UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark~~

(Mark One)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2020~~

2021

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to

_________

Commission File Number: 001-38338

~~Rekor Systems, Inc.~~

~~(Exact name of registrant as specified in its charter)~~

~~Delaware~~		~~81-5266334~~ Rekor Systems, Inc.
(Exact name of registrant as specified in its charter)

Delaware

81-5266334

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

~~7172~~

6721 Columbia Gateway Drive, Suite 400

Columbia, MD

(Address principal executive offices)

21046

(Zip Code)

(410) 762-0800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☐	☐	Accelerated filer	☐
Non-accelerated filer☒	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.0001 par value per share	REKR	The Nasdaq Stock Market

As of November ~~9, 2020,~~15, 2021, the Registrant had ~~32,974,257~~43,977,218 shares of common stock, $0.0001 par value per share outstanding.

SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties, including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestiture, merger, acquisition, or other business combination that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.

Table of Content

REKOR SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~September~~SEPTEMBER 30, ~~2020~~

2021

PART I - FINANCIAL INFORMATION			4
ITEM 1.	FINANCIAL STATEMENTS		4
	UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS		4
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS		5
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS'~~SHAREHOLDERS’ EQUITY (DEFICIT)		6
	UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS		7
	NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS		8
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32	31
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	46	45
ITEM 4.	CONTROLS AND PROCEDURES	47	45

PART II - OTHER INFORMATION		48	46
ITEM 1.	LEGAL PROCEEDINGS	48	46
ITEM 1A.	RISK FACTORS	49	47
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50	48
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	51	49
ITEM 4.	MINE SAFETY DISCLOSURES	51	49
ITEM 5.	OTHER INFORMATION	51	49
ITEM 6.	EXHIBITS	51	50

SIGNATURES			51


~~SIGNATURES~~	523

Table of Contents

P~~ART~~

PART I FINANCIAL INFORMATION

I~~TEM~~

ITEM 1. FINANCIAL STATEMENTS

REKOR SYSTEMS, INC. AND SUBSIDIARIES

C~~ONDENSED~~

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

September 30, 2020

December 31, 2019

ASSETS

Current Assets

Cash and cash equivalents
$24,154
$1,075
Restricted cash and cash equivalents
  573
  461
Accounts receivable, net
  966
  776
Inventory
  591
  302
Note receivable, current portion
  255
  -
Other current assets, net
  361
  175
Current assets of discontinued operations
  3
  7,441
Total current assets
  26,903
  10,230
Long-term Assets


Property and equipment, net
  554
  442
Right-of-use lease assets, net
  276
  283
Goodwill
  6,336
  6,336
Intangible assets, net
  7,429
  8,244
Investments in unconsolidated companies
  75
  -
Note receivable, long-term
  1,445
  -
Long-term assets of discontinued operations
  -
  3,457
Total long-term assets
  16,115
  18,762
Total assets
$43,018
$28,992
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)


Current Liabilities


Accounts payable and accrued expenses
$3,834
$3,678
Loan payable, current portion
  370
  -
Lease liability, short-term
  232
  148
Contract liabilities
  1,234
  749
Current liabilities of discontinued operations
  114
  5,757
Total current liabilities
  5,784
  10,332
Long-term Liabilities


Notes payable, long-term
  976
  20,409
Loan payable, long-term
  504
  -
Lease liability, long-term
  60
  161
Contract liabilities, long-term
  936
  775
Other long-term liabilities
  10
  10
Long term liabilities of discontinued operations
  14
  536
Total long-term liabilities
  2,500
  21,891
Total liabilities
  8,284
  32,223
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value, 505,000 shares authorized and 502,327 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
  6,442
  5,804
Commitments and Contingencies


Stockholders' Equity (Deficit)


Common stock, $0.0001 par value, 100,000,000 and 30,000,000 shares authorized, 32,911,854 and 21,595,653 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
  3
  2
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, 2020 and December 31, 2019, respectively
  -
  -
Series B Cumulative Convertible Preferred stock, $0.0001 par value, 240,861 shares authorized, issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
  -
  -
Additional paid-in capital
  68,117
  19,371
Accumulated deficit
  (39,828)
  (28,408)
Total stockholders’ equity (deficit)
  28,292
  (9,035)
Total liabilities and stockholders’ equity (deficit)
$43,018
$28,992

	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		0			75
Note receivable, long-term		1,105			1,360
SAFE investment		1,000			0
Other long-term assets		127			0
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			0
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		0			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		0			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		0			0
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		0			0
Treasury stock, 19,361 and 0 shares as of September 30, 2021 and December 31, 2020, respectively		(319	)		0
Additional paid-in capital		169,944			68,238
Accumulated other comprehensive income		6			0
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.

Table of Contents

REKOR SYSTEMS, INC. AND SUBSIDIARIES

C~~ONDENSED~~

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF OPERATIONS

(Dollars in thousands, except share amounts)

(Unaudited)

Three Months ended September 30,

Nine Months ended September 30,

2020

2019

2020

2019

Revenue
$2,126
$1,536
$6,399
$3,962
Cost of revenue
  984
  390
  2,753
  1,152
Gross profit
  1,142
  1,146
  3,646
  2,810





Operating expenses:




General and administrative expenses
  3,168
  2,600
  8,896
  6,259
Selling and marketing expenses
  560
  587
  1,356
  1,081
Research and development expenses
  781
  450
  2,143
  757
Operating expenses
  4,509
  3,637
  12,395
  8,097





Loss from operations
  (3,367)
  (2,491)
  (8,749)
  (5,287)
Other income (expense):




Loss on extinguishment of debt
  (3,081)
  -
  (3,281)
  (1,113)
Interest expense
  (218)
  (1,182)
  (2,468)
  (2,724)
Other income
  6
  157
  27
  123
Gain on sale of business
  -
  -
  3,631
  -
Total other expense
  (3,293)
  (1,025)
  (2,091)
  (3,714)
Loss before income taxes
  (6,660)
  (3,516)
  (10,840)
  (9,001)
Income tax provision
  (7)
  (12)
  (20)
  (35)
Net loss from continuing operations
$(6,667)
$(3,528)
$(10,860)
$(9,036)
Net loss from discontinued operations
  (2)
  (100)
  (215)
  (2,392)
Net loss
$(6,669)
$(3,628)
$(11,075)
$(11,428)
Loss per common share from continuing operations - basic and diluted
  (0.26)
  (0.19)
  (0.52)
  (0.51)
Loss per common share discontinued operations - basic and diluted
  -
  (0.01)
  (0.01)
  (0.12)
Loss per common share - basic and diluted
$(0.26)
$(0.20)
$(0.53)
$(0.63)





Weighted average shares outstanding




Basic and diluted
  26,907,069
  19,878,518
  22,781,807
  19,592,679

	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		0			(3,081	)		0			(3,281	)
Interest expense		(21	)		(218	)		(72	)		(2,468	)
Gain on the sale of business		0			0			0			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		0			0			(150	)		0
Net loss from continuing operations		(9,613	)		(6,667	)		(19,777	)		(10,860	)
Net loss from discontinued operations		0			(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			0			6			0
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.

Table of Contents

REKOR SYSTEMS, INC. AND SUBSIDIARIES

C~~ONDENSED~~

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(Dollars in thousands, except share amounts)

(Unaudited)

Shares of Common Stock

Common Stock

Shares of Series B Preferred Stock

Series B Preferred Stock

Additional Paid-In Capital

Accumulated Deficit

Total Stockholders’ Equity (Deficit)

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 June 30, 2019
  19,382,185
$2
  240,861
$-
$16,496
$(20,094)
$(3,596)
Stock-based compensation
  -
  -
  -
  -
  76
  -
  76
Exercise of cashless warrants in exchange for common stock
  813,975
  -
  -
  -
  -
  -
  -
Exercise of warrants in exchange for common stock
  103,125
  -
  -
  -
  103
  -
  103
Issuance of common stock pursuant to at the market offering, net
  103,566
  -
  -
  -
  38
  -
  38
Exercise of warrants related to series A preferred stock
  3,638
  -
  -
  -
  4
  -
  4
Preferred stock dividends
  -
  -
  -
  -
  -
  (114)
  (114)
Accretion of Series A preferred stock
  -
  -
  -
  -
  (191)
  -
  (191)
Net loss
  -
  -
  -
  -
  -
  (3,628)
  (3,628)
Balance as of September 30, 2019
  20,406,489
$2
  240,861
$-
$16,526
$(23,836)
$(7,308)








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








Balance as of December 31, 2018
  18,767,619
$2
  240,861
$-
$15,518
$(12,064)
$3,456
Stock-based compensation
  -
  -
  -
  -
  314
  -
  314
Issuance of warrants in conjunction with notes payable
  -
  -
  -
  -
  706
  -
  706
Exercise of cashless warrants in exchange for common stock
  828,541
  -
  -
  -
  -
  -
  -
Exercise of warrants in exchange for common stock
  103,125
  -
  -
  -
  103
  -
  103
Common stock issued in OpenALPR acquisition
  600,000
  -
  -
  -
  397
  -
  397
Issuance of common stock pursuant to at the market offering, net
  103,566
  -
  -
  -
  38
  -
  38
Exercise of warrants related to series A preferred stock
  3,638
  -
  -
  -
  4
  -
  4
Preferred stock dividends
  -
  -
  -
  -
  -
  (344)
  (344)
Accretion of Series A preferred stock
  -
  -
  -
  -
  (554)
  -
  (554)
Net loss
  -
  -
  -
  -
  -
  (11,428)
  (11,428)
Balance as of September 30, 2019
  20,406,489
$2
  240,861
$-
$16,526
$(23,836)
$(7,308)

	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	)		-		$	0	$	148,754		$	3	$	(53,269	)	$	95,173
Stock-based compensation		-		0		-			0			-			0		694			0		0			694
Exercise of warrants related to series A preferred stock		1,213		0		-			0			-			0		1			0		0			1
Shares issued as part of the Waycare Acquisition		2,784,474		0		-			0			-			0		20,287			0		0			20,287
Issuance upon exercise of stock options		130,380		0		-			0			-			0		208			0		0			208
Issuance upon vesting of restricted stock units		19,448		0		-			0			-			0		0			0		0			0
Change in unrealized gain on short-term investments		-		0		-			0			-			0		0			3		0			3
Net loss		-		0		-			0			-			0		0			0		(9,613	)		(9,613	)
Balance as of September 30, 2021		43,948,281	$	4		(19,361	)	$	(319	)		-		$	0	$	169,944		$	6	$	(62,882	)	$	106,753

Balance as of June 30, 2020		22,942,546	$	2		-		$	0			240,861		$	0	$	22,180		$	0	$	(33,044	)	$	(10,862	)
Stock-based compensation		-		0		-			0			-			0		202			0		0			202
Issuance of common stock pursuant to Exchange Agreement		4,349,497		0		-			0			-			0		17,325			0		0			17,325
Exercise of cashless warrants in exchange for common stock		171,522		0		-			0			-			0		0			0		0			0
Exercise of warrants in exchange for common stock		625,000		0		-			0			-			0		463			0		0			463
Issuance of common stock pursuant to at the market offering, net		4,677,595		1		-			0			-			0		27,752			0		0			27,753
Exercise of warrants related to series A preferred stock		16,214		0		-			0			-			0		17			0		0			17
Issuance upon exercise of stock options		129,480		0		-			0			-			0		398			0		0			398
Preferred stock dividends		-		0		-			0			-			0		0			0		(115	)		(115	)
Accretion of Series A preferred stock		-		0		-			0			-			0		(220	)		0		0			(220	)
Net loss		-		0		-			0			-			0		0			0		(6,669	)		(6,669	)
Balance as of September 30, 2020		32,911,854	$	3		-		$	0			240,861		$	0	$	68,117		$	0	$	(39,828	)	$	28,292

Balance as of December 31, 2020		33,013,271	$	3		-		$	0			240,861		$	0	$	68,238		$	0	$	(43,050	)	$	25,191
Stock-based compensation		-		0		-			0			-			0		2,600			0		0			2,600
Exercise of cashless warrants in exchange for common stock		62,921		0		-			0			-			0		0			0		0			0
Exercise of warrants in exchange for common stock		54,235		0		-			-			-			0		307			0		0			307
Exercise of warrants related to series A preferred stock		97,805		0		-			0			-			0		101			0		0			101
Public underwriting		6,126,939		1		-			0			-			0		70,124			0		0			70,125
Shares issued as part of the Waycare Acquisition		2,784,474		0		-			0			-			0		20,287			0		0			20,287
Conversion of series A preferred stock		899,174		0		-			0			-			0		7,775			0		0			7,775
Conversion of series B preferred stock		517,611		0		-			0			(240,861	)		0		179			0		0			179
Issuance upon exercise of stock options		195,782		0		-			0			-			0		434			0		0			434
Issuance upon vesting of restricted stock units		196,069		0		-			0			-			0		0			0		0			0
Shares withheld upon vesting of restricted stock units		-		0		(19,361	)		(319	)		-			0		0			0		0			(319	)
Preferred stock dividends		-		0		-			0			-			0		0			0		(51	)		(51	)
Accretion of Series A preferred stock		-		0		-			0			-			0		(101	)		0		0			(101	)
Change in unrealized gain on short-term investments		-		0		-			0			-			0		0			6		0			6
Net loss		-		0		-			0			-			0		0			0		(19,781	)		(19,781	)
Balance as of September 30, 2021		43,948,281	$	4		(19,361	)	$	(319	)		-		$	0	$	169,944		$	6	$	(62,882	)	$	106,753

Balance as of December 31, 2019		21,595,653	$	2		-		$	0			240,861		$	0	$	19,371		$	0	$	(28,408	)	$	(9,035	)
Stock-based compensation		-		0		-			0			-			0		539			0		0			539
Issuance of common stock pursuant to Exchange Agreement		4,349,497		0		-			0			-			0		17,325			0		0			17,325
Exercise of cashless warrants in exchange for common stock		214,740		0		-			0			-			0		0			0		0			0
Exercise of warrants in exchange for common stock		1,180,000		0		-			0			-			0		874			0		0			874
Issuance of common stock pursuant to at the market offering, net		5,216,562		1		-			0			-			0		29,929			0		0			29,930
Exercise of warrants related to series A preferred stock		74,177		0		-			0			-			0		77			0		0			77
Issuance upon exercise of stock options		281,225		0		-			0			-			0		640			0		0			640
Preferred stock dividends		-		0		-			0			-			0		0			0		(345	)		(345	)
Accretion of Series A preferred stock		-		0		-			0			-			0		(638	)		0		0			(638	)
Net loss		-		0		-			0			-			0		0			0		(11,075	)		(11,075	)
Balance as of September 30, 2020		32,911,854	$	3		-		$	0			240,861		$	0	$	68,117		$	0	$	(39,828	)	$	28,292

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

Table of Contents

REKOR SYSTEMS, INC. AND SUBSIDIARIES

C~~ONDENSED~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

Nine Months ended September 30,
2020 2019
Cash Flows from Operating Activities
Net loss from continuing operations $ (10,860) $ (9,036)
Net loss from discontinued operations                             (215)                                (2,392)
Net loss                         (11,075)                              (11,428)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Bad debt expense                                 36                                       -
      Depreciation                               270                                    243
      Amortization of right-of-use lease asset                               139                                      51
      Share-based compensation                               539                                    314
      Amortization of financing costs                               653                                    768
      Amortization of intangible assets                               977                                    663
      Loss on extinguishment of debt                            3,281                                  1,113
      Gain on sale of AOC Key Solutions                           (2,619)                                       -
      Gain on sale of TeamGlobal                           (1,012)                                       -
      Loss on sale of Secure Education                                 -                                        3
      Changes in operating assets and liabilities:
         Accounts receivable                             (226)                                   (910)
         Inventory                             (289)                                   (312)
         Other current assets                             (186)                                      57
         Accounts payable and accrued expenses                               940                                  1,676
         Contract liabilities                               646                                    982
         Lease liability                             (149)                                      (6)
            Net cash used in operating activities - continuing operations                           (7,860)                                (4,394)
            Net cash used in operating activities - discontinued operations                           (3,884)                                (4,861)
            Net cash used in operating activities                         (11,744)                                (9,255)
Cash Flows from Investing Activities
      Capital expenditures                             (544)                                   (656)
      Proceeds from sale of Secure Education                                 -                                    250
      Proceeds from sale of AOC Key Solutions                            3,400                                       -
      Proceeds from sale of TeamGlobal                            2,300                                       -
    Investment in equity investment                               (75)                                       -
      Proceeds from AOC Key Solutions notes receivable                               600                                       -
            Net cash provided by (used in) by investing activities - continuing operations                            5,681                                   (406)
            Net cash used in investing activities - discontinued operations                                 -                                       -
            Net cash provided by (used in) investing activities                            5,681                                   (406)
Cash Flows from Financing Activities
      Proceeds from PPP loan                               874                                       -
Payment of stock issuance costs associated with Note Exchange transaction                               (73)                                       -
      Repayments of notes payable                           (7,266)                                       -
      Net proceeds from notes payable                                 -                                  3,839
      Net proceeds from exercise of options                               640                                       -
      Net proceeds from exercise of warrants                               874                                    103
      Net proceeds from exercise of warrants associated to series A preferred stock                                 77                                        4
      Net proceeds from at-the-market agreement                          29,930                                      38
      Payment of preferred dividends                                 -                                   (108)
      Payment of debt modification costs                             (300)                                       -
            Net cash provided by financing activities - continuing operations                          24,756                                  3,876
            Net cash provided by financing activities - discontinued operations                            4,171                                  5,224
            Net cash provided by financing activities                          28,927                                  9,100
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations                          22,577                                   (924)
Net increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations                               287                                    363
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents                          22,864                                   (561)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period                            1,866                                  2,768
Cash, cash equivalents and restricted cash and cash equivalents at end of period $ 24,730 $ 2,207

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents at end of period - continuing operations $ 24,154 $ 885
Restricted cash and cash equivalents at end of period - continuing operations                               573                                    708
Cash and cash equivalents at end of period - discontinued operations                                   3                                    614
Cash, cash equivalents and restricted cash at end of period $ 24,730 $ 2,207

	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			0
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			0
Unrealized gain on short-term investments		(6	)		0
Loss on extinguishment of debt		0			3,281
Gain on sale of AOC Key Solutions		0			(2,619	)
Gain on sale of TeamGlobal		0			(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	)		0
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	)		0
SAFE Investment		(1,000	)		0
Capital expenditures		(1,618	)		(544	)
Proceeds from sale of AOC Key Solutions		0			3,400
Proceeds from sale of TeamGlobal		0			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			0
Proceeds from PPP loans		0			874
Payment of notes payable		(29	)		0
Proceeds from notes receivable		255			600
Payment of stock issuance costs associated with the Note Exchange transaction		0			(73	)
Repayments of notes payable		0			(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		0			29,930
Repurchases of common stock		(319	)		0
Payment of debt modification costs		0			(300	)
Net cash provided by financing activities - continuing operations		70,874			25,356
Net provided by financing activities - discontinued operations		0			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.

