $ 26,705 Accumulated amortization ( 124 ) ( 219 ) ( 2,938 ) ( 656 ) ( 3,937 ) Identifiable intangible assets from continuing operations, net $ 337 $ 108 $ 21,527 $ 796 $ 22,768 These intangible assets are being amortized on a straight-line basis over their estimated useful life. Amortization expense attributable to continuing operations for the three months ended September 30, 2021 and 2020 was $ 713,000 and $ 343,000 , respectively, and for the nine months ended September 30, 2021 and 2020 was $ 1,529,000 and $ 977,000 , respectively and is presented as part of depreciation and amortization in the accompanying unaudited condensed consolidated statements of operations. 21 Table of Contents As of September 30, 2021, the estimated impact on continuing operations from annual amortization from intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands): 2021 $ 1,017 2022 4,008 2023 3,828 2024 3,525 2025 3,516 Thereafter 6,874 Total $ 22,768 NOTE 8 – DEBT Firestorm Notes On January 25, 2017, pursuant to the terms of the Company’s acquisition of Firestorm, the Company issued $ 1,000,000 in the aggregate form of four unsecured, subordinated promissory notes with interest payable over five years. The principal amount of one of the notes payable is $ 500,000 payable at an interest rate of 2.0 % and the remaining three notes are evenly divided over the remaining $ 500,000 and payable at an interest rate of 7.0 %. The notes mature on January 25, 2022 . The aggregate balance of these notes payable was $ 994,000 and $ 980,000 , net of unamortized interest, as of September 30, 2021 and December 31, 2020, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of $ 6,000 and $ 20,000 , respectively. The Company is not paying current interest on these notes and does not expect to pay principal due in January 2022 as the Company has requested rescission in connection with the Firestorm acquisition and is currently in litigation with the sellers (see NOTE 10- COMMITMENTS AND CONTINGENCIES ) Paycheck Protection Program Loan On May 26, 2020, the Company entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $ 221,000 (the “Rekor PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor PPP Loan has a two-year term and bears interest at a rate of 1.0 % per annum. Monthly principal and interest payments are deferred for nine months after the date of disbursement. On June 3, 2020, the Company’s wholly owned subsidiary, Rekor Recognition Systems, Inc., entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $ 653,000 (the “Rekor Recognition PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor Recognition PPP Loan has a two-year term and bears interest at a rate of 1.0 % per annum. Monthly principal and interest payments are deferred for nine months after the date of disbursement. The Rekor PPP Loan and the Rekor Recognition PPP Loan (collectively the “Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. The Loans contain events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company used the entire Loans amount for qualifying expenses and has to applied for forgiveness of the Loans in accordance with the terms of the CARES Act. The Loans are presented in loan payable, current portion on the accompanying unaudited consolidated balance sheets. In October 2021, the Company was informed the Loans forgiveness was processed by the Small Business Administration (“SBA”) and the Company’s Loans have been fully forgiven. The Loans are now considered paid in full by SBA. 22 Table of Contents 2019 Promissory Notes On March 12, 2019, the Company entered into a note purchase agreement pursuant to which investors, including OpenALPR Technology, Inc. (the “2019 Lenders”) loaned $ 20,000,000 to the Company (the “2019 Promissory Notes”) and the Company issued to the 2019 Lenders warrants to purchase 2,500,000 shares of Rekor common stock (the “March 2019 Warrants”). The loan bore interest at 16% per annum, of which at least 10.0 % per annum was required to be paid in cash. Any remaining interest accrued to be paid at maturity or earlier upon redemption. The notes also required a $ 1,000,000 exit fee due at maturity, or a premium if paid before the maturity date, and compliance with affirmative, negative and financial covenants, including a fixed charge coverage ratio and minimum liquidity and maximum capital expenditures covenants. Transaction costs included $ 403,000 for a work fee payable over 10 months, $ 290,000 in legal fees and a $ 200,000 closing fee. As of December 31, 2020, the Company had settled the full amount of the 2019 Promissory Notes. The loan was secured by a security interest in substantially all of the assets of Rekor. The March 2019 Warrants are exercisable over a period of five years, at an exercise price of $ 0.74 per share, and were valued at $ 706,000 , at the time of issuance. The warrants became exercisable commencing March 12, 2019 and expire on March 12, 2024 . The 2019 Promissory Notes had an effective interest rate of 24.87 %. As of the first anniversary date of the commencement of the 2019 Promissory Notes $ 1,283,000 of the paid-in kind interest had not been paid in cash by the Company and per the purchase agreement was added to the principal balance of the 2019 Promissory Notes in March 2020. 