Table of Contents

REKOR SYSTEMS, INC. AND SUBSIDIARIES

N~~OTES~~

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, ~~2020,~~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, ~~2020~~2021 and ~~2019.~~

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, ~~2020~~2021, are not necessarily indicative of the results to be expected for the year ending December 31, ~~2020.~~

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, ~~2019.~~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 ~~was formed in February 2017~~delivers integrated solutions, actionable insights, and ~~is currently~~predictions that increase roadway safety with its disruptive technology. With a ~~leader in~~global footprint across 65 countries, the ~~field of artificial intelligence ("AI") enabled vehicle identification~~Company provides actionable and ~~management systems. In development for over six years using machine learning algorithms, the Company’s core software enables the creation of more powerful~~real-time insights to commercial clients, as well as government entities. Rekor’s capabilities appeal to businesses and capable vehicle recognition systems that can be deployed at a fraction of the cost of traditional legacy systems. The software provides a wider field of view, greater light sensitivity and recognitions at faster speeds with higher accuracy rates. It also includes the ability to identify the color, make and type of a vehicle and its direction of travel. These capabilities are particularly useful to governmental entities ~~and businesses~~ in solving a wide variety of real-world ~~vehicle related~~mobility and infrastructure-related operational challenges. In addition, the reduction in cost, increased number and improved performance of internet protocol connected cameras has presented significant new uses for vehicle recognition technology that were not previously available or cost effective.

In March 2019, through its subsidiary, OpenALPR Software Solutions, LLC (“OpenALPR”), Rekor acquired certain assets and certain liabilities of OpenALPR Technology, Inc. (such assets and liabilities being referred to herein as “OpenALPR Technology”). The financial information in this Quarterly Report only includes OpenALPR in the results of operations beginning as of March 12, 2019.

~~During the third quarter of 2019, the Company began to separately report the results of Global Technical Services, Inc. (“TeamGlobal”),~~Currently, customers use the Company’s ~~wholly owned subsidiary, as operations held~~solutions for ~~sale. TeamGlobal provides skilled technical professionals~~a multitude of applications, including roadway safety and ~~maintenance~~incident management, traffic and ~~modification specialists to the aerospace~~infrastructure analytics, sustainability and ~~aviation maintenance industries. On June 29, 2020, the Company sold TeamGlobal to certain members~~green initiatives, public safety and contactless compliance.

Table of Contents

Use of ~~TeamGlobal's management team and began to separately report the results~~Estimates

The preparation of ~~TeamGlobal as discontinued operations. See Note 3.~~

During the first quarter of 2020, the Company began to separately report the results of AOC Key Solutions, Inc. (“AOC Key Solutions”) another of the Company’s wholly owned subsidiaries as operations held for sale. On April 2, 2020, the Company sold AOC Key Solutions to a member of AOC Key Solutions’ management and began to separately report the results of AOC Key Solutions as discontinued operations. See Note 3.

During the first quarter of 2020, the Board of Directors of the Company approved a strategic shift by the Company to focus on its technology services and products. In addition to the contemplated sale of AOC Key Solutions and TeamGlobal, the Company determined to present the operations of Firestorm Solutions, LLC (“Firestorm Solutions”) and Firestorm Franchising, LLC (“Firestorm Franchising” and together with Firestorm Solutions, “Firestorm”) as discontinued operations. Prior to the Company’s decision to sell TeamGlobal and AOC Key Solutions, and discontinue the operations of Firestorm, the assets, liabilities and operating results for these subsidiaries were presented in the Professional Services segment. As a result of the decision, the Company determined that all of the Professionals Services segment should be classified as discontinued operations.

Since the Company is reporting the historical operating results and cash flows of the Company’s Professional Services segment as discontinued operations, they have been excluded from continuing operations for all periods presented. The assets and liabilities of the Professional Services segment are presented as current and long-term assets and liabilities of discontinued operations in the unaudited condensed consolidated ~~balance sheets~~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 ~~presented as a loss~~not apparent from ~~discontinued operations~~other sources. Actual results may differ from those estimates under different assumptions or conditions.

Reclassifications

Certain amounts in the ~~unaudited condensed consolidated statement of operations.~~

~~Reclassification~~

~~Certain~~ prior ~~year amounts have been reclassified to conform with the current year presentation. Amounts for the three and nine month periods ending September 30, 2019 and the year ending December 31, 2019,~~year's financial statements have been reclassified to conform to the current ~~year~~year's presentation. ~~Due~~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 ~~sale of TeamGlobal, the sale of AOC Key Solutions,~~three and nine month period ending September 30, 2020 and the ~~discontinuance of all professional services activities, certain amounts~~period ended December 31, 2020, have been reclassified ~~in order~~ to conform to the current ~~period~~year’s presentation.

~~Going Concern Assessment~~

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, ~~or available to be 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 ~~including~~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 ~~expenditures~~programs or ~~programs and its ability to raise additional capital, if necessary,~~expenditures to the extent management has the proper authority to ~~execute them~~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 ~~in February 2017~~ 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 ~~public company corporate overhead and~~ non-capital expenditures related to the scaling ~~and~~of existing products, development of new products and service offerings ~~in connection~~and marketing efforts associated with ~~the focus on the technology of the Company.~~these products and services. As of and for the nine months ended September 30, ~~2020,~~2021, the Company had working capital of $28,203,000 and a ~~net~~comprehensive loss from continuing operations of ~~$10,860,000 and working capital of $21,230,000.~~

$19,771,000.

The ~~Company's net~~Company’s cash ~~position was~~ increased by ~~$22,577,000~~$15,157,000 for the nine months ended September 30, ~~2020~~2021 primarily due ~~primarily~~ to the net proceeds of ~~$29,930,000~~$70,125,000 from the ~~At Market Issuance Sales Agreement (the "Sales Agreement") and the net cash proceeds of $6,300,000 from the sale of AOC Key Solutions and TeamGlobal, which includes the repayment~~completion of the ~~$600,000 AOC Key Solutions Subordinate Note,~~Public Offering (see NOTE 10 - STOCKHOLDERS’ EQUITY for details on the Public Offering). This amount was offset by the net ~~loss from operations~~cash outlay of $40,699,000 in connection with the ~~period. As~~acquisition of ~~September 21, 2020,~~Waycare (see NOTE 2 – ACQUISITIONS for details on the ~~Company voluntarily terminated the Sales Agreement (see Note 10)~~Waycare acquisition).

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 Company's ability to generate positive operating results and complete the execution of its business strategy will depend on (i) its ability to continue the growth of its technology business, (ii) the continued performance of its contractors, subcontractors and vendors, (iii) its ability to maintain and build good relationships with its lenders and financial intermediaries, (iv) its ability to maintain timely collections from existing customers, and (v) the stabilization of the world economy and global financial markets. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise, depending on the severity of such impact, materially adversely affect its operating results.

The Company’s operations have been affected by the recent and ongoing outbreak of the coronavirus disease (“COVID-19”) which was declared a pandemic by the World Health Organization in March 2020. The impact has resulted in a slowdown in the Company’s rate of growth and includes disruptions in the delivery and installation of equipment, slower than expected contract approvals and implementation of projects by its customers, the need for employees to work remotely, restrictions on travel affecting the Company’s ability to attend meetings, conferences, consultations and installations and otherwise provide and market its products and services, and disruptions to its customers' operations which may affect its revenues. The Company benefited from the financing under the CARES Act. The Company continues to evaluate the potential impact of the pandemic and the ultimate disruption that may be caused by the outbreak is uncertain. Possible additional effects may include, but are not limited to, continuing disruption to the Company’s customers and revenue, absenteeism in the Company’s labor workforce, unavailability of products and supplies used in operations, and a decline in value of assets held by the Company. As a result, the pandemic may result in a material adverse impact on the Company’s financial position, operations and cash flow.

~~Use of Estimates~~

The preparation of financial statements in conformity with U.S. GAAP requires the extensive use of management estimates. Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the 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 collectability of accounts receivable, fair value of debt and equity instruments and income taxes. 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.

~~Goodwill and Intangible Assets~~

~~Goodwill represents the~~ excess ~~of the fair value of~~purchase consideration ~~transferred in a business combination~~ over the fair value of ~~tangible~~acquired assets and ~~intangible assets acquired, net of the fair value of~~ liabilities ~~assumed. Goodwill~~ is ~~tested for impairment within one year of acquisitions or annually~~recorded as ~~of October 1, and whenever indicators of impairment exist. In testing~~goodwill. The Company will assess goodwill for impairment ~~the Company may elect to utilize a qualitative assessment to evaluate whether it is~~annually, or more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company’s qualitative assessment indicates that goodwill impairment is more likely than not, the Company will perform a two-step impairment test. The Company will test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book valueoften if events or ~~qualitative factors~~changes in circumstances indicate that it ~~is more likely than not that goodwill is~~might be impaired, ~~a second step is performed~~by comparing its carrying value to ~~compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. The Company estimates the fair value of~~ the reporting units using discounted cash flows. Forecasts of future cash flows are based on the Company’s best estimate of future net sales and operating expenses, based primarily on expected growth and general economic conditions.

~~Identifiable intangible assets are initially valued at~~unit’s fair value using generally accepted valuation methods appropriate for the type of intangible asset. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and are reviewed for impairmentvalue. As if ~~indicators of impairment arise. Except for goodwill,~~September 30, 2021 the Company ~~does~~has not completed its annual impairment assessment. During the nine months ended September 30, 2021 and 2020, we have not recognized any ~~intangible assets with indefinite useful lives.~~

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 ~~FASB ASC~~the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 323, Investments – Equity Method and Joint ~~Ventures.~~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.

~~In June~~

Treasury Stock

Treasury stock is recorded at acquisition cost. Upon disposition of ~~2020, the Company announced a joint venture~~treasury shares gains and losses are recorded as increases or decreases to additional paid-in capital with losses in ~~which the Company would have a 50 percent equity interest in Roker Inc. In the third quarter~~excess of ~~2020, the Company contributed $75,000 for its 50 percent equity interest. This investment is accounted for under the equity method.~~

~~In February 2017, the Company contributed substantially all of the assets and certain liabilities related~~previously recorded gains charged directly 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 has elected to report this investment at cost, less impairment. In 2018, the Company recorded an impairment of $262,000, related to the investment in Global Public Safety, effectively reducing the total investment value to $0.

~~The carrying amount of the Company’s investments are included as part of investments in unconsolidated companies in the unaudited condensed consolidated balance sheets.~~

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, ~~inventory,~~short-term investments, accounts receivable and accounts payable approximate fair value as of September 30, ~~2020~~2021 and December 31, ~~2019~~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, ~~2020~~2021 and December 31, ~~2019~~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 ~~Accounting Standards Codification (“ASC”)~~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.

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 ~~has concluded that~~considers its ~~Series A Preferred Stock is a~~note receivable and Simple Agreement for Future Equity (“SAFE”) investment to be Level 3 ~~financial instrument~~investments and that the fair value approximates the carrying ~~value, which includes the accretion of the discounted interest component through September 30, 2020.~~ value.

There were no changes in levels during the nine months ended September 30, ~~2020.~~

~~The Company considers its note receivables to be Level 3 investmentsand that the fair value approximates the carrying value~~.

2021.

Note Receivables

In connection with the sale of AOC Key Solutions in April 2020, the Company received a $600,000, five-year promissory note due March 2025, that carries an interest rate of 8%. Based on the general market conditions and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates the current market rates.

~~In September 2020, the full principal balance of the $600,000 note associated with the sale of AOC Key Solutions was paid in full.~~

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%4.0% and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note ~~will begin~~began in January 2021. Based on ~~the~~ general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates ~~the~~ 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, and is included as part of other income on the unaudited condensed consolidated statement of operations. Interest income for the three and nine months ended September 30, 2019 was immaterial.

respectively.

Revenue Recognition

The Company derives its revenues ~~substantially~~primarily from Software as a Service (“SaaS”), subscriptions, customer support services, contactless compliance solutions, implementation services, perpetual license sales and ~~subscription fees for software and related products and services. A portion~~the sale of ~~the subscription fees are generated through the Company’s eCommerce website rather than though in-person sales. In addition, the Company derives net revenues~~hardware in connection with ~~certain citation and collection services in connection with the Company’s automated traffic safety and parking enforcement services.~~

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. If the consideration promised in the contract includes a variable amount, for example maintenance fees, the Company includes an estimate of the amount it expects to receive for the total transaction price, if it is probable that a significant reversal of cumulative revenue recognized will not occur.

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~~

●

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):

Three Months ended September 30,

Nine Months ended September 30,

2020

2019

2020

2019

Revenue

Licensing and subscription revenue
$1,341
$575
$4,122
$1,386
Automated traffic safety enforcement
  785
  961
  2,277
  2,576
Total revenue
$2,126
$1,536
$6,399
$3,962

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

~~Licensing~~

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 ~~revenues~~contracts with customers are ~~derived principally from fees~~generally for ~~technology products and services, including software licenses and subscriptions, hardware leases and sales, and other related support services.~~

~~In March 2019,~~a term of one to five years. The payment for SaaS solutions may be received either at the ~~Company acquired substantially all~~inception of the ~~assets~~arrangement or over the term of the arrangement. These SaaS solutions are considered to have a ~~software development company, OpenALPR Technologies, Inc. The software acquired from this acquisition~~single performance obligation where the customer simultaneously receives and ~~subsequently developed by~~consumes the ~~Company have provided~~benefit, and as such we recognize revenue for these solutions ratably over the ~~basis for~~term of the ~~Company’s licensing and subscription revenue. Licensing and subscription services include~~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 ~~Company's proprietary software employs a convolutional neural network architecture~~subscription arrangements with customers typically do not provide the customer with the right to classify images and features that include seamless video analysis and data analytics. Current customers include law enforcement agencies, highway authorities, parking system operators, private security companies, and wholesale and retail operations supporting logistics and customer loyalty programs.

~~Included in the licensing and subscription revenue is revenue that was recognized through~~take possession of the Company’s eCommerce platform. For the three and nine months ended September 30, 2020, the Company recognized revenues of $235,000 and $621,000, respectively, for products and services that were purchased through the Company’s eCommerce platform. For the three and nine months ended September 30, 2019, the Company recognized revenues of $167,000 and $280,000, respectively, for products and services that were purchased through the Company’s eCommerce platform.

~~During the second quarter of 2019, the Company changed its primary method of selling its~~ software ~~from perpetual software licenses, with associated maintenance services, to service subscriptions of limited duration. These subscriptions give the customer~~at any time. Instead, customers are granted continuous access to the ~~use of the latest version of the Company's~~Company’s software ~~only during the term of the subscription. Revenue is generally recognized ratably~~or services over the ~~contract term.~~contractual period. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. ~~Revenue~~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 ~~Company's perpetual software licenses are recognized up-front at~~guarantee that the ~~point in time when the software is made~~customer support resources and personnel will be available to them. Revenue for customer support is recognized ratably over the ~~customer.~~

~~Automated traffic safety enforcement~~

~~Automated traffic safety enforcement~~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.

Table of Contents

Contactless compliance solutions revenues reflect arrangements to provide traffic safety systems to ~~a number of~~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 ~~analyses~~and analyzes the images to provide data and supports citation management services. ~~The Company also provides an enterprise parking enforcement solution that~~In the first quarter of 2021, the Company ~~licenses~~launched a new service offering for the State of Oklahoma to ~~parking management companies~~support its Uninsured Vehicle Enforcement Diversion (“UVED”) Program. Rekor provides hardware, software and ~~municipalities.~~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 ~~camera systems that are operated, or the number of~~ citations ~~issued~~collected by the relevant municipality.~~The~~

Implementation revenue is incurred when the Company ~~also installs and maintains public safety systems, which~~provides pilot programs to customers. Pilot programs may involve a ~~combination of installation and lease payments or simply software licenses to~~one-time fee for a defined period in which the customer can use the ~~Company's~~Company’s software in connection with a previously installed camera ~~network. Revenue~~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~~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 ~~and monthly~~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 ~~lease or license payments.~~

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.

A This may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance ~~obligation~~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 ~~a promise~~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 ~~to transfer services that are distinct. The performance obligations that~~ are not yet satisfied or have only been partially satisfied ~~are performance obligations that are expected~~as of a particular date, the unsatisfied portion is to be recognized as revenue in the ~~future for a contract with a customer which was executed as~~future. As of ~~a particular date. On~~ September 30, ~~2020,~~2021, the Company had approximately ~~$16,459,000~~$23,845,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately ~~27%~~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 ~~five~~four years thereafter.

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 ~~$488,000~~$425,000 and ~~$440,000~~$600,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of September 30, ~~2020~~2021 and December 31, ~~2019,~~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 ~~six~~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, ~~2020~~2021 were not materially impacted by any other factors. Contract liabilities as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 were ~~$2,170,000~~$3,716,000 and ~~$1,524,000,~~$2,084,000, respectively. ~~All contract liabilities as of September 30, 2020 and December 31, 2019 were attributable to continuing operations.~~ During the nine months ended September 30, ~~2020 $622,000~~2021, $920,000 of the contract liabilities balance as of December 31, ~~2019 were~~2020 was recognized as revenue.

The services due for contract liabilities described above are shown below as of September 30, ~~2020~~2021 (dollars in thousands):

2020
$607
2021
  750
2022
  368
2023
  275
2024
  160
Thereafter
  10
Total
$2,170

~~Practical Expedients Election~~ ‒

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, ~~2020,~~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, ~~2019,~~2020 costs incurred to ~~obtain~~fulfill contracts in excess of one year ~~have~~had been ~~immaterial to date.~~

~~Segment Reporting~~

~~The Financial Accounting Standard Board (“FASB”) ASC Topic 280,Segment Reporting, requires that an enterprise report selected information about reportable segments in its financial reports issued to its stockholders. In 2019, the Company changed its operating~~immaterial.

Cash and reportable segments from one segment to two segments: the Technology Segment and the Professional Services Segment. The two segments reflected the Company’s separate focus on technology products and services versus professional services.

As part of a strategic shift by the Company, all operations related to the Professional Services segment have been classified as discontinued operations. As of January 1, 2020, the Company had one reportable segment. Continuing operations are all operations that previously were reported as part of the Technology Segment.

~~Cash,~~ Cash Equivalents, and Restricted Cash and Cash Equivalents

The Company considers all highly liquid debt instruments, including U.S. Treasury Bills purchased with ~~the~~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, ~~2020~~2021 and December 31, ~~2019~~2020 were ~~$573,000~~$1,063,000 and ~~$461,000,~~$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.

Table of Contents

Concentrations of Credit Risk

The Company ~~places~~deposits its temporary cash investments with ~~higher~~highly rated quality financial institutions that are located in the United States ~~(“U.S.”).~~and Israel. The United States deposits are federally insured up to $250,000 per account. As of September 30, ~~2020 and December 31, 2019,~~2021 the Company had deposits from continuing operations totaling ~~$24,727,000~~$36,165,000 in three U.S. institutions and ~~$1,536,000, respectively,~~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 that was federally insured up to $250,000 per account.~~

institution.

The Company has a market concentration of revenue and accounts receivable from continuing operations related to its customer base.

Customer A accounted for ~~17% and~~ less than ~~10%~~10.0% of the Company’s total revenues for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Customer A accounted for ~~20%~~19.0% and less than ~~10%~~10.0% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively.

Customer B accounted for less than ~~10% and 14%~~10.0% of the Company’s total revenues for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. Customer B accounted for 13.0% and less than ~~10% and 18%~~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 ~~2019,~~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, ~~2020,~~2021, accounts receivable from ~~Customer C~~Company A and ~~Customer~~Company D totaled 19%18.0% and ~~16%~~ 14.0% of the unaudited condensed consolidated accounts receivable balance. As of December 31, ~~2019, Customer C~~2020, Company A and Company B accounted for ~~26%~~43.0% and 20.0%, respectively, of the unaudited condensed consolidated accounts receivable balance.

No other single customer accounted for more than ~~10%~~10.0% of the Company’s unaudited condensed consolidated ~~revenue~~revenues for the three and nine ~~month period~~months ended September 30, 2021 and 2020 ~~and 2019~~ or the unaudited condensed consolidated accounts receivable balance as of September 30, ~~2020~~2021 and December 31, ~~2019.~~

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, ~~2019.~~

2020.

New Accounting Pronouncements Effective in the Nine ~~Months~~months ended September 30, ~~2020~~

~~In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13,~~ ~~Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement~~ (“ASU 2018-13”). This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have a material impact on the Company’s disclosures.

~~New Accounting Pronouncements Effective in Future Periods~~

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. ~~The~~ 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 ~~will adopt~~adopted this guidance in the first quarter of ~~2021~~2021. The adoption of ASU 2020-01 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes.

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 itASU 2016-13 to have a material impact on its unaudited condensed consolidated ~~financial statements.~~

statements of operations and balance sheets.

The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the ~~standard~~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

~~OpenALPR Technology Acquisition~~

On ~~March 12, 2019,~~August 18, 2021, the Company completed ~~the~~its acquisition of ~~certain assets and assumed certain liabilities of OpenALPR Technology, Inc. (the “OpenALPR Technology Acquisition”). Consideration paid as part~~Waycare by acquiring 100.0% of the ~~OpenALPR Technology Acquisition was: $7,000,000 in cash,~~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 ~~adjustment after closing; 600,000~~a customary working capital adjustment. The purchase price was comprised of $40,813,000 of cash and 2,784,474 shares of ~~Rekor~~the Company’s common stock, valued at ~~$397,000; and $5,000,000~~$20,287,000. As a result of the ~~2019 Promissory Notes principal amount, together with an accompanying warrant to purchase 625,000 shares~~transaction, Waycare has become a wholly-owned subsidiary of ~~Rekor common stock, exercisable over a period of five years, at an exercise price of $0.74 per share, valued at $208,000.~~

the Company.

The purchase price ~~allocation~~has been preliminarily allocated to the assets acquired and liabilities assumed ~~are~~ based on fair values as of the acquisition date. Since the ~~OpenALPR Technology Acquisition~~acquisition of Waycare occurred on ~~March 12, 2019,~~August 18, 2021, the results of operations ~~including OpenALPR Technology Acquisition~~for Waycare from the date of acquisition have been included in the Company’s ~~unaudited condensed~~ consolidated statement of operations for the three and nine months ended September 30, ~~2020.~~

2021. The table below shows the breakdown related to the ~~final~~preliminary purchase price allocation for the ~~OpenALPR Technology Acquisition~~acquisition (dollars in thousands):

~~Accounts receivable, net~~	$~~381~~
~~Other current assets, net~~	13 16
~~Property and equipment, net~~	21
~~Contract liabilities~~	~~(388~~) Table of Contents
~~Net assets acquired~~	27
~~Less intangible assets~~	~~7,436~~
~~Consideration paid~~	~~(12,397~~)
~~Net goodwill recorded~~	$~~4,934~~

~~Cash consideration~~	$~~7,000~~
~~Note payable~~	~~5,000~~
~~Common stock consideration~~	~~397~~
~~Total acquisition consideration~~	$~~12,397~~

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 ~~OpenALPR Technology Acquisition~~acquisition of Waycare as if it was consummated as of January 1, ~~2019.~~2020. This unaudited pro forma financial information is presented for ~~informational~~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, ~~2019~~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,

2020

2019

2020

2019

Total revenue from continuing operations
$2,126
$1,536
$6,399
$4,931
Net loss from continuing operations
  (6,667)
  (3,528)
  (10,860)
  (8,228)
Basic and diluted loss per share from continuing operations
$(0.26)
$(0.19)
$(0.52)
$(0.46)
Basic and diluted number of shares
  26,907,069
  19,878,518
  22,781,807
  19,761,363

	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 – ~~DISCONTINUED OPERATIONS~~

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 ~~2019~~30, 2021 and ~~March~~December 31, 2020 the investment in Global Public Safety had a value of $0.

Table of Contents

In June 2020, the Company ~~determined that TeamGlobal and AOC Key Solutions, respectively, met the criteria for held for sale accounting because~~announced a joint venture in which the Company ~~expected to complete~~would have a 50 percent equity interest in Roker Inc. (“Roker”). In the ~~sale~~third quarter of ~~TeamGlobal~~2020 and ~~AOC Key Solutions during~~ the ~~next 12~~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 ~~plan~~SAFE with Roker (the “Roker SAFE”). The Roker SAFE allows the Company to ~~concentrate~~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 ~~development~~cost method of ~~its Technology segment. Historically, TeamGlobal~~accounting and ~~AOC Key Solutions have been presented~~included under SAFE investment on the unaudited condensed consolidated balance sheets and is shown as ~~part~~long-term, as it is not readily convertible into cash. If the Company identifies factors that may be indicative of impairment the ~~Company’s Professional Services segment.~~

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 ~~remainder of its~~ historical ~~Professionals~~Professional Services segment should be classified as discontinued operations. As part of this plan TeamGlobal, AOC Key Solutions and Firestorm ~~has also been~~were classified as discontinued operations and presented as part of discontinued operations. ~~Previously, Firestorm was not included as part of held or sale and discontinued operations as it did not meet the threshold of being considered a strategic shift.~~

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~~“AOC Key SolutionsBuyer”), by which the Company agreed to sell AOC Key Solutions, to theAOC Key SolutionsBuyer.

TheAOC Key SolutionsBuyer 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 ~~September 30,~~December 31, 2020, the AOC Key Solutions Subordinated Note had been paid in full by the AOC Key Solutions Buyer.

~~The table below shows the breakdown related to the AOC Key Solutions Purchase Agreement (dollars in thousands):~~

~~Total assets sold~~	$~~4,549~~
~~Total liabilities assumed~~	~~3,514~~
~~Net assets sold~~	~~1,035~~
~~Closing cost~~	~~346~~
~~Consideration received (see below)~~	~~4,000~~
~~Gain on sale of AOC Key Solutions~~	$~~2,619~~

~~Cash consideration~~	$~~3,400~~
~~Note receivable~~	~~600~~
~~Total AOC Key Solution Purchase Agreement consideration~~	$~~4,000~~

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 ~~(the “Pledge Agreement”)~~ with respect to all the outstanding shares of TeamGlobal being acquired by the TeamGlobal Buyer.

~~The table below shows the breakdown related to the TeamGlobal Purchase Agreement (dollars in thousands):~~

~~Total assets sold~~	$~~9,996~~
~~Total liabilities assumed~~	~~7,130~~ 18
~~Net assets sold~~	~~2,866~~
~~Closing cost~~	~~122~~ Table of Contents
~~Consideration received (see below)~~	~~4,000~~
~~Gain on sale of TeamGlobal~~	$~~1,012~~

~~Cash consideration~~	$~~2,300~~
~~Note receivable~~	~~1,700~~
~~Total TeamGlobal Purchase Agreement consideration~~	$~~4,000~~

The dispositions of AOC Key Solutions and TeamGlobal are athe 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~~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, ~~2020~~2021 and ~~2019~~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, ~~2020~~2021 and December 31, ~~2019.~~

2020.

The assets and liabilities classified as discontinued operations in the ~~Company's~~Company’s unaudited condensed consolidated financial statements as of September 30, ~~2020~~2021 and December 31, ~~2019~~2020 are shown below (dollars in thousands):

September 30. 2020

December 31, 2020

Global

AOC Key Solutions

Firestorm

Total

Global

AOC Key Solutions

Firestorm

Total

ASSETS

Cash and cash equivalents
$-
$-
$3
$3
$225
$93
$12
$330
Accounts receivable, net
  -
  -
  -
  -
  2,763
  4,055
  -
  6,818
Other current assets, net
  -
  -
  -
  -
  238
  52
  3
  293
Current assets of discontinued operations
  -
  -
  3
  3
  3,226
  4,200
  15
  7,441
Property and equipment, net
  -
  -
  -
  -
  113
  41
  -
  154
Right-of-use lease assets, net
  -
  -
  -
  -
  130
  499
  -
  629
Goodwill
  -
  -
  -
  -
  669
  -
  -
  669
Intangible assets, net
  -
  -
  -
  -
  1,994
  -
  -
  1,994
Deposits and other long-term assets
  -
  -
  -
  -
  -
  11
  -
  11
Long-term assets of discontinued operations
  -
  -
  -
  -
  2,906
  551
  -
  3,457
Total assets of discontinued operations
$-
$-
$3
$3
$6,132
$4,751
$15
$10,898
LIABILITIES








Accounts payable and accrued expenses
$-
$-
$31
$31
$461
$1,260
$33
$1,754
Lines of credit
  -
  -
  -
  -
  1,842
  1,894
  -
  3,736
Lease liability, short term
  -
  -
  83
  83
  113
  100
  54
  267
Current liabilities of discontinued operations
  -
  -
  114
  114
  2,416
  3,254
  87
  5,757
Lease liability, long term
  -
  -
  14
  14
  30
  467
  39
  536
Long-term liabilities of discontinued operations
  -
  -
  14
  14
  30
  467
  39
  536
Total liabilities of discontinued operations
$-
$-
$128
$128
$2,446
$3,721
$126
$6,293

	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		0		5
Long-term liabilities of discontinued operations		0		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,

2020

2019

Global

AOC Key Solutions

Firestorm

Total

Global

AOC Key Solutions

Firestorm

Total

Revenue
$-
$-
$-
$-
$6,205
$3,397
$50
$9,652
Cost of revenue
  -
  -
  -
  -
  5,378
  1,836
  6
  7,220
Gross profit
  -
  -
  -
  -
  827
  1,561
  44
  2,432
Operating expenses:








General and administrative expenses
  -
  -
  2
  2
  850
  1,073
  25
  1,948
Selling and marketing expenses
  -
  -
  -
  -
  (1)
  138
  -
  137
Operating expenses
  -
  -
  2
  2
  849
  1,211
  25
  2,085
Income loss income from operations
  -
  -
  (2)
  (2)
  (22)
  350
  19
  347
Other expense:








Loss on extinguishment of debt
  -
  -
  -
  -
  (31)
  (46)
  -
  (77)
Interest expense
  -
  -
  -
  -
  (107)
  (47)
  -
  (154)
Other expense
  -
  -
  -
  -
  -
  (154)
  (62)
  (216)
Total other expense
  -
  -
  -
  -
  (138)
  (247)
  (62)
  (447)
Income (loss) from discontinued operations
  -
  -
  (2)
  (2)
  (160)
  103
  (43)
  (100)
Income tax provision from discontinued operations
  -
  -
  -
  -
  -
  -
  -
  -
Net income (loss) from discontinued operations
$-
$-
$(2)
$(2)
$(160)
$103
$(43)
$(100)

Nine Months ended September 30,

2020

2019

Global

AOC Key Solutions

Firestorm

Total

Global

AOC Key Solutions

Firestorm

Total

Revenue
$10,510
$3,392
$5
$13,907
$20,260
$9,916
$1,005
$31,181
Cost of revenue
  9,190
  1,866
  -
  11,056
  17,551
  5,367
  501
  23,419
Gross profit
  1,320
  1,526
  5
  2,851
  2,709
  4,549
  504
  7,762
Operating expenses:








General and administrative expenses
  1,341
  1,284
  (2)
  2,623
  2,745
  3,634
  1,017
  7,396
Selling and marketing expenses
  79
  131
  -
  210
  142
  412
  48
  602
Impairment of intangibles
  -
  -
  -
  -
  -
  -
  1,549
  1,549
Operating expenses
  1,420
  1,415
  (2)
  2,833
  2,887
  4,046
  2,614
  9,547
Income loss income from operations
  (100)
  111
  7
  18
  (178)
  503
  (2,110)
  (1,785)
Other income (expense):








Loss on extinguishment of debt
  -
  -
  -
  -
  (31)
  (46)
  -
  (77)
Interest expense
  (166)
  (74)
  -
  (240)
  (208)
  (108)
  -
  (316)
Other income (expense)
  5
  2
  -
  7
  2
  (151)
  (65)
  (214)
Total other expense
  (161)
  (72)
  -
  (233)
  (237)
  (305)
  (65)
  (607)
Income (loss) from discontinued operations
  (261)
  39
  7
  (215)
  (415)
  198
  (2,175)
  (2,392)
Income tax provision from discontinued operations
  -
  -
  -
  -
  -
  -
  -
  -
Net income (loss) from discontinued operations
$(261)
$39
$7
$(215)
$(415)
$198
$(2,175)
$(2,392)

	Three Months ended September 30,					Nine Months ended September 30,
	2021		2020			2021			2020
	Firestorm		Firestorm			Firestorm			Global			AOC Key Solutions			Firestorm			Total
Revenue	$	0	$	-		$	0		$	10,510		$	3,392		$	5		$	13,907
Cost of revenue		0		0			0			9,190			1,866			-			11,056
Gross profit		0		0			0			1,320			1,526			5			2,851
Operating expenses:
General and administrative expenses		0		2			-			1,341			1,284			(2	)		2,623
Selling and marketing expenses		0		0			4			79			131			0			210
Operating expenses		0		2			4			1,420			1,415			(2	)		2,833
Income loss income from operations		0		(2	)		(4	)		(100	)		111			7			18
Other (income) expense:
Interest expense		0		0			0			(166	)		(74	)		0			(240	)
Other expense (income)		0		0			0			5			2			0			7
Total other (income) expense		0		0			0			(161	)		(72	)		0			(233	)
Net income (loss) from discontinued operations	$	0	$	(2	)	$	(4	)	$	(261	)	$	39		$	7		$	(215	)

Table of Contents

NOTE 45 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Supplemental disclosures of cash flow information for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 were as follows (dollars in thousands):

Nine Months ended September 30,

2020

2019

Cash paid for interest - continuing operations
$1,211
$839
Cash paid for interest - discontinued operations
  241
  184
Cash paid for taxes - continuing operations
  -
  -
Cash paid for taxes - discontinued operations
  -
  11
Non-cash financing - Paid-in-kind interest transferred to the principal balance of the 2019 Promissory Notes
  (1,283)
  -
Non-cash operating - Paid-in-kind interest transferred to the principal balance of the 2019 Promissory Notes
  1,283
  -
Note received as part of TeamGlobal Sale
  1,700
  -
Financing:


Notes payable - continuing operations
  -
  21,000
Debt discount financing costs
  -
  (2,599)
Extinguishment of debt
  -
  (1,113)
Repayment of notes payable and interest expense, net of debt discount
  -
  (2,515)
Investment in OpenALPR Technology
  -
  (12,000)
Issuance of warrants in conjunction with notes payable
  -
  706
Accounts Payable
  -
  360
Proceeds from notes payable
  -
  3,839
Note Exchange transaction (1)


Exchange of accrued interest
  (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
  -
Payment of stock issuance costs associated with Note Exchange transaction
  (73)
  -
Adoption of ASC-842 Lease Accounting:


Right-of-use lease asset
  132
  291
Lease liability
$(132)
$(291)

~~(1)See Note 7 for additional information related to the Note Exchange transaction.~~

	Nine Months ended September 30,
	2021			2020
Cash paid for interest - continuing operations	$	0		$	1,211
Note received as part of TeamGlobal Sale		0			1,700
Paid-in-kind interest transferred from accrued interest to the principal balance of the 2019 Promissory Notes		0			1,283
Increase in accounts payable and accrued expenses related to purchases of property and equipment		2,479			0
Fair market value of shares issued in connection with the acquisition of Waycare		20,287			0
Non-cash Note Exchange transaction
Exchange of accrued interest and stock issuance costs		0			(226	)
Debt extinguishment costs		0			(2,484	)
Exchange of the net principal balance of the 2019 Promissory Notes		0			(14,688	)
Issuance of common stock		0			17,325
Cash impact of Note Exchange transaction		0			(73	)
Financing activities:
Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock		(1,005	)		0
Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock		(6,770	)		0
Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock		(179	)		0
New Leases under ASC-842
Right-of-use lease asset		6,039			132
Lease incentive recognized in property and equipment, net		3,833			0
Lease liability	$	(9,872	)	$	(132	)

NOTE 56 – OPERATING LEASES

~~The Company has~~

We have operating leases for office facilities in various locations throughout the United ~~States.~~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, 2020 and 2019 was $72,000 and $57,000, and for the nine months ended September 30, 2020 and 2019 was $175,000 and $131,000, respectively, and is part of general and administrative expenses in the accompanying unaudited condensed consolidated statement of operations.