2019 Promissory Note Retirement On June 30, 2020, the Company entered into Exchange Agreements with certain 2019 Lenders of the Company’s 2019 Promissory Notes. Subject to the terms and conditions set forth in the Exchange Agreements, approximately $ 17,398,000 was redeemed in exchange for 4,349,497 shares of the Company’s common stock, at a rate of $4 per share, which was the closing price of the common stock on the date of the Exchange Agreements. On July 15, 2020, the Company completed the Note Exchange. At the time of the Exchange Agreement the net amount of long-term debt redeemed for common stock was $ 14,688,000 . This included the existing principal balance subject to conversion, the portion of the exit fee associated with the which notes subject to conversion, offset by the portion of unamortized issuance costs associated with the notes subject to conversion. There was also $ 226,000 related to the paid-in-kind (“PIK”) interest associated with the notes subject to conversion that was exchanged as part of the Exchange Agreements. The difference between the market value of the shares issued and the net carrying amount of the obligations above of $ 2,484,000 was recorded as part of debt extinguishments costs in the accompanying consolidated statements of operations. Following the Note Exchange, approximately $ 4,398,000 aggregate principal amount of the 2019 Promissory Notes remained outstanding, plus an additional $ 216,000 related to the exit fee. The Company incurred stock issuance costs of approximately $ 73,000 related to legal, accounting, and other fees in connection with the Exchange Agreements. These costs are presented as a reduction to additional paid-in capital on the accompanying consolidated balance sheets. On September 16, 2020, the Company issued a cash payment of $ 5,284,000 to complete the retirement of the remaining aggregate principal balance of the 2019 Promissory Notes. As a result of this optional prepayment, the 2019 Promissory Notes have been fully redeemed pursuant to their terms, and as a result the Company has no further obligations under the Note Purchase Agreement, as amended. The warrants previously issued pursuant to the Note Purchase Agreement remain outstanding pursuant to their terms. Interest Expense The following table presents the interest expense related to the contractual interest and the amortization of debt issuance costs for the Company’s debt arrangements (dollars in thousands): Three Months ended September 30, Nine Months ended September 30, 2021 2020 2021 2020 Contractual interest $ 17 $ 176 $ 58 $ 1,815 Amortization of debt issuance costs 4 42 14 653 Total interest expense $ 21 $ 218 $ 72 $ 2,468 23 Table of Contents Schedule of Principal Amounts Due of Debt The principal amounts due for long-term notes payable are shown below as of September 30, 2021 (dollars in thousands): 2021 $ 489 2022 1,432 2023 36 Total 1,957 Less unamortized interest ( 6 ) Total notes payable $ 1,951 Loan payable, current portion $ 911 Loan payable, long-term 46 Notes payable, current portion 994 Total notes payable $ 1,951 NOTE 9 – INCOME TAXES The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company reviewed both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections, and the overall prospects of the Company’s business. The Company established a valuation allowance against deferred tax assets during 2017 and has continued to maintain a full valuation allowance, outside of the deferred tax liability related to the indefinite lived intangible, through the three months ended September 30, 2021. The Company files income tax returns in the United States and in various states. No U.S. Federal, state or foreign income tax audits were in process as of September 30, 2021. The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite lived intangible, because the Company believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly. For the nine months ended September 30, 2021 the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax expense. The 2017 through 2019 tax years remain subject to examination by the Internal Revenue Service. NOTE 10 – COMMITMENTS AND CONTINGENCIES On August 19, 2019, the Company 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 Firestorm (the “Firestorm Principals”)— Rekor Systems, Inc. v. Suzanne Loughlin, et al ., Case no. 1:19-cv-07767-VEC. The Complaint alleges that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by the Company. The Complaint requests equitable rescission of that transaction, or, alternatively, monetary damages. 