~~Cash paid for amounts included in the measurement of operating lease liabilities from continuing operations was $64,000 and $168,000 for the three and nine months ended September 30, 2020.~~

~~Supplemental balance sheet information related to leases as of September 30, 2020 was as follows (dollars in thousands):~~

Operating lease right-of-use lease assets from continuing operations
$276


Current portion of lease liability
$232
Long-term portion of lease liability
  60
Total lease liability from continuing operations
$292


Weighted average remaining lease term - operating leases from continuing operations
  1.78


Weighted average discount rate - operating leases
  9%


2020
$63
2021
  195
2022
  19
2023
  19
2024
  18
Total lease payments
  314
Less imputed interest
  22
Maturities of lease liabilities
$292

~~NOTE 6 – INTANGIBLE ASSETS~~

~~Goodwill~~

~~There have been no changes from December 31, 2019 in the carrying amount of goodwill of continuing operations for the nine months ended September 30, 2020.~~

~~Intangible Assets Subject to Amortization~~

~~The following summarizes the change in intangible assets from December 31, 2019 to September 30, 2020 (dollars in thousands):~~

Customer Relationships

Marketing Related

Technology Based

Internally Capitalized Software

Total

Identifiable intangible assets
$461
$327
$7,206
$1,452
$9,446
Accumulated amortization
  (90)
  (150)
  (1,583)
  (194)
  (2,017)
Identifiable intangible assets from continuing operations, net
$371
$177
$5,623
$1,258
$7,429

~~The following provides a breakdown of identifiable intangible assets as of September 30, 2020 (dollars in thousands):~~

December 31, 2019

Additions

Amortization

September 30, 2020

Intangible assets subject to amortization from continuing operations

Customer relationships
$396
$-
$(25)
$371
Marketing related
  230
  -
  (53)
  177
Technology based
  6,395
  -
  (772)
  5,623
Internally capitalized software
  1,223
  162
  (127)
  1,258
Intangible assets subject to amortization from continuing operations
$8,244
$162
$(977)
$7,429

~~These intangible assets are being amortized on a straight-line basis over their weighted average estimated useful life of 5.5 years. Amortization expense attributable to~~ continuing operations for the three months ended September 30, 2021 and 2020 was $105,000 and ~~2019 was $343,000 and $302,000, respectively,~~$72,000, and for the nine months ended September 30, 2021 and 2020 was $278,000 and ~~2019 was $977,000 and $663,000,~~$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):

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	$	0	$	(25	)	$	337
Marketing related		159		0		(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.

Table of Contents

As of September 30, ~~2020,~~2021, the estimated impact on continuing operations from annual amortization ~~expense~~ from ~~continuing operations~~intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):

2020
$343
2021
  1,362
2022
  1,281
2023
  1,148
2024
  1,060
Thereafter
  1,452
Capitalized software not yet placed in service
  783
Total
$7,429

2021	$	1,017
2022		4,008
2023		3,828
2024		3,525
2025		3,516
Thereafter		6,874
Total	$	22,768

NOTE 78 – DEBT

~~Long-Term Debt~~

Firestorm Notes

On January 25, 2017, pursuant to the terms of ~~its~~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%2.0% and the remaining three notes are evenly divided over the remaining $500,000 and payable at an interest rate of 7%7.0%. The notes mature on January 25, 2022. The aggregate balance of these notes payable was ~~$976,000~~$994,000 and ~~$961,000,~~$980,000, net of unamortized interest, as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest rates of ~~$24,000~~$6,000 and ~~$39,000,~~$20,000, respectively.

~~On April 3, 2018,~~ The Company is not paying current interest on these notes and does not expect to pay principal due in January 2022 as the Company entered into a transaction pursuant to which an institutional investor (the “2018 Lender”) loaned $2,000,000 to the Company (the “2018 Promissory Note”). On March 12, 2019, the $2,000,000 balance due on the 2018 Promissory Note was retired in its entirety in exchange for an equivalent principal amount of the 2019 Promissory Notes (see below). In addition, Rekor paid to the 2018 Lender $1,050,000 of consideration for the re-acquisition by the Company of the Lender’s participation interest in the Company and $75,000 of interest due through May 1, 2019. All amounts paid were obtained from the proceeds of the 2019 Promissory Notes. The consideration of $1,050,000 for the 2018 Lender’s participation and unamortized financing costs of $63,000 are recorded as costshas requested rescission in connection with the ~~loss on~~Firestorm acquisition and is currently in litigation with the ~~extinguishment of debt of $1,113,000 for the nine months ended September 30, 2019.~~

~~The principal amounts due for long-term notes payable described above are shown below as of September 30, 2020 (dollars in thousands):~~

2020
$46
2021
  442
2022
  1,386
2023
  -
2024
  -
Thereafter
  -
Total
  1,874


Less unamortized interest
  (24)
Total debt
$1,850


Loan payable, current portion
$370
Loan payable, long-term
  504
Notes payable, long-term
  976
Total debt
$1,850

Amortized financing costs for the three months ended September 30, 2020 and 2019 were $43,000 and $328,000, respectively, and for the nine months ended September 30, 2020 and 2019 were $653,000 and $768,000, respectively, and are included in interest expense on the unaudited condensed consolidated statement of operations.

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 ~~six~~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 ~~six~~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 ~~intends to use~~used the entire Loans amount for qualifying expenses and has to ~~apply~~applied for forgiveness of the Loans in accordance with the terms of the CARES Act. The ~~current and long-term portion of the~~ Loans isare presented ~~as part of loans~~in loan payable, current portion ~~and loans payable, long-term, respectively,~~ on the accompanying unaudited ~~condensed~~ consolidated balance sheets.

~~The~~

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 consultation with the Department of Treasury, issued new guidance that creates uncertainty regarding the qualification requirements for a PPP loan for public companies. The Company will apply for forgiveness once Newtek Small Business Finance, LLC begins to accept applications.

full by SBA.

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%~~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. As of September 30, 2020, the Company had settled the full amount of the 2019 Promissory Notes.~~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 ~~were~~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 Amendments~~

~~On March 26, 2020, the Company entered into the First Amendment to Note Purchase Agreement which effectively extended the maturity date of the 2019 Promissory Notes~~ ~~from March 11, 2021 to~~ June 12, 2021. The Company incurred $100,000 in transaction costs related to the First Amendment to the Note Purchase Agreement, these costs were financing costs and deferred over the remaining life of the loan.

~~On April 2, 2020, in connection with the sale of AOC Key Solutions~~, the Company transferred $2,200,000 to the holders of the 2019 Promissory Notes. $2,000,000 of the funds were used as a prepayment of principal while the other $200,000 was paid as premium percentage as the portion of the 2019 Promissory Notes were paid prior to the maturity date. The premium percentage paid in connection with this transaction is presented as part of debt extinguishment costs in the unaudited condensed consolidated statement of operations.

On April 2, 2020, the Company entered into a partial release and Second Amendment to Note Purchase Agreement (the “Second Amendment”), by and among the Credit Parties, the Purchasers and the Agent. Pursuant to the terms of the Second Amendment, AOC Key Solutions was released as a Credit Party and the assets related to AOC Key Solutions were released as collateral, and the Asset Disposition Proceeds terms of the Note Purchase Agreement were amended to reflect the transaction.

On June 29, 2020, in connection with the TeamGlobal Purchase Agreement, the Company entered into a Partial Release and Third Amendment to Note Purchase Agreement (the “Third Amendment”), by and among the Credit Parties, the Purchasers and the Agent. Pursuant to the terms of the Third Amendment, TeamGlobal was released as a credit party and the assets related to TeamGlobal were released as collateral, the mandatory prepayments provision of the 2019 Promissory Notes were waived with regard to the sale of TeamGlobal, and the maturity date of the 2019 Notes remaining outstanding was extended to December 31, 2021.

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.~~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~~$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 ~~PIK~~paid-in-kind (“PIK”) interest associated towith 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 ~~unaudited condensed~~accompanying consolidated ~~statement~~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 ~~unaudited condensed~~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.

~~For~~

Interest Expense

The following table presents the ~~three and nine months ended September 30, 2020, the Company recognized the following debt extinguishment costs: $200,000 related to an early cash payment in April 2020~~interest expense related to the ~~2019 Promissory Notes, $2,484,000 related to~~contractual interest and the Exchange Agreements completed in July 2020 2019 Promissory Notes and $684,000 related to an early cash payment in September 2020 to retire the remaining balance of the 2019 Promissory Notes, these costs were offset by the forgiveness of loans in the amount of $87,000 in the third quarter of 2020. These costs are presented as partamortization of debt ~~extinguishment~~issuance costs ~~in the unaudited condensed consolidated statement of operations,~~ for the ~~three and nine months ended~~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

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, ~~2020.~~

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 89 – 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’s income tax provision for the three and nine months ended September 30, 2020 was~~ ~~$7,000 and $20,000, respectively. The Company’s income tax provision for the three and nine months ended September 30, 2019 was $12,000 and $35,000, respectively.~~

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 ~~nine~~three months ended September 30, ~~2020.~~

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, ~~2020.~~

~~Management has~~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 ~~management~~the Company believes that it is ~~more-likely-than-not~~not more likely than not that their benefits will ~~not~~ 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, ~~2020~~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 ~~2016~~2017 through ~~2018~~2019 tax years remain subject to examination by the Internal Revenue Service.

NOTE 910 – 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 ~~and~~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.

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 ~~executives~~directors and officers named as counterclaim-defendants, which resulted in the Firestorm Principals voluntarily dismissing ~~those~~the counterclaims against those parties. The Company thereafter filed its response and affirmative defenses to the Counterclaims on April ~~22.~~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. ~~That~~With respect to the Firestorm Principals’ motion ~~was fully briefed as~~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 ~~February~~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, ~~2020. It remains~~ ~~sub judice, and no argument has been scheduled upon it.~~

2021. The Firestorm Principals filed their reply in support of their partial summary judgment motion on July 9, 2021.

In ~~the year~~ 2020, the Firestorm Principals filed ~~suit~~various suits in New York, ~~Supreme Court in Sullivan County~~Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel. The ~~Company believes that~~defendants in the suits moved to dismiss the amended complaint. At this ~~suit is without merit~~stage of these litigations, suits against two of the directors have been dismissed and ~~intend~~one has been permitted to ~~vigorously litigate this matter.~~

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.

Vigilant Solutions, LLC, a subsidiary of Motorola Solutions, Inc., filed a complaint on February 21, 2020 against the Company and certain of the Company’s subsidiaries in the US District Court for the District of Maryland. The complaint alleged that certain of the Company’s products violated a patent held by Vigilant. On June 10, 2020, the Company filed an Answer to the complaint denying the pertinent allegations and asserting substantial defenses to the allegations contained in the complaint, including that the patent underlying the complaint is invalid. ~~On September 23, 2020, the Company filed a Motion to Stay Pending~~ ~~Inter Partes~~ ~~Review in light of a Petition for~~ ~~Inter Partes~~ ~~Review filed by the Company and certain subsidiaries against Vigilant in the U.S. Patent and Trademark Office (as discussed below). Vigilant opposed the Motion.~~

~~On September 8, 2020, the Company and certain of the Company’s subsidiaries that were defendants in the Vigilant Solutions, LLC Litigation discussed above filed a Petition for~~ ~~Inter Partes~~ Review at the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (“PTAB”) requesting that the PTAB review and find unpatentable certain claims of the patent asserted by Vigilant in the Vigilant Solutions, LLC Litigation. The PTAB was expected to decide whether to institute review in March or April 2021.

In November of 2020, Rekor and Vigilant Solutions, LLC agreed to resolve the district court litigation and intellectual property rights action between the parties pursuant to a confidential settlement agreement. The Company will have no material effect from its obligations under the agreement.

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 ~~parties are currently awaiting the Court’s decision on joinder. Nevertheless,~~Company considers this matter closed.

On September 18, 2020, Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against the Company ~~believes~~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.

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 ~~has substantial defenses to~~had filed against the ~~claims~~Company and ~~intend to vigorously defend the allegations~~several of ~~those claims.~~

its executives.

In addition, from time to time, the Company ismay be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of ~~the Company’s~~ 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 ~~opinion of the~~ Company’s ~~management~~opinion that the outcome of these proceedings, individually and collectively, will not be material to the Company’s ~~unaudited condensed~~ consolidated financial statements as a whole.

NOTE 1011 – STOCKHOLDERS’ EQUITY ~~(DEFICIT)~~

Common Stock

~~The~~

Effective March 18, 2020, the Company ~~has~~ 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~~$0.0001 par ~~value,~~ ~~which was effective March 18, 2020.~~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.As

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 ~~September 30, 2020, and December 31, 2019,~~$350,000,000.

Waycare Acquisition

In connection with the acquisition as described in NOTE 2 – ACQUISITIONS, the Company issued ~~and outstanding common~~2,784,474 shares of ~~Rekor were 32,911,854 and~~ ~~21,595,653, respectively.~~

~~For~~ the three and nine months ended September 30, 2020, the Company issued 129,480 and 281,225 shares of Rekor common stock related to the exercise of common stock options, respectively. For the three and nine months ended September 30, 2019, the Company issued no shares of Rekor common stock related to the exercise of common stock options.

~~During the third quarter of 2020, the Company issued 4,349,497 shares of Rekor~~Company’s common stock as part of the ~~Exchange Agreementswith certain 2019 Lenders of the Company’s 2019 Promissory Notes.~~The Company incurred stock issuance costs of approximately $73,000 related to legal, accounting, and other fees in connection with the Exchange Agreement. These costs are presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.

consideration.

Public Offering

On ~~March 12, 2019,~~February 9, 2021, the Company issued ~~600,000 shares of Rekor common stock as part of the consideration for the acquisition of the OpenALPR Technology Acquisition.~~

~~At-the-Market Offering~~

On August 14, 2019, the Company entered into the Sales Agreement with B. Riley FBR, Inc. (“B. Riley FBR”) to create an at-the-market equity program under which the Company from time to time offered and sold 6,126,939 shares of its common stock ~~having~~(which includes 799,166 shares of common stock sold pursuant to the exercise of an ~~aggregate~~overallotment option) (the “Public Offering”). The net proceeds to the Company, after deducting the underwriting discounts and commissions and estimated offering ~~price of up~~expenses payable by the Company, were approximately $70,125,000. The shares were sold pursuant to ~~$15,000,000, through or to~~an underwriting agreement with B. Riley ~~FBR. Subject to the terms~~Securities, Inc. and ~~conditions~~Lake Street Capital Markets, LLC, as representatives of the Sales Agreement, B. Riley FBR would use its commercially reasonable efforts to sell the shares of the Company’s common stock from time to time, based upon the Company’s instructions. B. Riley FBR was entitled to a commission equal to 3.0% of the gross proceeds from each sale. The Company incurred issuance costs of approximately $226,000 related to legal, accounting, and other fees in connection with the Sales Agreement. These costs were charged against the gross proceeds of the Sales Agreement and presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.

~~On August 28, 2020, the Company filed Amendment No. 1 to the Sales Agreement dated August 14, 2019 to increase the size of the market equity program~~several underwriters named therein under which the Company from time to time offered and sold shares of its common stock, from an aggregate offering price of up to $15,000,000 to an amended maximum aggregate offering price of up to $40,000,000 through or to B. Riley FBR.The Company incurred issuance costs of approximately $25,000 related to legal fees in connection with the amendment to the Sales Agreement. These costs were charged against the gross proceeds of the Sales Agreement and presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.

~~Sales of the Company’s common stock under the Sales Agreement were issued and sold pursuant to~~ the Company’s shelf registration statement on Form S-3 ~~(File No~~(Registration Statement No. 333-224423)~~, previously~~ filed by the Company with the ~~Securities and Exchange Commission (“SEC”) on April 24, 2018 and declared~~SEC that became effective ~~by the SEC~~ on April 30, 2018. ~~For the nine months ended September 30, 2020, based on settlement date, the Company sold 5,216,562 shares of common stock at~~On February 4, 2021, a ~~weighted-average selling price of $5.92 per share in accordance~~prospectus supplement and accompanying prospectus were filed with the ~~Sales Agreement. Net cash provided for~~SEC in connection with the ~~nine months ended September 30, 2020 from the Sales Agreement~~offering and a related registration statement (File No. 333-252735) was ~~$29,930,000 after paying 3.0% or $926,000 related to cash commissions provided to B. Riley FBR.~~

~~On September 21, 2020, the Company elected to voluntarily terminate its Sales Agreement with B. Riley FBR~~filed pursuant to Rule 462(b) promulgated under the terms of the Sales Agreement. As of the termination date, the Company had offered and sold an aggregate of 6,509,202 shares of common stock pursuant to the Sales Agreement, which resulted in aggregate gross proceeds of $34,154,000.

Securities Act.

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 ~~are~~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 ~~are~~were entitled to quarterly dividends of 7.0% per annum per share. The holders of Series A Preferred Stock have a right to convert each share into common stock at an initial conversion price and a specified conversion price which increases annually based on the passage of time beginning in November 2019. The holders of Series A Preferred Stock also have a put right after 60 months from the issuance date to redeem any or all of the Series A Preferred Stock at a redemption price of $15.00 per share plus any accrued but unpaid dividends. The Company has a call right after 36 months from the issuance date to redeem all of the Series A Preferred Stock at a redemption price which increases annually based on the passage of time which began in November 2019. The Series A Preferred Stock contains an automatic conversion feature based on a qualified initial public offering in excess of $30,000,000 or a written agreement by at least two-thirds of the holders of Series A Preferred Stock at an initial conversion price and a specified price which increases annually based on the passage of time beginning in November 2016.

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 ~~September 30, 2020 and~~ December 31, ~~2019.~~

2020.

Rekor ~~adjusts~~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 iswas recorded through additional paid in capital of ~~$220,000~~$0 and ~~$191,000~~$220,000 for the three months ended September 30, 2021 and 2020, respectively, and ~~2019, respectively,~~ $101,000 and $638,000 ~~and $554,000~~ 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 ~~2019, respectively.~~

~~As of September 30, 2020, and December 31, 2019, 502,327 shares of~~outstanding Series A Preferred Stock ~~were issued and outstanding.~~

~~The holders of Series A Preferred Stock are entitled~~was converted pursuant to ~~quarterly cash dividends of $0.175 (7% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following~~ the ~~end of a quarter. F~~or the three and nine months ended September 30, 2020 and 2019 the Company did not pay cash dividends to shareholders of record of Series A Preferred Stock. Accrued dividends payable to Series A Preferred Stock shareholders were $849,000 and $551,000 as of September 30, 2020 and December 31, 2019, respectively, and are presented as partoriginal terms of the ~~accounts payable and accrued expenses on~~agreement into 899,174 shares of the ~~accompanying unaudited condensed consolidated.~~

Company’s common stock.

Series B Cumulative Convertible Preferred Stock

Of the 2,000,000 authorized shares of preferred stock, 240,861 shares ~~are~~were designated as $0.0001 par value Rekor Series B Cumulative Convertible Preferred Stock (the ~~"Series~~“Series B Preferred ~~Stock"~~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 ~~the TeamGlobal Merger.~~TeamGlobal. The Series B Preferred Stock ~~has~~had a conversion price of $5.00 per share. Each Series B Preferred Stock ~~has~~had an automatic conversion feature based on the share price of Rekor.

~~The~~

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 is entitled to quarterly cash dividends of 1.121% (4.484% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following the end of a quarter. The Company paid $108,000 in cash dividendswas converted pursuant to the ~~Series B Preferred shareholders in June 2019, The Company did not pay any cash dividends to the Series B Preferred shareholders for the nine months ended September 30, 2020. Accrued dividends payable to Series B Preferred Stock shareholders were $138,000 and $54,000 as of September 30, 2020 and December 31, 2019, respectively, and are presented as part~~original terms of the ~~accounts payable and accrued expenses on the accompanying unaudited~~ ~~condensed~~ ~~consolidated balance sheets.~~

~~Warrants~~

~~The Company had warrants outstanding that are exercisable~~agreement into ~~a total of 1,004,155 and 2,251,232 shares of Rekor common stock as of September 30, 2020 and December 31, 2019, respectively.~~

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 exercise price for these warrants is $1.03 and they are exercisable into a total of 165,840 and 240,017 shares of Rekor common stock as of September 30, 2020 and December 31, 2019, respectively. The warrants expire on November 23, 2023. In August 2019, 7,500 of the outstanding warrants were exercised and converted into 3,638 shares of the Company's common stock. In the nine months ended September 30, 2020, 152,927 of the outstanding warrants were exercised and converted into 74,177517,611 shares of the Company’s common stock.

~~As part~~

Warrants

A summary of the ~~acquisition of Firestorm on January 24, 2017,~~warrant activity for the Company ~~issued: warrants to purchase 315,627 shares of its common stock, exercisable over a~~for the 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. As of September 30, 2020 and December 31, 2019, there were 631,254 Firestorm Warrants outstanding.

Pursuant to its 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. As of September 30, 2020, and December 31, 2019, there were 66,666 Secure Education Warrants outstanding.

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, exercisable over a period of five years, at an exercise price of $1.00 per share. These warrants are exercisable commencing April 27, 2019 and expire on October 29, 2023. During the year ended December 31, 2019, 189,813 warrants were exercised in cash and cashless transactions resulting in the issuance of 148,279 shares of common stock. During the nine months ended September 30, 2020, 10,417 warrants were exercised and converted into 7,704 shares of the Company’s common stock. As of September 30, 2020 and December 31, 2019, 6,020 and 16,437 warrants related to the 2018 underwritten public offering remain outstanding, respectively.

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		$	0		$	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

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 $2.5744per 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)

(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 2019, in connection with the 2019 Promissory Notes, the Company issued warrants to purchase 2,500,000 shares of its common stock, 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. During the year ended December 31, 2019, 963,125 warrants were exercised in cash and cashless transactions resulting in the issuance of 783,387 shares of common stock. During the nine months ended September 30, 2020, 1,415,000 warrants were exercised in cash and cashless transactions resulting in the issuance of 1,387,036 shares of common stock. As of September 30, 2020 and December 31, 2019, 134,375 and 1,536,875 warrants related to the 2019 Promissory Notes remain outstanding, respectively.

~~NOTE 11~~ – 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.

~~Stock compensation expense~~ In October 2021, the Company announced it had registered an additional 4,368,733 shares of its common stock available for issuance under the ~~three months ended September 30, 2020 and 2019 was $202,000 and $76,000, respectively, and for the nine months ended September 30, 2020 and 2019 was $539,000 and $314,000, respectively,and is presented as part of general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations.~~

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 ~~to four~~ years with a contractual term of ten years.

~~The 2017 Plan~~

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 ~~administered by the Administrator, which is currently the Board~~presented as part of ~~Directors of the Company. The Administrator has the exclusive authority, subject to the terms~~general and ~~conditions set forth~~administrative expenses in the ~~2017 Plan, to determine all matters relating to awards under the 2017 Plan, including the selection~~accompanying unaudited condensed consolidated statements of individuals to be granted an award, the type of award, the number of shares of Rekor common stock subject to an award, and all terms, conditions, restrictions and limitations, if any, including, without limitation, vesting, acceleration of vesting, exercisability, termination, substitution, cancellation, forfeiture, or repurchase of an award and the terms of any instrument that evidences the award.

When making an award under the 2017 Plan, the Administrator may designate the award as “qualified performance-based compensation,” which means that performance criteria must be satisfied in order for an employee to be paid the award. Qualified performance-based compensation may be made in the form of restricted common stock, restricted stock units, common stock options, performance shares, performance units or other stock equivalents. The 2017 Plan includes the performance criteria the Administrator has adopted, subject to stockholder approval, for a “qualified performance-based compensation” award.

operations.

A summary of stock option activity under the Company’s 2017 Plan for the ~~nine months~~period ended September 30, ~~2020~~2021 is as follows:

Number of Shares Subject to Option

Weighted Average Exercise Price

Weighted Average Remaining Contractual Term (Years)

Aggregate Intrinsic Value

Outstanding Balance at December 31, 2019
  1,655,383
$1.68
  8.33
$3,224
      Granted
  20,000
  4.32
  9.41

      Exercised
  (281,225)
  2.28


      Forfeited
  (62,175)
  3.07


      Canceled
  (44,062)
  2.15


Outstanding Balance at September 30, 2020
  1,287,921
$1.50
  7.84
$5,193
Exercisable at September 30, 2020
  799,550
$1.48
  7.46
$3,324

The weighted average grant date fair value of options granted, to employees and non-employees, for the nine months ended September 30, 2020 and 2019 was $3.18 and $0.52, respectively. The intrinsic value of the stock options granted during the nine months ended September 30, 2020 and 2019 was ~~$29,000~~ ~~and $1,030,000, respectively. The total fair value of options that vested in the nine months ended September 30, 2020 and 2019 was $154,000 and $735,000, respectively.~~

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, ~~2020,~~2021, there was ~~$282,000~~$82,000 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan that will be recognized over ana weighted average ~~remaining~~ period of ~~1.71~~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, ~~2020~~2021 is as follows:

Number of Shares

Weighted Average Unit Price

Weighted Average Remaining Contractual Term (Years)

Outstanding Balance at December 31, 2019
  -
$-
  -
      Granted
  413,634
  4.12
  1.79
      Vested
  -
  -
  -
      Forfeited
  (3,900)
  3.81
  -
Outstanding Balance at September 30, 2020
  409,734
$4.12
  1.79

	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 ~~was~~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, ~~2020,~~2021, there was ~~$1,352,000~~$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 ~~1.79~~1.92 years.

~~Compensation expense for restricted stock and RSUs is recognized on a straight-line basis over the requisite service period. There were no RSUs issued in fiscal year 2019.~~

NOTE 1213 – LOSS PER SHARE

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

Three Months ended September 30,

Nine Months ended September 30,

2020

2019

2020

2019

(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
$(6,667)
$(3,528)
$(10,860)
$(9,036)
    Less: preferred stock accretion
  (220)
  (191)
  (638)
  (554)
    Less: preferred stock dividends
  (115)
  (114)
  (345)
  (344)
        Net loss attributable to shareholders from continuing operations
  (7,002)
  (3,833)
  (11,843)
  (9,934)
Net loss from discontinued operations
  (2)
  (100)
  (215)
  (2,392)
Net loss attributable to shareholders
$(7,004)
$(3,933)
$(12,058)
$(12,326)
    Weighted average common shares outstanding - basic and diluted
  26,907,069
  19,878,518
  22,781,807
  19,592,679
        Basic and diluted loss per share from continuing operations
$(0.26)
$(0.19)
$(0.52)
$(0.51)
        Basic and diluted loss per share from discontinued operations
  -
  (0.01)
  (0.01)
  (0.12)
Basic and diluted loss per share
$(0.26)
$(0.20)
$(0.53)
$(0.63)
       Common stock equivalents excluded due to anti-dilutive effect
  4,134,979
  5,400,047
  4,134,979
  5,400,047

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		0			(220	)		(101	)		(638	)
Less: preferred stock dividends		0			(115	)		(51	)		(345	)
Net loss attributable to shareholders from continuing operations	$	(9,613	)	$	(7,002	)	$	(19,929	)	$	(11,843	)
Net loss from discontinued operations		0			(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 ~~had~~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 ~~net loss~~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 ~~three~~2017 Plan. This increase was approved by the Company’s Board of Directors on May 7, 2021, and ~~nine months ended~~by the Company’s stockholders on September ~~30, 2019,~~14, 2021 at the ~~following5,400,047 potentially dilutive securities were excluded from diluted loss per share: 2,251,232 for outstanding warrants, 959,937~~Company’s annual meeting.

Form S-3 Registration Statement Resale Shares

On October 29, 2021 the Company filed a prospectus related to the ~~Series A Preferred Stock, 481,722 related~~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 ~~Series B Preferred Stock and 1,707,156 related to outstanding options.~~

~~Loss Per Share under Two – Class Method~~

selling stockholders on August 18, 2021, as a portion of the purchase price consideration. The ~~Series A Preferred Stock and Series B Preferred Stock have~~Company registered the ~~non-forfeitable right to participate~~Resale Shares on ~~an as converted basis at~~behalf of the conversion rate then in effect in any common stock dividends declared and, as such, is considered a participating security. The Series A Preferred Stock and Series B Preferred Stock are included in the computation of basic and diluted loss per shareselling stockholders pursuant to the ~~two-class method. Holders of the Series A Preferred Stock and Series B Preferred Stock do not participate in undistributed net losses because they are not contractually obligated to do so.~~

I~~TEM~~Waycare purchase agreement.

Table of Contents

ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties, and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 and our Quarterly ~~Report’s~~Reports for the ~~quarters~~quarter’s ended March 31, ~~2020~~2021 and June 30, ~~2020,~~2021, entitled “Risk Factors” and elsewhere in this Quarterly Report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the ~~"SEC"~~“SEC”) that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. We undertake no obligation to update any forward-looking statement as a result of new information, future events or otherwise.

Specific factors that might cause actual results to differ from our expectations include, but are not limited to:

●

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

●

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

●

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

●

~~financial market conditions and the results of financing efforts;~~

●

~~our ability to successfully identify, integrate and complete acquisitions and dispositions;~~

●

~~our ability to access the public markets for debt or equity capital quickly;~~

●

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

●

~~current and future litigation;~~

●

~~competition from other companies with an established position in the market, we enter or who are seeking to enter markets we already serve;~~

●

our failure to successfully develop products using our technology that are accepted by the markets we serve or tend to serve or the development of new technologies that change the nature of our business or provide our customers with products or services superior to or less expensive than ours; and

●

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

●

risks associated with pandemics and other global health emergencies, such as the spread of a novel strain of coronavirus (“COVID-19”) around the world since the first quarter of 2020, which has caused significant volatility in U.S. and international markets and has created significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies.

●

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

●

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

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

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

●

financial market conditions and the results of financing efforts;

●

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

●

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

●

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

●

current and future litigation;

●

competition from other companies with an established position in the markets we have recently entered or are seeking to enter or from other companies who are seeking to enter markets we already serve;

●

our failure to successfully develop products using our technology that are accepted by the markets we serve or intend to serve or the development of new technologies that change the nature of our business or provide our customers with products or services superior to or less expensive than ours;

●

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

Table of Contents

●

risks associated with pandemics and other global health emergencies, such as the spread of a novel strain of coronavirus (“COVID-19”) around the world since the first quarter of 2020 which has caused significant volatility in U.S. and international markets and has created significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies; and

●

Investors are cautioned that these forward-looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Other than as required by law, we undertake no obligation to update forward-looking statements even though our situation may change in the future. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 (the ~~“2019~~“2020 Annual Report”), our Quarterly ~~Report’s~~Reports for the quarters ended March 31, ~~2020~~2021 and June 30, ~~2020,~~2021 and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.

General

Overview

~~We are~~

Rekor Systems, Inc. develops innovative products and services for the intelligent infrastructure market and is working to drive the world to be safer, smarter, and more efficient. As a ~~leader in~~provider of comprehensive, continuous and real-time roadway intelligence, Rekor delivers integrated solutions, actionable insights and predictions that increase roadway safety, increase efficiency and better protect the ~~field~~environment. With a global footprint across 65 countries, we provide actionable and real-time insights to commercial clients, as well as government entities.

Our vision is to provide innovations that improve the lives, safety and well-being of ~~artificial intelligence ("AI") enabled vehicle identification~~people using AI and ~~intelligent roadway management systems. In development for over six years using machine learning algorithms, our core software enables the creation of more powerful~~other advanced technologies. Our capabilities appeal to businesses and capable vehicle recognition systems that can be deployed at a fraction of the cost of traditional legacy systems. The software provides a wider field of view, greater light sensitivity and recognitions at faster speeds and with higher accuracy rates. It also includes the ability to identify the color, make and type of a vehicle and its direction of travel. These capabilities are particularly useful to governmental entities ~~and businesses~~ in solving a wide variety of real-world ~~vehicle related~~mobility and infrastructure-related operational challenges. ~~In addition,~~Using the ~~reduction in cost, increased number and improved performance of internet protocol connected cameras has enabled significant new uses for vehicle recognition~~latest technology that ~~were not previously available or cost effective. We currently provide~~gathers and collates comprehensive data and transforms this data into actionable insights, the Company delivers useable solutions that empower smart cities and intelligent roadways. Our suite of solutions is seamless, easy to use, and can tie directly into customer workflows, providing value directly to users in their daily operations. Our products and services ~~for governmental organizations, for large~~contribute to building environmentally friendly cities and ~~small businesses~~roadways that leverage our insights to operate more efficiently and ~~for individuals throughout the world.~~sustainably. Customers ~~currently~~can operate our technology on existing systems or use our ~~products or services in over 70 countries, in applications that include public safety, security, customer experience, transportation, parking, operational efficiencies~~advanced sensors and ~~logistics.~~ 

~~Previously, we provided professional services and staffing solutions~~third-party data to the government contracting and the aerospace and aviation industries through our Professional Services Segment. The Professional Services Segment included our wholly owned subsidiaries AOC Key Solutions Inc. (“AOC Key Solutions”).;Global Technical Services, Inc. (“GTS” or “TeamGlobal”), Firestorm Solutions, LLC (Firestorm Solutions”) and Firestorm Franchising, LLC (“Firestorm Franchising” and, together with Firestorm Solutions, “Firestorm”). As partcreate a holistic view of the ~~development~~roadway and infrastructure. Currently, customers use our solutions for a variety of ~~a new line of products for the~~applications, including roadway safety and incident management, traffic and infrastructure analytics, sustainability and green initiatives, public safety and security markets, we determined that our resources were best concentrated on vehicle recognition products and services and began to consider dispositions in our Professional Services Segment. Concurrently, we reorganized and retooled our product development, business development and administrative resources to better serve our Technology Segment. On April 2, 2020, we sold AOC Key Solutions. As of June 29, 2020, we sold Team Global and determined that all the remaining operations that comprised our Professional Services Segment met the criteria to be presented as discontinued.

~~Our continuing operations are conducted~~contactless compliance. We create safer communities by ~~our wholly owned subsidiary, Rekor Recognition Systems, Inc. (“Rekor Recognition”). In connection~~providing government agencies with the ~~development~~technology they need to effectively protect and serve their citizens and provide businesses with solutions to improve customer experience, enhance revenue, reduce operating costs and drive operational efficiency.

Rekor aggregates data using mobile and mounted optical sensors with on-device (“edge”) processing, as well as through the acquisition of several new public safety products, we determined to acquire substantially all the assets of OpenALPR Technology, Inc. This acquisition (the “OpenALPR Technology Acquisition”), completed in March 2019, transferred vehicle recognition softwaredata feeds from third party vendors such as connected vehicles, weather, construction, and associated licenses and proprietary rights to OpenALPR Software Solutions, LLC (“OpenALPR”), a new wholly owned subsidiary of Rekor Recognition. OpenALPR’s vehicle recognition platform, already operating on more than 6,200 cameras that cover over 8,600 lanes of roadway in 56 countries worldwide, has laid the groundwork for expansion, enabling multiple deployment mechanisms for our products and services.

traffic data. Our ~~core vehicle recognition software currently has the capability to analyze multi-spectral images and video streams produced by nearly~~tech stack, with its open architecture, allows seamless integration with any Internet Protocol ~~security camera~~(“IP”) optical device, reducing our clients’ need to invest in legacy system upgrades and ~~concurrently extract license plate~~affording them the ability to gain additional value from existing infrastructure. Our advanced sensors use edge processing to capture, store, and process real-time data ~~by state from more than 85 countries, in addition~~close to the ~~vehicle’s make, color, type~~source, allowing them to provide almost instant actionable insights from the roadway. We use artificial intelligence and ~~direction~~machine learning to process the large amounts of ~~travel. When combined~~information we capture and integrate and use it to provide tailored solutions to our clients. Our sophisticated and proprietary personally identifiable information (“PII”) filter de-identifies relevant data in an irreversible way so that it is incorporated into our intelligent infrastructure platform in full compliance with ~~speed optimized code, parallel processing capability~~the security and ~~best-in-class accessories, such as cameras and communications modules, the software captures license plate~~privacy requirements of each end user. Authorized entities can also leverage our operational data and vehicle characteristics at extremely high vehicle speeds with a high degree of accuracy, even in unusually difficult conditions, such as low lighting, poor weather, extreme camera viewing angles, and obstructions.

~~Since the OpenALPR Technology Acquisition, we have grown our vehicle recognition product and service lines into a much broader range of customer segments, starting with~~to improve public safety and ~~expanding into parking~~institute contactless compliance programs.

Table of Contents

Rekor One™ is our single source platform for intelligent infrastructure. Rekor One provides government agencies with real-time roadway intelligence using cutting edge artificial intelligence and machine learning technology that can be significantly enhanced using our proprietary advanced sensors. The result is a powerful analytics platform that delivers a comprehensive picture of vehicles, traffic, incidents and more within a particular jurisdiction. Rekor One’s actionable insights improve operations, ~~auto wash~~enable better informed decision making, and service, and quick service restaurants and retail. We shifted from a perpetual licensing model to a subscription-based model, rebranded OpenALPR to highlight software products such as “Watchman” and “CarCheck” and released several packagedallow for more strategic allocation of resources. The solution is hardware and software ~~solutions with preloaded versions of each of these vehicle recognition engines. We have also launched a robust eCommerce portal on the OpenALPR.com site, enabling customers~~agnostic, allowing for seamless integration without interrupting existing systems in place. Our platform was built to conveniently purchase Watchman and CarCheck vehicle recognition solutions with just a credit card and a click. This allows owners to immediately enhance their business operations while reducing the cost of service for Rekor. Additional services will be added in the future. By the end of 2020, we expect to have a portfolio of (16 products), including 9 unique products, each with several sub-lines. Completion of this complete set of product offerings allowsallow us to offer full-scale software and hardware vehicle recognition solutions and services for public agencies and commercial or industrial businesses of nearly any size, as well as serve campus and residential settings.