24 Table of Contents Following an initial amended complaint, answer and counterclaims, and defendants’ motion for judgment on the pleadings, on January 30, 2020, the Company filed a Second Amended Complaint, which the Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, the Company moved to dismiss certain counterclaims against certain directors and officers named as counterclaim-defendants, which resulted in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. The Company thereafter filed its response and affirmative defenses to the Counterclaims on April 22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which the Company has opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. With respect to the Firestorm Principals’ motion for judgment on the pleadings, the Court’s November 23, 2020 order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion. On April 27, 2021, the Firestorm Principals filed a notice of motion for partial summary judgment, seeking summary judgment on several of the Company’s claims and the Firestorm Principals’ counterclaims, along with supporting declarations and exhibits. After the Court decided to allow the proposed motion to proceed, the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed their opposition to the partial summary judgment motion on June 21, 2021. The Firestorm Principals filed their reply in support of their partial summary judgment motion on July 9, 2021. In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel. The defendants in the suits moved to dismiss the amended complaint. At this stage of these litigations, suits against two of the directors have been dismissed and one has been permitted to proceed. On September 28, 2021, the Court issued an order denying the motion to dismiss. On October 21, 2021, the Delaware Action defendants filed a motion for reconsideration of the Court’s September 28, 2021 order. At this stage of these litigations, the Company is unable to render an opinion regarding the likelihood of a favorable outcome. The Company intends to continue vigorously litigating its claims against the Firestorm Principals and believes that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit. On January 31, 2020, the Company’s wholly owned subsidiary, OpenALPR, filed a complaint in the US District Court for the Western District of Pennsylvania against a former customer, Plate Capture Solutions, Inc. (“PCS”) for breach of software license agreements pursuant to which software was licensed to PCS. On June 14, 2020, PCS filed its operative answer to the Complaint. On June 21, 2020, PCS filed a motion to join the Company and another entity, OpenALPR Technology, Inc., as parties to the litigation and made claims against them and counter claims against OpenALPR for defamation, fraud and intentional interference with existing and future business relationships. On July 13, 2020, OpenALPR filed an opposition to the motion for joinder. On November 23, 2020, the court denied PCS’s Motion for Joinder with prejudice. On August 30, 2021, OpenALPR and PCS filed a joint stipulation of dismissal with prejudice, and the court ordered dismissal of the case with prejudice on August 31, 2021. The Company considers this matter closed. On September 18, 2020, Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against the Company in the Supreme Court for the State of New York, New York County. Fordham alleges that the Company breached an underwriting agreement with Fordham. Fordham has brought claims for breach of contract, a declaratory judgment, and attorneys’ fees and expenses, and seeks damages. The Complaint was served on the Company on September 25, 2020. The Company issued a motion to dismiss counterclaims on June 23, 2021, Rekor’s opposition has been filed and Fordham’s reply will be due on August 19, 2021. The Court granted Fordham’s motion to dismiss Rekor’s counterclaims on October 21, 2021. At this stage of the Fordham litigation, the Company is unable to render an opinion regarding the likelihood of a favorable outcome. However, the Company maintains that Fordham’s claims have no merit. To that end it intends to vigorously litigate this action. 25 Table of Contents In June 2021, a putative shareholder class action lawsuit (captioned Miller v. Rekor Systems, Inc. et al.) was filed in in the United States District Court for the District of Maryland, naming as defendants Rekor Systems, Inc. and certain of its officers. It alleges violations of Sections 10(b) and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 related to Rekor’s automatic license plate recognition technology and uninsured vehicle enforcement diversion related business and seeks damages on behalf of shareowners who acquired Rekor stock between April 12, 2019 and May 25, 2021. In November 2021, the plaintiff filed an order of dismissal, seeking to voluntarily dismiss without prejudice the Lawsuit that it had filed against the Company and several of its executives. In addition, from time to time, the Company may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the Company’s opinion that the outcome of these proceedings, individually and collectively, will not be material to the Company’s consolidated financial statements as a whole. NOTE 11 – STOCKHOLDERS’ EQUITY Common Stock Effective March 18, 2020, the Company adopted and approved an amendment to increase the number of authorized shares of common stock from 30,000,000 to 100,000,000 , $ 0.0001 par value. The rights and privileges terms of the additional authorized shares of common stock are identical to those of the currently outstanding shares of common stock. However, because the holders of common stock do not have preemptive rights to purchase or subscribe for any new issuances of common stock, the subsequent potential issuance of additional shares of common stock will reduce the current stockholders’ percentage ownership interest in the total outstanding shares of common stock. The Amendment and the creation of additional shares of authorized common stock will not alter current stockholders’ relative rights and limitations. Form S-3 Registration Statement On September 13, 2021 the Company filed a Form S-3 Registration Statement SEC, using a “shelf” registration process. By using a shelf registration statement, the Company may sell securities from time to time and in one or more offerings up to a total dollar amount of $ 350,000,000 . Waycare Acquisition In connection with the acquisition as described in NOTE 2 – ACQUISITIONS , the Company issued 2,784,474 shares of the Company’s common stock as part of the consideration. Public Offering On February 9, 2021, the Company issued and sold 6,126,939 shares of its common stock (which includes 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the “Public Offering”). The net proceeds to the Company, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, were approximately $ 70,125,000 . The shares were sold pursuant to an underwriting agreement with B. Riley Securities, Inc. and Lake Street Capital Markets, LLC, as representatives of the several underwriters named therein under the Company’s shelf registration statement on Form S-3 (Registration Statement No. 333-224423) filed by the Company with the SEC that became effective on April 30, 2018. On February 4, 2021, a prospectus supplement and accompanying prospectus were filed with the SEC in connection with the offering and a related registration statement (File No. 333-252735) was filed pursuant to Rule 462(b) promulgated under the Securities Act. 26 Table of Contents Preferred Stock The Company is authorized to issue up to 2,000,000 shares of preferred stock, $ 0.0001 par value. The Company’s preferred stock may be entitled to preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution or winding-up of the Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of the winding-up of its affairs. The authorized but unissued shares of the preferred stock may be divided into, and issued in, designated series from time to time by one or more resolutions adopted by the Board of Directors of the Company. The Board of Directors of the Company, in its sole discretion, has the power to determine the relative powers, preferences and rights of each series of preferred stock. Series A Cumulative Convertible Redeemable Preferred Stock Of the 2,000,000 authorized shares of preferred stock, 505,000 shares were designated as $ 0.0001 par value Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”). The holders of Series A Preferred Stock were entitled to quarterly dividends of 7.0 % per annum per share. Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying unaudited condensed consolidated balance sheets as of December 31, 2020. Rekor adjusted the value of the Series A Preferred Stock to redemption value at the end of each reporting period. The adjustment to the redemption value was recorded through additional paid in capital of $0 and $ 220,000 for the three months ended September 30, 2021 and 2020, respectively, and $ 101,000 and $ 638,000 for the nine months ended September 30, 2021 and 2020, respectively. As a result of the closing of the Public Offering in the first quarter of 2021, all of the issued and outstanding Series A Preferred Stock was converted pursuant to the original terms of the agreement into 899,174 shares of the Company’s common stock. Series B Cumulative Convertible Preferred Stock Of the 2,000,000 authorized shares of preferred stock, 240,861 shares were designated as $ 0.0001 par value Rekor Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”). As part of the TeamGlobal Merger, the Company issued 240,861 shares of $0.0001 par value Series B Preferred Stock. All Series B Preferred Stock was issued at a price of $ 10.00 per share as part of the acquisition of TeamGlobal. The Series B Preferred Stock had a conversion price of $ 5.00 per share. Each Series B Preferred Stock had an automatic conversion feature based on the share price of Rekor. As a result of the volume