Additionally, the recent launch of our Rekor One™ platform will provide government agencies with a comprehensive vehicle intelligence system that supports multiple agency-specific missions and addresses three major governmental concern: Infrastructure, Safety, and Revenue. By interfacing with multiple databases and operating systems, Rekor One will allow governmental units to observe security and privacy protocols and fractionalize costs based on relative end-user value. With the Rekor One platform, an agency will be able to integrate their existing IP and traffic cameras into a smart multi-dimensional roadway network, providing intelligence that supports both long range planning and quicker responses to dangerous situations. With user dashboards customized per department, each agency can access the information they need while maintaining full compliance with their individual security and privacy requirements. This single interconnected platform can eliminate the need for redundant systems and single-function equipment. Rekor One’s proprietary technology has six patents pending, demonstrating innovation in vehicle recognition and itscreate custom applications for ~~government agencies. The patents cover areas that include privacy enhancements, the intelligent~~an array of use ~~of data, smarter image processing, advanced vehicle identification techniques, and the improved aesthetics of roadside equipment.~~

~~Prior~~cases. Some use cases used today include:

	·	Traffic and Congestion Forecasting
	·	Cross-Agency Incident Management
	·	Electric Vehicle Monitoring
	·	Commercial Vehicle and Tonnage Monitoring
	·	Environmental Impact
	·	On-Demand Traffic View
	·	Contactless Compliance
	·	License Plate Recognition & Vehicle Recognition for Public Safety

Ultimately, we seek to the development of our vehicle identification software, highly accurate results were not available using a typical Internet Protocol camera. We believe that Rekor’s ability to generate results with less expensive hardware is changing the dynamics of the existing public safety market, enabling the creation of increasingly robust networks with cameras at more locations. In addition, we expect our improvements in cost and accuracy to create competitive advantages in tolling systems and logistics operations that currently rely on complex radio frequency identification (RFID) systems. We also expect our lower costs, superior distance and field of view capabilities, along with the ability to capture additional vehicle information, such as direction, color, make and type of vehicle, to open opportunities in other market segments. These opportunities include parking operations, school safety and retail customer loyalty programs and, particularly, smart cities and smart roadways. Smart roadway systems, sometimes referred to as smart transport or intelligent transport systems (“ITS”), inclusive of parking management and guidance, passenger information and traffic management systems, can optimize the movement of vehicles to make travel safer and more efficient. These technologies are expected to enable users to be more coordinated, better informed, and make smarter use of transport networks.

~~Rekor’s vision is to enable “AI Driven Decisions” by enhancing the capabilities in commercial and government sectors with actionable, real-time insights. We~~ deliver ~~these~~ insights through an expanding software portfolio that not only addresses the challenges our customers are currently facing but also empowers them to effectively deal with their evolving ~~needs.~~

challenges in the future.

Our vehicle recognition solution has the capability to analyze multi-spectral images and video streams using AI trained algorithms and concurrently extract license plate data by state or province from approximately 80 countries, together with the vehicle’s make, model, color, body type, and direction of travel. When combined with speed-optimized code, parallel processing capability and best-in-class hardware accessories, such as optical sensors and communications modules, the solution captures license plate data and vehicle characteristics at extremely high vehicle speeds with a high degree of accuracy. It is also able to effectively operate in unusually difficult conditions, such as low lighting, poor weather, extreme camera viewing angles, and obstructions.

Our incident management solution also uses artificial intelligence and machine learning to detect anomalies in regular traffic patterns. A jurisdiction will be broken down into sections of roadway that are then analyzed methodically by our platform. Historical incident information will be fed into the system from multiple sources. This data contains clues that the algorithm can use to identify when a roadway is most likely to exhibit high crash risk, is displaying irregular patterns of traffic, or there might be an incident on the road. Based on current variables at play and the knowledge the system has gained, our platform displays these insights on the live map for agencies to assess and respond to proactively. Each insight and its outcomes are used in the machine learning algorithms to improve the accuracy of our modeling.

It is with this advanced technology and breadth of use-cases across multiple industries that we seek to address issues of aging infrastructure, increasing traffic congestion, and depletion of natural resources, by providing customers with the ability to collect, analyze and communicate actionable roadway and community intelligence in an accurate, real-time, and cost-effective manner. We provide actionable and differentiated answers on a single platform that is built to serve multiple missions.

Our operations are conducted by our wholly owned subsidiary, Rekor Recognition Systems, Inc. (“Rekor Recognition”) and Waycare. In October 2020, we announced the launch of Rekor One™, an advanced platform that serves as a unifying source of roadway intelligence for multiple government agencies across cities, counties, and states. Rekor One™ next generation operating system purpose built for the intelligent infrastructure industry. Using patented AI and Machine learning, our operating system joins many disparate data points and transforms them into purpose-built solutions that provide a more complete picture of the roadway. This technology disrupts the 100-year-old intelligent transportation systems (“ITS”) legacy systems that exist today and brings real-time solutions to customers, all unified under a single platform that helps municipalities and businesses make the world safer, smarter, and more efficient.

Table of Contents

Recent Developments

The most significant developments in our company and business since January 1, ~~2020~~2021 are described below:

●

On November 9, 2020, we announced that the State of Oklahoma will integrate our Rekor One™ platform across the state to provide vehicle information associated with uninsured motorists as part of the state's Uninsured Vehicle Enforcement Diversion Program (“UVED Program”), which is operated by the Oklahoma District Attorneys Council.

●

On October 22, 2020, we announced that the Dauphin County, Pennsylvania, District Attorney’s Office has chosen us to provide vehicle recognition services to support five different law enforcement jurisdictions. The engagement, which totals $525,000 over five years, includes 30 new edge cameras and one in-vehicle Automatic License Plate Recognition (ALPR) system.

●

On October 12, 2020, we announced the launch of Rekor One™, a new platform that will serve as a unifying source of roadway intelligence for government agencies across cities, counties and states. The platform will support multiple community safety, intelligent roadway and revenue generation activities.

●

~~On October 6, 2020, we launched our redesigned eCommerce platform, which will allow our customers to purchase our products and services online.~~

●

On September 9, 2020, we announced Rekor Go, a mobile application that will bring the power of accurate Automatic License Plate Recognition (APLR) to commercial users in a broad array of markets later this fall.

●

~~On August 28, 2020, we increased the maximum~~ aggregate offering price through our At-the-Market Agreement (“Sales Agreement”) up to $40,000,000. On September 21, 2020, the Company elected to voluntarily terminate the Sales Agreement after raising $34,154,000 in aggregate gross proceeds (which included $7,882,000 from prior sales under the Sales Agreement).

●

~~On August 6, 2020,~~ we granted to Verra Mobility a non-exclusive right to resell and distribute our products to Verra Mobility customers and licensed certain software to Verra Mobility to be incorporated into Verra Mobility Products.

●

On July 23, 2020, James K. McCarthy, Chairman of the Board of Directors notified our Board of Directors (the “Board”) of his intention to retire from our Board, effective immediately. Mr. McCarthy did not advise us of any disagreement with the Company on any matter relating to its operations, policies or practices. Effective upon Mr. McCarthy’s resignation as a director, the size of the Board was reduced from eight to seven, and Mr. Robert Berman was named the Executive Chairman of the Board.

●

In June 2020, we entered a five-year non-exclusive licensing agreement with Mesa Technologies, LLC (“Mesa”), for the use of our intellectual property as part of a school bus stop arm system (“SBSA”). Mesa has installed over 3,000 photo enforcement systems world-wide. We expect the agreement to increase our market penetration in the state, local government, and international markets.

●

In June 2020, certain 2019 Lenders agreed to a redemption of approximately 77% of the remaining principal balance of the 2019 Promissory Notes as of June 30, 2020. The settlement was completed on July 15, 2020, with 77% of the aggregate principal amount of the 2019 Promissory Notes, including accreted interest plus certain fees payable pursuant to the terms of the 2019 Promissory Notes, redeemed in exchange for common stock at a rate of $4 per share. The 2019 Lenders also agreed that the maturity of the 2019 Promissory Notes will be extended until December 31, 2021. ~~On September 16, 2020, the Company issued a cash payment to complete the retirement of the remaining aggregate principal balance of 2019 Notes.~~

●

~~In June 2020, we completed the sale of~~ ~~TeamGlobal to certain members of TeamGlobal's management team for approximately $4M in cash and a secured note.~~

●

In June 2020, we launched a standalone Company with Cygnet Infotech, a premier product engineering and application development services firm along with affiliates of Cygnet, named Roker Inc. ("Roker"). Roker will be designed to automate parking enforcement and enable higher revenue recovery for both public safety institutions and private businesses alike. We and Cygnet are each contributing our respective technology stacks in exchange for equity in Roker. In the third quarter of 2020, we made an initial investment of $75,000 for 50% of the venture.

●

The spread of COVID-19 around the world since the first half of 2020 has caused significant volatility in U.S. and international markets. There continues to be significant uncertainty about the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, we are unable to determine at this time the full impact it will have impact to our operations.

●

In response to COVID-19, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. The CARES Act, among other things, provides cash payments to certain individuals and has various programs for businesses. In particular, it includes the Payroll Protection Program which provides forgivable loans to qualified small businesses, primarily to allow these businesses to continue to pay their employees. The Company received $874,000 as a result of the Payroll Protection Program.

●

On April 2, 2020, we entered into a Stock Purchase Agreement with, AOC Key Solutions, Inc., our wholly owned subsidiary, and PurpleReign, LLC, a Virginia limited liability company owned by the members of AOC Key Solutions’ management, pursuant to which we agreed to sell AOC Key Solutions for $4 million.

●

In the first quarter of 2020, Digifort, a global leader in video surveillance and monitoring, headquartered in Brazil with more than 28,000 customers in 130 countries, became a premier reseller for Watchman software in Brazil, Latin America, the Pacific Rim and the Middle East. In addition, we were selected by Brite Computers ("Brite"), LiveView Technologies, ("LiveView"), and Alliance Technology Group ("Alliance") to provide our vehicle recognition systems to their existing customer bases. Brite is leader in public safety systems integration and will use us as their sole ALPR solution to their extensive customer base comprised of law enforcement and state and local governments. LiveView is a leader in remote security solutions, which will provide our vehicle recognition systems for deployment within its full security platform. Alliance will offer our vehicle recognition solutions to its customer base both as a standalone solution and as part of an integrated video surveillance system.

●

In March 2020, we increased our authorized shares of common stock from 30,000,000 to 100,000,000. The increase in authorized shares was done in order to permit us to raise capital or issue our common stock for other business purposes.

●

In February 2020, the City of Lauderhill, Florida, selected our Rekor Edge vehicle recognition cameras and Watchman software for use in its public safety program. As a result, on March 5, 2020 we signed an agreement with the City of Lauderhill for $1.79 million and contract to provide services for a five-year term.

●

In February 2020, SecurePark Technologies, a leading software-as-a-service (“SaaS”) based parking solutions company, selected our iP360 Parking and Permit Management software as a simple, reliable, and affordable solution for their global clients.

●

In January 2020, the Mt. Juliet Police Department in Tennessee selected Rekor to roll out the community’s Automated License Plate Recognition (“ALPR”) program which the department is terming, “Guardian Shield.” The Guardian Shield program was initiated to enhance the community’s safety by providing an additional tool to law enforcement.

	·	On October 22, 2021, we announced that our Waycare subsidiary was honored with a Nevada Traffic Safety Project of the Year Award for its part in Nevada’s “Road to Zero” program. The Nevada Highway Patrol (NHP) and the Regional Transportation Commission of Southern Nevada (RTC) were joint recipients of the award. The accolade, which was announced October 18 at the 2021 Nevada Traffic Safety Summit in Las Vegas, recognizes individuals and organizations that have made an outstanding effort to eliminate serious injury and fatal crashes on Nevada roadways.

	·	On October 19, 2021, we announced that the City of Chattanooga, Tennessee (or the “City”) has selected our Rekor One™ platform to provide traffic analytics in support of its Smart Corridor+ infrastructure initiative. With a total area of 144.6 square miles and a population of 181,099, the City will be using Rekor One as part of a pilot program to capture and analyze traffic data to help the City discover new approaches for battling traffic congestion, improve forecasting, estimate emissions from real-time data, and increase public safety.

	·	On October 11, 2021, we announced that our wholly owned subsidiary, Waycare Technologies (“Waycare”) was selected for a strategic research initiative by Volvo Cars to ascertain how artificial intelligence can be used to enable predictive awareness in a smart city context. This marks the first deployment in Europe for the company’s crash prediction technology. The six-month pilot test, beginning in October 2021, involves the Waycare technology being used for AI-based crash prediction in Volvo Cars’ hometown of Gothenburg, Sweden. Volvo Cars is leading the research project for Drive Sweden’s AI Aware program, which investigates and tests central traffic control that supports connected and automated vehicles. The test will be performed in conjunction with the Swedish Transport Administration (“STA”) and the Gothenburg Traffic Management Center (“TMC”).

	·	On October 5, 2021, we announced that we have partnered with the world’s leading Weather Intelligence Platform, Tomorrow.io. The partnership will enable data integration to provide transportation agencies increased visibility into weather-related challenges impacting traffic conditions. Government agencies and other field users will benefit from predictive insights to identify high risk zones and routes and enable proactive operational decisions to increase road safety prior to weather impact.

	·	On October 4, 2021, we announced that three Mid-Atlantic customers will deploy Rekor solutions to improve public safety in their respective municipalities. With each of these customers, Rekor’s technology met or exceeded rigorous performance requirements necessary to support public safety missions including being a turnkey, cloud-based solution that is not dependent on proprietary infrastructure.

	·	On September 30, 2021, we announced that our wholly owned subsidiary Waycare has collaborated with the Toyota Mobility Foundation (“TMF”) to reduce traffic congestion and incidents in Bangkok, Thailand. The deployment, which is expected to run for a year, targets Thailand’s oldest and busiest road—Rama IV Road in Bangkok.

	·	On September 21, 2021, we announced that our wholly owned subsidiary Waycare launched a Road Safety Pilot with the Utah Department of Transportation (“UDOT”) and Utah Department of Public Safety (“DPS”). The pilot, which launched in July 2021, will focus on major corridors in the Salt Lake City region along Interstates 15, 215, and 80, as well as Utah State Route 201. The agencies will leverage the Company's solutions to enable quicker, more efficient incident management and mitigation strategies, in addition to improving its collaboration and reporting capabilities.

	·	On September 9, 2021, we announced that our wholly owned subsidiary Waycare has been selected by the Louisiana Department of Transportation and Development (“LaDOTD”) for a pilot program to help reduce congestion and collisions in the Baton Rouge area and promote speed harmonization for a safer driving experience. The initial deployment, which kicked off July 15, 2021, focuses on some of the region’s most dangerous sections of highway: Interstate 10 (“I-10”) and Interstate 12 (“I-12”).

Table of Contents

	●	On August 19, 2021, we announced the successful closing of the acquisition of Waycare Technologies Ltd. a privately held company focused on optimizing traffic management systems using predictive analytics. Pursuant to the purchase agreement the Company provided $61,000,000 in total consideration consisting of a combination of cash and common stock and acquired 100% of the issued and outstanding capital stock of Waycare from its stockholders.

●		In July 2021, we announced the selection of or Rekor One™ vehicle recognition system by the City of Albany, New York, in partnership with the Albany Police Department. Rekor was selected after a competitive bid process in June 2021 to help maintain the safety and security of the community and its citizens.

	●	In July 2021, we announced that Wisconsin’s Waukesha County has selected the Rekor One™ vehicle recognition system for implementation at eight of its public park entrances. The solution was selected after a competitive bid process in early 2021, to help maintain the security of each location and to ensure entrance fee compliance.

	●	On February 26, 2021, we announced that the State of North Dakota Parks and Recreation Department selected our Rekor One™ solution to help state park leadership understand use patterns and plan for future needs.

●

In February 2021, we completed an underwritten public offering of 6,126,939 shares of common stock of the Company at a price to the public of $12.25 per share. We received aggregate gross proceeds of approximately $75.1 million from the offering, prior to deducting underwriting discounts and commissions and offering expenses payable by us. We intend to use these proceeds to increase our product development, sales and marketing efforts and to consider strategic partnerships and acquisitions in our target markets. As a result of the offering, all of our Series A Cumulative Convertible Redeemable Preferred Stock automatically converted into 899,174 shares of our common stock. In addition, on February 9, 2021, we issued 517,611 shares of our common stock, due to the automatic conversion of 240,861 shares of Series B Preferred Stock, as a result of the volume weighted share price of our common stock exceeding certain thresholds. These automatic conversions resulted in the retirement of all of our outstanding preferred shares.

●

On January 7, 2021, we announced that the State of Oklahoma had integrated our Rekor One™ platform across relevant state systems to provide vehicle information associated with uninsured motorists as part of the state’s Uninsured Vehicle Enforcement Diversion (“UVED”) Program, which is operated by the Oklahoma District Attorneys Council. Oklahoma’s UVED Program uses our vehicle recognition technology to leverage existing state resources to ensure that all drivers have at least the minimum required amount of liability insurance, ultimately leading to safer roadways. The platform allows for real-time detection of non-compliant vehicles and instant data consolidation into a regularly updating insurance system connected to the state’s enforcement and intervention programs. We assist Oklahoma drivers by providing a one-stop web portal for uninsured motorists to easily find non-standard and standard insurance for their vehicles. With the successful implementation of Oklahoma’s UVED Program, we have now established a leading position in the implementation of an innovative program under active consideration by a number of other states.

Table of Contents

Opportunities, Trends and Uncertainties

~~Different~~

We look to identify the various trends, ~~factors and uncertainties, including~~ market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that impact our operations and financial ~~conditions, including~~condition from time to time. Although there are many that ~~are unforeseeable. However,~~we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by ~~trends, factors and uncertainties discussed in our 2019 Annual Report under “Part II - Item 7 – Management’s Discussion and Analysis~~the following:

	●	Growing Smart City Market – According to a United Nation’s report, about two-thirds of the world population will live in urban areas by 2050. Our cities are getting larger, our commute longer, roads bigger and the impact on the environment and the quality of life is worse than ever been. This trend requires forward-thinking officials to manage assets and resources more efficiently than they have in the past. We believe that advancements in “big data”, connected devices and artificial intelligence will allow for ITS solutions and applications that can be used to reduce congestion, keep travelers safe, improve transportation, protect the environment, respond to climate change, and enhance the quality of life. We believe our data-driven, artificial intelligence aided solutions provide the necessary tools to more effectively tackle the challenges cities and communities are facing today and over the coming decades.

	●	AI for Infrastructure – We believe that the application of AI to the analysis of infrastructure, including roadways and roadway conditions will significantly affect vehicular travel in the future. As vehicles move towards full automation, there is a need for real-time data and actionable insights around traffic flow, identification of anomalous and unsafe movements – e.g. wrong way vehicles, stopped vehicles, or/and pedestrians on the roadway. Marketers and drive-thru retailers with loyalty programs can also benefit from rapid, lower cost identification of existing and potential customers in streamlining and accelerating vehicular flow as well as data around the vehicles on the roadway.