weighted average share price of the Company’s common stock being over $ 7.50 for thirty consecutive days, in the first quarter of 2021, all of the Company’s issued and outstanding Series B Preferred Stock was converted pursuant to the original terms of the agreement into 517,611 shares of the Company’s common stock. Warrants A summary of the warrant activity for the Company for the period ended September 30, 2021 is as follows: Series A Preferred Stock Warrants (1) Firestorm Warrants (2) Secure Education Warrants (3) 2018 Public Offering Warrants (4) 2019 Promissory Note Warrants (5) Total Active warrants January 1, 2021 141,789 631,254 66,666 4,886 68,750 913,345 Exercised warrants ( 97,805 ) - ( 51,110 ) ( 1,381 ) ( 68,750 ) ( 219,046 ) Outstanding warrants September 30, 2021 43,984 631,254 15,556 3,505 - 694,299 Weighted average strike price of outstanding warrants $ 1.03 $ 3.09 $ 6.06 $ 1.00 $ - $ 3.02 Shares of common stock issued during the three months ended September 30, 2021 97,805 - 51,110 1,280 64,766 214,961 27 Table of Contents (1) As part of a Regulation A Offering in fiscal year 2016 and 2017, the Company issued warrants to the holders of Series A Preferred Stock (the “Series A Preferred Stock Warrants”). The exercise price for these warrants is $1.03. The expiration date of the Series A Preferred Stock Warrants is November 8, 2023. (2) As part of the acquisition of Firestorm on January 24, 2017, the Company issued warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years, at an exercise price of $ 2.5744 per share, and warrants to purchase 315,627 shares of its common stock, exercisable over a period of five years , at an exercise price of $ 3.6083 per share (the “Firestorm Warrants”). The expiration date of the Firestorm Warrants is January 24, 2022. The Company has rejected requests from the holders of the Firestorm Warrants to exercise them pending resolution of pending litigation (see NOTE - 10 COMMITMENTS AND CONTINGENCIES ). (3) Pursuant to the Company’s acquisition of Secure Education Consultants on January 1, 2018, the Company issued warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years , at an exercise price of $ 5.44 per share, and warrants to purchase 33,333 shares of its common stock, exercisable over a period of five years , at an exercise price of $ 6.53 per share (the “Secure Education Warrants”). The expiration date of the Secure Education Warrants is January 1, 2023. (4) On November 1, 2018, in connection with an underwritten public offering of its common stock, the Company issued to the underwriters warrants to purchase 206,250 shares of its common stock (the “2018 Public Offering Warrants”), exercisable over a period of five years , at an exercise price of $ 1.00 per share. These warrants were exercisable commencing April 27, 2019 and expire on October 29, 2023. (5) On March 12, 2019, in connection with the 2019 Promissory Notes, the Company issued warrants to purchase 2,500,000 shares of its common stock (the “2019 Promissory Note Warrants”), which were immediately exercisable at an exercise price of $ 0.74 per share, to certain individuals and entities. Of the 2,500,000 warrants, 625,000 were issued as partial consideration for the OpenALPR Technology Acquisition. NOTE 12 – EQUITY INCENTIVE PLAN In August 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”) which replaced the 2016 Equity Award Plan (the “2016 Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. Maximum awards available under the 2017 Plan were initially set at 3,000,000 shares. In October 2021, the Company announced it had registered an additional 4,368,733 shares of its common stock available for issuance under the 2017 Plan. Stock Options Stock options granted under the 2017 Plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. Stock options are granted at exercise prices as determined by the Board of Directors. The vesting period is generally three years with a contractual term of ten years. Stock compensation expense related to stock options for the three months ended September 30, 2021 and 2020 was $ 30,000 and $ 63,000 , respectively, and for the nine months ended September 30, 2021 and 2020 was $ 90,000 and $ 208,000 , respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. A summary of stock option activity under the Company’s 2017 Plan for the period ended September 30, 2021 is as follows: 28 Table of Contents Number of Shares Subject to Option Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding Balance at December 31, 2020 1,291,753 $ 1.44 7.57 $ 7,827 Exercised ( 195,782 ) 2.24 Forfeited ( 13,000 ) 0.90 Outstanding Balance at September 30, 2021 1,082,971 1.40 6.52 $ 10,313 Exercisable at September 30, 2021 887,806 $ 1.48 6.30 $ 8,472 As of September 30, 2021, there was $ 82,000 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan that will be recognized over a weighted average period of 0.69 years. Restricted Stock Units Stock compensation expense