	●	Connected Vehicle Data – Today’s vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors. This data is an untapped resource for cities and transportation agencies alike. Notably, the data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public agencies. Connected vehicle sensors provide important information related to hazardous conditions, speed variations, intersection performance, and more. This data can help agencies and cities gain more visibility on their roads, supplementing the existing city infrastructure and providing untapped transportation information in more rural areas, that are not currently available from the current ITS infrastructure. Our utilization and greater use of cellular-enabled connected vehicle data can be another step towards vehicle safety as the Federal Communications Commissions and the U.S. Department of Transportation sort out the next iteration in connectivity.

	●	New and Expanded Uses for Vehicle Recognition Systems – We believe that reductions in the cost of vehicle recognition products and services will significantly broaden the market for these systems. We currently serve a number of users who could not afford the cost or adapt to, the restrictions of conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions and municipalities that are testing automated license plate recognition (“ALPR”) systems or that issued requests for proposals to install a network of ALPR cameras. We also expect the availability of faster, higher accuracy, lower cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion and implement smart city programs.

	●	Adaptability of the Current ALPR Market – We have made a considerable investment in our advanced vehicle recognition systems because we believe their increased accuracy, affordability and ability to capture additional vehicle data will allow them to compete effectively with existing providers. Based on published benchmarks, our software currently outperforms competitors in almost every metric. However, large users of existing ALPR technology, such as toll roads, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. In addition, existing providers may be able to reduce the cost of their current offerings or elect to reduce prices and accept reduced profitability while working to develop or secure their advanced vehicle recognition systems. As a result, our success in establishing a major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and maintain leadership in providing the capabilities that customers want. As with any large market, this will require considerable effort and resources.

Table of Contents

	●	Expansion of Automated Enforcement of Motor Vehicle Laws – We believe that future legislation will allow for automated enforcement of motor vehicle regulations, including insurance requirements, to be expanded as the types of violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where automated enforcement is beneficial. In addition, due to high rates of fatalities and injuries to law enforcement and other emergency response crews on roadsides, several states are considering authorizing automated enforcement of violations where motorists fail to slow down and/or move over for emergency responders and law enforcement vehicles at the side of the road. Legislative implementation is a deliberative and necessarily time-consuming process. However, as states expand auto enforcement, the market for our products and services should increase and broaden in the public safety market.

	●	Graphic Processing Unit (“GPU”) Improvements – We expect our business to benefit from more powerful and affordable GPU hardware that has recently been developed. These GPUs are more efficient for image processing because their highly parallel structure makes them more efficient than general-purpose central processing units (“CPUs”) for algorithms that process large blocks of data, such as those produced by video streams. GPUs also provide superior memory bandwidth and efficiencies as compared to their CPU counterparts. The most recent versions of our software have been designed to use the increased GPU speeds to accelerate image recognition. The GPU market is predicted to grow as a result of a surge in the adoption of the Internet of Things (“IoT”) by the industrial and automotive sectors. As GPU manufacturers increase production volume, we hope to benefit from the reduced cost to manufacture the hardware included in our products or available to others using our services.

	●	Edge Processing – Demand for actionable roadway information continues to grow in parallel with camera resolutions. Over the last several decades, cameras have evolved from 25K pixels to 8.3 million pixels and beyond, with each advancement unlocking new capabilities thereby fueling growth. Further, cellular networks are optimized for downloading data not for uploading data, and while speeds have improved over time, what amounts to large infrastructure changes has resulted in relatively small improvements to cellular upload speeds. With road-side deployments experiencing explosive growth in count and density, scalability has become an obstacle for competition in the market. All of these factors mean that scalability, latency and bandwidth concerns require edge processing which are enabled by the continued growth of the increasingly effective graphic processing units and continual improvements in the efficiency of our AI algorithms. Edge processing ingests local high definition (“HD”) video streams and converts the raw video data to text data, thus reducing the volume of data that needs to be transferred. Edge processing allows massive scale without the bandwidth, cost, latency and dependability limitations that would be experienced with streaming to the cloud solution.

	●	Accelerated Business Development and Marketing – Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a leadership position. As a result, we have accelerated our business development marketing and eCommerce activities to increase awareness and market adoption of our new technology and products within the market. We anticipate that an increased presence in the market, the continued development of strategic partnerships and other economies of scale will significantly reduce the level of costs necessary to support sales of our products and services. However, the speed at which these markets grow to the degree to which our products and services are adopted is uncertain.

Table of Contents

●

COVID 19- The spread of a novel strain of COVID-19 around the world since the first quarter of 2020 has caused significant volatility in U.S. and international markets. Despite the roll-out of vaccinations, there continues to be significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, we are unable to determine the full impact to our operations. However, we have also seen a positive impact of COVID-19 on the technology sector, in which we are competing. The pandemic has accelerated adoption of technology across businesses by several years. According to a McKinsey Global Survey of executives, their companies have accelerated the digitization of their customer and supply-chain interactions and of their internal operations by three to four years. Funding for digital initiatives has increased, creating opportunities for innovate solution providers such as Rekor.

	●	Pressure on Government Budgets– COVID-19 has caused significant strain on government budgets. With less money to spend and more need for resources, government agencies need affordable, effective, and scalable solutions for revenue recovery and discovery. With subscription pricing and an intelligent infrastructure platform that accomplishes multiple agency missions, we are uniquely positioned to provide agencies force-multiplying tools when money and human resources are limited. Agencies can be better positioned to improve public safety, manage resources more effectively, and make an impact on their citizens quality of life with limited capital expenditure. In addition, states adopting contactless compliance programs may be able to garner significant net cash contributions to their annual budgets while reducing the number of noncompliant vehicles on their roadways.

	●	American Jobs Plan (“AJP”) - Through the AJP, President Biden is calling on Congress to make a national investment in the transit systems in the United States. The current legislative text provides approximately $1 trillion in total spending, with approximately $550 billion in new spending over the five year period between 2022 and 2026. This includes more than $50 billion annually during this period on surface transportation. It also includes $250 million in funding, for each year 2022-2026, for transportation infrastructure finance and innovation; $50 million in funding, for each year 2022-2026, for congestion relief; more than $2 billion over the five year period for charging and fueling infrastructure; $147 million in funding, for each year 2022-2026, for highway research and development; $110 million in funding, for each year 2022-2026, for technology innovation and deployment; and $110 million in funding, for each year 2022-2026, for intelligent transportation systems. The Senate has passed this legislation and it is now awaiting action in the House. We believe that our offerings with Rekor One, and its ability to provide a comprehensive offering of solutions position the Company well to emerge as a technology leader in this proposed transformation and development of this nascent and rapidly expanding market of intelligent infrastructure.

Components of ~~Financial Condition and~~Operating Results ~~of Operations”, in addition to the information set forth in this Quarterly Report on Form 10-Q. The opportunities, trends, and uncertainties that we are most focused on at the current time are:~~

●

~~AI for the Roadway~~ –

Revenues

We believe that the application of AI to the analysis of roadway condition will significantly affect vehicular travel in the future by assisting in the intelligent optimization of traffic flows and the identification of anomalous and unsafe movements – e.g. wrong way, stopped vehicle, pedestrian on the roadway. Marketers and drive-thru retailers with loyalty programs can benefit from the rapid identification of existing and potential customers and streamlining vehicular flow.

●

~~Graphic Processing Unit (“GPU”) Improvements~~ – We expect our business to benefit as a result of more powerful and affordable GPU hardware that has recently been developed. These GPUs are more efficient for image processing because their highly parallel structure makes them more efficient than general-purpose central processing units (“CPUs”) for algorithms that process large blocks of data, such as those produced by video streams. GPUs also provide superior memory bandwidth and efficiencies as compared to their CPU counterparts. The most recent versions of our software have been designed to use the increased GPU speeds to accelerate image recognitions. The GPU market is predicted to grow as a result of a surge in adoption of the Internet of Things (“IoT”) by the industrial and automotive sectors. As GPU manufacturers increase production volume, we hope to benefit from the reduced cost to manufacture the hardware included in our products or available to others using our services.

●

~~Adaptability of the Current ALPR Market~~ – We have made a considerable investment in our advanced vehicle recognition systems because we believe their increased accuracy and affordability will allow them to compete effectively with existing providers. Based on published benchmarks, our software currently outperforms competitors in almost every metric. However, large users of existing ALPR Technology, such as toll roads, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. In addition, existing providers may be able to reduce the cost of their current offerings or elect to reduce prices and accept reduced profitability while working to develop or secure their own advanced vehicle recognition systems. As a result, our success in establishing a major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and maintain leadership in providing the capabilities that customers want. As with any large market, this will require considerable effort and resources.

●

~~New and Expanded Uses for Vehicle Recognition Systems~~ – We believe that reductions in the cost of vehicle recognition products and services will significantly broaden the market for these systems. We currently serve a number of users who could not afford the cost or adapt to, the restrictions of conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions and municipalities that are testing ALPR systems or that issued requests for proposals to install a network of ALPR cameras. We also expect the availability of faster, higher accuracy, lower cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion and implement smart city programs. We do not currently have the resources to develop all of these entirely new markets by ourselves, so we will need to rely on affiliations with other partners, who may or may not realize the significant benefits that we envision from these new uses.

●

~~Expansion of Automated Enforcement of Motor Vehicle Laws~~ – We believe that future legislation will allow for automated enforcement of motor vehicle regulations to be expanded as the types of violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where automated enforcement is beneficial. For example, there are now 17 states that allow for the automatic enforcement of violations by vehicles that pass a school bus displaying its flashing red lights and a stop sign. In addition, due to high rates of fatalities and injuries to law enforcement and other emergency response crews on roadsides, several states are considering authorizing automated enforcement of violations where motorists fail to slow down and/or move over for emergency responders and law enforcement vehicles at the side of the road. Legislative implementation is a deliberative and necessarily time-consuming process. However, as states expand auto enforcement, the market for our products and services should increase and broaden in the public safety market

●

~~Increasing Smart City Market~~ – Nokia has approved the use of our OpenALPR software for its smart city offerings. In the smart city’s market, real-time vehicle recognition technologies are widely used for traffic management and public safety. As a result, we expect to benefit from the growth of this market.

●

~~Accelerated Business Development and Marketing~~ – Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a leadership position. As a result, we have accelerated our business development and marketing activities to increase awareness and market adoption of our new technology and products within the market. We anticipate that an increased presence in the market, the continued development of strategic partnerships and other economies of scale will significantly reduce the level of costs necessary to support sales of our products and services. However, the speed at which these markets grow to the degree of which our products and services are adopted is uncertain.

●

~~Sales Cycle~~ – As many of our products are new to market, their acceptance and integration into the intended markets is uncertain and we do not have sufficient historical experience to accurately predict revenues as a result of their implementation.

●

~~COVID 19 -~~ The spread of a novel strain of COVID-19 around the world since the first quarter of 2020 has caused significant volatility in U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and, as such, we are unable to determine the full impact to our operations.

●

~~Pressure on Government Budgets –~~ In addition to the COVID-19 crisis crippling businesses revenues, it has caused significant strain on government budgets. With less money to spend and more need for resources, government agencies need affordable, effective, and scalable solutions for revenue recovery and discovery. With subscription pricing and a roadway intelligence platform that accomplishes multiple agency missions from a single camera source, we are uniquely positioned to provide agencies force-multiplying tools when money and man-power are limited. Agencies can be better positioned to identify vehicle registration fee avoidance, enforce parking and find scofflaws, aid motorists in acquiring valid insurance, and dynamically price tolls based on traffic flow.

●

~~Increased Demand for Contactless Economy Solutions –~~ Even prior to the COVID-19 crisis, efficient, touch-free shopping experiences were becoming increasingly present. Now moving beyond simple tap-to-pay credit card functionality, we can offer businesses such as retail and quick service restaurants the ability to have customers pay-by-plate for a complete contactless experience for curbside pick-up or drive-thru transactions. Pay-by-plate functionality not only keeps customers and employees safe, it accelerates service time as the technology fully integrates with existing POS and customer loyalty systems.

●

~~Necessity for On-Demand Mobile Solutions –~~ With app downloads increasing exponentially year-over-year and over 90% of mobile phone time spent within apps, businesses require a means to leverage the ever-present smartphones of employees. By developing a first-of-its-kind iOS and Android app that can read license plates on-device, we can provide businesses an affordable way to scale by utilizing existing devices as license plate recognition sensors. Now businesses can efficiently manage visitors, streamline parking operations, enhance campus/event security, and even recover costly assets.

We believe that recent developments in computing capabilities, such as GPU advances, and new techniques of analysis, sometimes referred to broadly as AI, have broadened the market for vehicle recognition technology and created new opportunities in existing markets. With our new line of products and services, we are working to actively exploit these opportunities.

Other than as discussed above and elsewhere in this Quarterly Report on Form 10-Q, we are not aware of any trends, events or uncertainties that are likely to have a material effect on our financial condition.

~~Revenues~~

~~We generate our~~derive revenues substantially from Software-as-a-Service products (“SaaS”), licensing and ~~subscription revenues for~~subscriptions, customer support services, contactless compliance solutions, implementation services, perpetual license sales, and the sale of hardware in connection with our software ~~and related products and services.~~

solutions. Revenue is recognized upon transfer of control of promised products and services to our customers, in an amount that reflects the consideration ~~we expect~~the Company expects to receive in exchange for those products and services. If the consideration promised in the contract includes a variable amount, for example maintenance fees, we include an estimate of the amount we expect to receive in the total transaction price, if it is probable that a significant reversal of cumulative revenue recognized will not occur.

~~We determine 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 subscription revenues from perpetual software licenses and related products consist of fees that give customers a permanent license to use of software and receive related support and updates during the term of the arrangement. Revenue from our perpetual software licenses is recognized up-front at the point in time when the software is made available to the customer. During the second quarter of 2019, we changed our primary method of selling software from perpetual software licenses, with associated maintenance services, to service subscriptions that give customers access to the use of the current version of the service for a period limited duration. This change is expected to impact our revenue in the short term as we begin to recognize the bulk of our revenue from subscriptions ratably over the contract period rather than at a point in time when the customer takes possession of the license. The amount of contract revenue received over the long term is not expected to decline, however. Our subscription services arrangements are non-cancelable and do not contain refund-type provisions, although the change to service subscriptions result in an increase in credit risk.

Costs of ~~Revenues~~

revenues, excluding depreciation and amortization

Direct costs of revenues consist primarily of ~~that~~the portion of technical and non-technical salaries and wages and payroll-related costs incurred in connection with revenue generating activities. Direct costs of revenues also include production expenses, data subscriptions, sub-consultant services and other expenses that are incurred in connection with our revenue generating activities. Direct costs of revenues exclude ~~that~~the portion of technical and non-technical salaries and wages related to marketing efforts, vacations, holidays, and other time not spent directly generating fees under existing contracts. Such costs are included in operating expenses. We expense direct costs of revenues when incurred.

Table of Contents

Operating Expenses

Our operating expenses consist of general and administrative expenses, sales and marketing, ~~and~~ research and ~~development.~~development and depreciation and amortization. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, payroll taxes and stock-based compensation ~~expense.~~expenses. Operating expenses also include depreciation, amortization and impairment of assets.

General and Administrative

General and administrative expense ~~consists~~consist of personnel costs for our executive, finance, legal, human resources and administrative departments. Additional expenses include ~~travel and entertainment,~~office leases, professional fees and insurance.

We expect our general and administrative ~~expense~~expenses to continue to increase in absolute dollars for the foreseeable future due to additional costs associated with accounting, compliance, insurance and investor relations as a public company. However, we expect our general and administrative expense to decrease as a percentage of our revenue over the long term, although our general and administrative ~~expense~~expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Sales and Marketing

Sales and marketing expenses consist of personnel costs, marketing programs, travel and entertainment associated with sales and marketing personnel, expenses for conferences and trade shows. We intend to make significant investments in our sales and marketing expenses to grow revenue, further penetrate the market and expand our customer base. ~~With the release of our Partners Program we expect our sales and marketing expense to increase in the future.~~

Research and Development

Research and development expenses consists of personnel costs, software used to develop our products and consulting and professional fees for third-party development resources. Our research and development expenses support our efforts to continue to add capabilities to and improve the value of our existing products and services, as well as develop new products and services.

We expect our research and development ~~expense~~expenses to continue to increase in absolute dollars for the foreseeable future as we continue to invest in research and development efforts to enhance the functionality of our AI ~~software.~~solutions. However, we expect our research and development ~~expense~~expenses to decrease as a percentage of our revenue over the long term, although our research and development expense may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses.

Depreciation and Amortization

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

Other Income (Expense)

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

note receivables.

Income Tax Provision

Income tax provision consists primarily of income taxes in certain domestic jurisdictions in which we conduct business. We have recorded deferred tax assets for which a full valuation allowance has been provided, including net operating loss carryforwards and tax credits. We expect to maintain this full valuation allowance for the foreseeable future as it is more likely than not that some or all of those deferred tax assets may not be realized based on our history of losses.

Table of Contents

Critical Accounting Estimates and Assumptions

A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~

2020.

New Accounting ~~Pronouncement~~

Pronouncements

See Note 1 to our unaudited condensed consolidated financial statements set forth in Item 1 of this quarterly report for information regarding new accounting pronouncements.

Results of Operations

Our historical operating results in dollars ~~and as a percentage of total revenues~~ are presented below. The ~~results below and the~~ analysis of operation is solely related to continuing operations and dodoes not ~~include~~consider the results of ~~operations from TeamGlobal, AOC Key Solutions and Firestorm.~~

discontinued operations.

	Three Months ended September 30,						Nine Months ended September 30,
(dollars in thousands)	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	)

Table of Contents

Comparison of the Three and Nine ~~Months~~months ended September 30, ~~2020~~2021 and the Three and Nine ~~Months~~months ended September 30, ~~2019~~

~~Restructuring~~

As part of our shift in strategic direction since 2019, we are focusing on our Technology Segment and have disposed of or discontinued operations in the subsidiaries in our Professional Services Segment. In April 2020 we completed the Sale of AOC Key Solutions and in June 2020, we completed the sale of TeamGlobal. As part of evaluating the future of Firestorm, management decided to sell Secure Education and transfer the BC Management line of business to its founder in the second quarter of 2019. In addition, management determined to discontinue the operation of Firestorm Franchising, LLC, a division of Firestorm, due to non-performance by franchisees. The Company has also commenced an action for rescission of the original purchase of Firestorm.

As a result. we have completed the final steps our announced change in strategic direction to sell lower margin assets and focus on our core technology segment. Beginning in 2020, all of the subsidiaries that were previously presented as part of Professional Services operations are classified as discontinued operations and not presented as part of continuing operations.