related to RSU’s for the three months ended September 30, 2021 and 2020 was $ 664,000 and $ 139,000 , respectively, and for the nine months ended September 30, 2021 and 2020 was $ 2,510,000 and $ 331,000 , respectively, and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations. Pursuant to the terms of the Waycare purchase agreement, the Company reserved for issuance to Waycare’s continuing employees an aggregate of 686,248 restricted stock units, which were issued on October 28, 2021 pursuant to the terms of the Company’s 2017 Equity Award Plan, as amended. The restricted stock units are subject to customary vesting schedules and are intended to incentivize the continued performance of Waycare’s employees. A summary of RSU activity under the Company’s 2017 Plan for the nine months ended September 30, 2021 is as follows: Number of Shares Weighted Average Unit Price Weighted Average Remaining Contractual Term (Years) Outstanding Balance at December 31, 2020 479,984 $ 4.45 2.12 Granted 482,040 12.36 1.86 Vested ( 215,430 ) 7.43 Forfeited ( 93,940 ) 5.74 Outstanding Balance at September 30, 2021 652,654 $ 9.12 1.92 The grant date fair value is based on the estimated fair value of the Company’s common stock on the date of grant. All RSUs granted vest upon the satisfaction of a service-based vesting condition. As of September 30, 2021, there was $ 4,552,000 of unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining period of 1.92 years. NOTE 13 – LOSS PER SHARE The following table provides information relating to the calculation of loss per common share: 29 Table of Contents Three Months ended September 30, Nine Months ended September 30, 2021 2020 2021 2020 (Dollars in thousands, except per share data) (Dollars in thousands, except per share data) Basic and diluted loss per share Net loss from continuing operations $ ( 9,613 ) $ ( 6,667 ) $ ( 19,777 ) $ ( 10,860 ) Less: preferred stock accretion - ( 220 ) ( 101 ) ( 638 ) Less: preferred stock dividends - ( 115 ) ( 51 ) ( 345 ) Net loss attributable to shareholders from continuing operations $ ( 9,613 ) $ ( 7,002 ) $ ( 19,929 ) $ ( 11,843 ) Net loss from discontinued operations - ( 2 ) ( 4 ) ( 215 ) Net loss attributable to shareholders $ ( 9,613 ) $ ( 7,004 ) $ ( 19,933 ) $ ( 12,058 ) Weighted average common shares outstanding - basic and diluted 41,938,863 26,907,069 38,357,167 22,781,807 Basic and diluted loss per share from continuing operations $ ( 0.23 ) $ ( 0.26 ) $ ( 0.52 ) $ ( 0.52 ) Basic and diluted loss per share from discontinued operations 0.00 ( 0.00 ) ( 0.00 ) ( 0.01 ) Basic and diluted loss per share $ ( 0.23 ) $ ( 0.26 ) $ ( 0.52 ) $ ( 0.53 ) Common stock equivalents excluded due to anti-dilutive effect 2,429,924 4,134,979 2,429,924 4,134,979 As the Company had a net loss for the three and nine months ended September 30, 2021, the following 2,429,924 potentially dilutive securities were excluded from diluted loss per share: 694,299 for outstanding warrants, 1,082,971 related to outstanding options and 652,654 related to outstanding RSUs. As the Company had a net loss for the three and nine months ended September 30, 2020, the following 4,134,979 potentially dilutive securities were excluded from diluted loss per share: 1,004,155 for outstanding warrants, 923,844 related to the Series A Preferred Stock, 509,325 related to the Series B Preferred Stock, 1,287,921 related to outstanding options and 409,734 related to outstanding RSUs. NOTE 14 – SUBSEQUENT EVENTS Forgiveness of PPP Loans In October 2021, the Company was informed the Loans, as described in NOTE 8 – DEBT, forgiveness was processed by the Small Business Administration (“SBA”) and the Company’s Loans have been fully forgiven. These Loans are now considered paid in full by SBA. S-8 Amendment to the 2017 Plan The Company previously filed a Registration Statement on Form S-8 (File No. 333-220864) with the SEC in connection with the registration of an aggregate of 3,000,000 shares of the Company’s common stock, to be issued under the 2017 Plan. Pursuant to General Instruction E of Form S-8, the Company filed a registration statement on Form S-8 solely to register an additional 4,368,733 shares of its common stock available for issuance under the 2017 Plan. This increase was approved by the Company’s Board of Directors on May 7, 2021, and by the Company’s stockholders on September 14, 2021 at the Company’s annual meeting. Form S-3 Registration Statement Resale Shares On October 29, 2021 the Company filed a prospectus related to the resale from time to time of up to 2,186,931 shares (the “Resale Shares”) of our common stock, by the selling stockholders in connection with the acquisition. The Company issued the Resale Shares to the selling stockholders on August 18, 2021, as a portion of the purchase price consideration. The Company registered the Resale Shares on behalf of the selling stockholders pursuant to the Waycare purchase agreement. 30 Table of Contents