Total Revenue

Three Months ended September 30,

Change

Nine Months ended September 30,

Change

(dollars in thousands)

2020

2019

$

%

2020

2019

$

%

Revenue
$2,126
$1,536
$590
38%
$6,399
$3,962
$2,437
62%

	Three Months ended September 30,				Change					Nine Months ended September 30,				Change
(dollars in thousands)	2021		2020		$		%			2021		2020		$		%
Revenue	$	2,615	$	2,126	$	489		23	%	$	11,105	$	6,399	$	4,706		74	%

The increase in revenue for ~~the three months ended September 30, 2020 compared to the three months ended September 30, 2019, was a result of additional products the Company offered during the period and~~ ~~the implementation of a large software and hardware contract in Florida which generated up front revenues from building infrastructure.~~ Additionally, part of the growth in revenue for the three months ended September 30, 2020 was attributable to revenues earned through our eCommerce platform which organically increased, $68,000 or 41%, to $235,000 from $167,000 for the three months ended September 30, 2019.

The increase in revenue for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to the expanded technology offerings and large contracts stated above, as well as the fact that revenue attributable to the acquisition of OpenALPR assets has only been included in operations since March 2019. During the nine months ended September 30, 2020, revenue attributable to OpenALPR assets was recognized for the full nine month period compared to only a six and half a month period in the corresponding period in 2019.Additionally, part of the growth in revenue for the nine months ended September 30, 2020 was attributable to revenues earned through our eCommerce platform which organically increased, $341,000 or 122%, to $621,000 from $280,000 for the nine months ended September 30, 2019.

~~Cost of Revenue, Gross Profit and Gross Margin~~

Three Months ended September 30,

Change

Nine Months ended September 30,

Change

(dollars in thousands)

2020

2019

$ or % Points

%

2020

2019

$ or % Points

%

Cost of revenue
$984
$390
$594
  152%
$2,753
$1,152
$1,601
  139%
Gross profit
  1,142
  1,146
  (4)
  0%
  3,646
  2,810
  836
  30%
Gross margin
  54%
  75%
  -21%
  -28%
  57%
  71%
  -14%
  -20%

For the three months ended September 30, 2020, compared to the three months ended September 30, 2019, the decrease in gross profit was primarily attributable to building infrastructure in connection with large software and hardware contracts for the corresponding period.

For the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, the increase in gross profit was primarily attributable to the increase in revenue for the corresponding period.

~~For~~ the three and nine months ended September 30, 2020 the gross margin decreased to 54% and 57%, respectively, which was primarily attributable to building infrastructure in connection with large software and hardware contracts. These contracts included construction and assembly of fixtures for our vehicle recognition cameras and the infrastructure necessary to support database and communications operations on a shared basis with other municipalities. As this early stage, the cost of building the network is higher and the initial margins for such projects are consequently lower than expected than for future operations that will be able to use the same infrastructure.

~~Operating Expenses~~

Three Months ended September 30,

Change

Nine Months ended September 30,

Change

(dollars in thousands)

2020

2019

$

%

2020

2019

$

%

Operating expenses:

General and administrative expenses
$3,168
$2,600
$568
  22%
$8,896
$6,259
$2,637
  42%
Selling and marketing expenses
  560
  587
  (27)
  -5%
  1,356
  1,081
  275
  25%
Research and development expenses
  781
  450
  331
  74%
  2,143
  757
  1,386
  183%
Operating expenses
$4,509
$3,637
$872
  24%
$12,395
$8,097
$4,298
  53%

~~General and Administrative Expenses~~

~~The majority of the increase to general and administrative expenses is attributable to the increased staffing. For the three and nine months ended September 30, 2020~~2021, compared to the three and nine months ended September 30, ~~2019,~~2020, was a result of additional products and programs we ~~brought on additional officers~~offered, increases in our direct sales and ~~executives~~Partners Program sales.

In 2021, we initiated services for Oklahoma’s UVED Program which has generated revenue of $345,000 and $975,000 during the ~~Company~~three and nine months ended September 30, 2021.

During the three and nine months ended September 30, 2021, $260,000 of revenue was attributed to Waycare.

Additionally, during the nine months ended September 30, 2021, we had a higher volume of agreements with significant customers in which the revenue recognition was bifurcated into point in time revenue recognition related to the sale of hardware and perpetual licenses, as well as recurring revenue recognition related to the software and customer support fees.

Cost of Revenue, Excluding Depreciation and Amortization

	Three Months ended September 30,				Change					Nine Months ended September 30,				Change
(dollars in thousands)	2021		2020		$		%			2021		2020		$		%
Cost of revenue, excluding depreciation and amortization	$	1,402	$	979	$	423		43	%	$	4,705	$	2,745	$	1,960		71	%

For the three and nine months ended September 30, 2021, cost of revenue, excluding depreciation and amortization increased by $423,000 and $1,960,000 compared to the corresponding prior periods. The increase was primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our ~~growth plan~~increase in revenue.

Operating Expenses

	Three Months ended September 30,				Change					Nine Months ended September 30,				Change
(dollars in thousands)	2021		2020		$		%			2021		2020		$		%
Operating expenses:
General and administrative expenses	$	6,813	$	2,676	$	4,137		155	%	$	16,094	$	7,518	$	8,576		114	%
Selling and marketing expenses		1,125		560		565		101	%		3,044		1,356		1,688		124	%
Research and development expenses		2,000		781		1,219		156	%		4,741		2,143		2,598		121	%
Depreciation and amortization		930		497		433		87	%		2,169		1,386		783		56	%
Operating expenses	$	10,868	$	4,514	$	6,354		141	%	$	26,048	$	12,403	$	13,645		110	%

General and ~~build~~Administrative Expenses

The majority of the increase in general and administrative expenses is attributable to increased headcount and equity award expenses. Additionally, for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, we saw an increase in professional fees mainly associated with our ~~corporate structure.~~

merger and acquisition initiatives.

Selling and Marketing Expenses

The increase in ~~the~~ selling and marketing expenses during the year is attributable mainly to ~~the~~ increased marketing efforts to promote our products and services including digital marketing and other sales efforts. In connection with these efforts, there was an increase in staffing to support the Company’s growth plan.

Research and Development Expense

The overall increase in research and development expenses is primarily attributable to the ~~strategic shift to develop~~development of new products and additional software capabilities, as a result of our increased focus on ~~our~~ technology offerings. ~~This shift took place at the end of the first quarter of 2019.~~ The increase in ~~our~~ research and development expenses is mainly attributable to an increase in headcount and hours associated with ~~the~~ research and development activities.

Table of Contents

Depreciation and Amortization

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

Other Expense

Three Months ended September 30,

Change

Nine Months ended September 30,

Change

(dollars in thousands)

2020

2019

$

%

2020

2019

$

%

Other income (expense):

Loss on extinguishment of debt
$(3,081)
$-
$(3,081)
  -100%
$(3,281)
$(1,113)
$(2,168)
  -195%
Interest expense
  (218)
  (1,182)
  964
  82%
  (2,468)
  (2,724)
  256
  9%
Other income
  6
  157
  (151)
  -96%
  27
  123
  (96)
  -78%
Gain on sale of business
  -
  -
  -
  -
  3,631
  -
  3,631
  100%
Total other expense
$(3,293)
$(1,025)
$(2,268)
  -221%
$(2,091)
$(3,714)
$1,623
  44%

	Three Months ended September 30,						Change					Nine Months ended September 30,						Change
(dollars in thousands)	2021			2020			$		%			2021			2020			$			%
Other income (expense):
Loss on extinguishment of debt	$	-		$	(3,081	)	$	3,081		-100	%	$	-		$	(3,281	)	$	3,281			-100	%
Interest expense		(21	)		(218	)	$	197		90	%		(72	)		(2,468	)		2,396			97	%
Gain on the sale of business		-			-			-		0	%		-			3,631			(3,631	)		-100	%
Other income		66			6			60		1000	%		103			27			76			281	%
Total other income (expense)	$	45		$	(3,293	)	$	3,338		-101	%	$	31		$	(2,091	)	$	2,122			-101	%

The decrease in interest expense and debt extinguishment costs for the three and nine months ended September 30, ~~2020~~2021 compared to the three and nine months ended September 30, ~~2019~~2020 is due to the ~~staged~~ retirement of the 2019 Promissory notes in 2020.

The loss on the extinguishment of debt in for the three and nine months ended September 30, 2020, was related to the fees associated with the early extinguishment of the principal balance of our 2019 Promissory Notes. ~~During 2019, we incurred costs of $1,113,000 associated with the extinguishment of debt.~~

~~In connection with the sale of AOC Key Solutions and TeamGlobal, we recognized a gain on the sale of business of $3,631,000~~

Additionally, during the nine months ended September 30, ~~2020.~~

2020, we sold our non-core businesses which resulted in a gain of $3,631,000.

Non-GAAP Measures: EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA

We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, (v) losses associated with equity method investments, (vi) merger and ~~(v)~~acquisition transaction costs and (vii) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in the U.S. (“U.S. GAAP”) and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company’s ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.

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

Three Months ended September 30,

Nine Months ended September 30,

2020

2019

2020

2019

Net loss
$(6,667)
$(3,528)
$(10,860)
$(9,036)
Income taxes
  7
  12
  20
  35
Interest
  218
  1,182
  2,468
  2,724
Depreciation and amortization
  497
  418
  1,386
  957
EBITDA
$(5,945)
$(1,916)
$(6,986)
$(5,320)





Loss on extinguishment of debt
$3,081
$-
$3,281
$1,113
Share-based compensation
  202
  76
  539
  314
Gain on sale of business
  -
  -
  (3,631)
  -
Loss on sale of Secure Education
  -
  3
  -
  3
Adjusted EBITDA
$(2,662)
$(1,837)
$(6,797)
$(3,890)

~~Lease Obligations~~

	Three Months ended September 30,						Nine Months ended September 30,
	2021			2020			2021			2020
Total comprehensive loss from continuing operations	$	(9,610	)	$	(6,667	)	$	(19,771	)	$	(10,860	)
Income taxes		3			7			10			20
Interest		21			218			72			2,468
Depreciation and amortization		930			497			2,169			1,386
EBITDA	$	(8,656	)	$	(5,945	)	$	(17,520	)	$	(6,986	)

Loss on extinguishment of debt	$	-		$	3,081		$	-		$	3,281
Share-based compensation		694			202			2,600			539
Gain on sale of business		-			-			-			(3,631	)
Loss due to change in value of equity investments		-			-			150			-
One-time consulting fees		1,249			-			2,025			-
Adjusted EBITDA	$	(6,713	)	$	(2,662	)	$	(12,745	)	$	(6,797	)

Adjusted Gross Profit and Adjusted Gross Margin

Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of ~~September 30, 2020,~~revenue, excluding depreciation and amortization. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We expect Adjusted Gross Margin to continue to improve over time to the extent that we ~~leased building space at~~can gain efficiencies through the ~~following locations in the U.S.:~~

●

~~Columbia, Maryland – The corporate headquarters~~

●

~~Linthicum, Maryland – Storage facility for inventory related to~~adoption of our technology ~~hardware~~

and successfully cross-selling and upselling our current and future offerings. However, our ability to improve Adjusted Gross Margin over time is not guaranteed and could be impacted by the factors affecting our performance. We believe ~~our facilities~~Adjusted Gross Profit and Adjusted Gross Margin are ~~in good condition and adequate for their current use. We may improve, replace or reduce facilities~~useful to investors, as ~~considered appropriate to meet~~they eliminate the ~~needs~~impact of ~~our operations.~~

~~Liquidity and Capital Resources~~

Our operations and ability to raise capital resources may be affected by the recent and ongoing outbreak of COVID-19 which was declared a pandemic by the World Health Organization in March 2020. The ultimate disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on our balance sheet, operations and cash flows.

On May 26, 2020 and June 3, 2020, we entered into two loan agreements with Newtek Small Business Finance, LLC, which provided loans in the principal amount of $221,000 (the “Rekor PPP Loan”) and $653,000 (the “Rekor Recognition PPP Loan”), respectively, pursuant to the Paycheck Protection Program under the CARES Act. Each note has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement.

~~The Paycheck Protection Program provides that the notes may be partially or wholly forgiven if the funds are used for~~ certain ~~qualifying expenses as described in the CARES Act. We intend to use the entire note amount for qualifying~~non-cash expenses and ~~to apply for forgiveness~~allow a direct comparison of these measures between periods without the ~~loan in accordance with the terms~~impact of ~~the CARES Act.~~

~~2019 Promissory Notes~~

~~On March 12, 2019, we issued the 2019 Promissory Notes~~non-cash expenses and ~~the March 2019 Warrants to investors, including OpenALPR Technology, Inc.(the “2019 Lenders”)~~. The loan was due and payable on March 11, 2021. In March 2020, we received an extension of the maturity date of the loan until June 12, 2021. In June 2020, we received an extension of the maturity date of the loan until December 31, 2021. The loan bore interest at 16% per annum, of which at least 10% per annum was required to be paid in cash. The full remaining portion of all interest, if any, accrued and was to be paid-in-kind. The notes also required a premium, if paid before the maturity date, a $1,000,000 exit fee due at maturity, and compliance with affirmative, negative and financial covenants.

~~On June 30, 2020, we entered into the Exchange Agreements with~~ certain holders of our 2019 Promissory Notes. Under the Exchange Agreements, approximately $17,398,000 of the 2019 Promissory Notes was redeemed in exchange for 4,349,497 shares of our common stock, at a rate of $4 per share (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 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 PIK interest associated to 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, was recorded as part of debt extinguishments costs in the unaudited condensed consolidated statement of operations.

On September 16, 2020, we issued a cash payment for the remaining aggregate principal balance of 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 we have no further obligations under the Note Purchase Agreement, as amended. The warrants previously issued pursuant to the Note Purchase Agreement, as amended, remain outstanding pursuant to their terms.

other nonrecurring operating expenses.

Table of Contents

The following table sets forth the components of ~~our cash flows~~the Adjusted Gross Profit and Adjusted Gross Margin for the ~~period included (dollars in thousands):~~

Nine Months ended September 30,

2020

2019

Change

$

%

Net cash used in operating activities - continuing operations
$(7,860)
$(4,394)
$(3,466)
  -79%
Net cash provided by (used in) investing activities - continuing operations
  5,681
  (406)
  6,087
  1499%
Net cash provided by financing activities - continuing operations
  24,756
  3,876
  20,880
  539%
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations
$22,577
$(924)
$23,501
  2543%

~~Net cash used in operating activities – continuing operations~~periods included:

	Three Months ended September 30,						Nine Months ended September 30,
	2021			2020			2021			2020
	(in thousands, except percentages)						(in thousands, except percentages)
Revenue	$	2,615		$	2,126		$	11,105		$	6,399
Cost of revenue, excluding depreciation and amortization		1,402			979			4,705			2,745
Adjusted Gross Profit	$	1,213		$	1,147		$	6,400		$	3,654
Adjusted Gross Margin		46.4	%		54.0	%		57.6	%		57.1	%

Adjusted Gross Margin, for the nine months ended September 30, 2021 and 2020 ~~had~~increased to 57.6% from 57.1%, respectively, and Adjusted Gross Margin for the three months ended September 30, 2021 and 2020 decreased to 46.4% from 54.0%, respectively. The fluctuations in Adjusted Gross Margin were driven primarily by our mix of software and hardware sales. Software sales will carry a ~~net decrease~~higher margin than hardware sales as there are fewer human costs associated with software sales. Additionally, as part of ~~$3,466,000~~our planned go-to-market strategy, we offer our customers short-term pilot programs which ~~was primarily~~range from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to lay the ~~$3,631,000 gain on~~foundation for our solutions.

Key Performance Indicators

We regularly review several indicators, including the ~~sale of AOC Key Solutions~~following key indicators, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and ~~TeamGlobal. The gain on the sale is shown as a decrease in~~make strategic decisions.

Recurring Revenue Growth

Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow from ~~operations~~operations. This visibility enables us to better manage and invest in our business.

	Three Months ended September 30,				Change					Nine Months ended September 30,				Change
(dollars in thousands)	2021		2020		$		%			2021		2020		$		%
Recurring revenue	$	1,233	$	964	$	269		28	%	$	3,142	$	2,876	$	266		9	%

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

Total Contract Value

The total contract value of contracts won in the current period provides us visibility into our future operating results and cash flows from operations. There are certain assumptions that we make when determining the total contract value of an ~~increase in cash flow from investing activities~~agreement, such as, success rate of renewal periods, cancellations and usage estimates. For the nine months ended September 30, 2021 we won contracts valued at $7,663,000, compared to ~~reflect the nature~~$3,682,000 of the transactions. This gain on the sale of AOC Key Solutions and TeamGlobal was partially offset by increase in depreciation, amortization of intangible asset and a $3,281,000 loss on extinguishment of debt related to the retirement of the 2019 Promissory Notes.

The net increase of net cash provided by (used in) investment activities – continuing operations of $6,087,000 was primarily due to the cash proceeds of the sale of AOC Key Solutions and TeamGlobal and the cash proceeds from the note receivable issued in connection with the sale of AOC Key Solutions.

~~Net cash provided by financing activities – continuing operations~~contracts won for the nine months ended September 30, ~~2020 increased $20,880,000 from the prior nine month~~2020. This growth represents a $3,981,000 or 108% growth, period ended September 30, 2019. During the nine months ended September 30, 2020 cash provided by financing activities was related to the issuance of stock as part of the at-the-market agreement and issuance of common stock in connection with the exercises of stock options and warrants during theover period. In 2020, this amount was offset by $7,226,000 of cash outflows related to the modification and retirement of the 2019 Promissory Notes. During the nine months ended September 30, 2019 cash provided by financing activities was related to the $3,839,000 proceeds from the 2019 Promissory Notes issued the first quarter of 2019.

During 2020 and 2019, we funded our operations primarily through cash from operating activities from our subsidiaries, secured borrowing arrangements, issuance of debt, the sale of our subsidiaries and the sale of equity.

Table of Contents

Unsatisfied Performance Obligations

As of September 30, 2020, we had unrestricted cash and cash equivalents from continuing operations of $24,154,000 and working capital of $21,230,000, as compared to unrestricted cash and cash equivalents of $1,075,000 and a working capital deficit of $1,786,000 as of December 31, 2019.

Operating assets and liabilities consist primarily of receivables from billed and unbilled services, accounts payable, accrued expenses, secured borrowing arrangements, and accrued payroll and related benefits. The volume of billings and timing of collections and payments affect these account balances.

~~As of September 30, 2020,~~2021, we had approximately ~~$16,459,000~~$23,845,000 of ~~licensing and subscription~~ contracts that were closed prior to September 30, ~~2020~~2021 but have a contractual ~~subscription~~ period beyond September 30, ~~2020.~~2021. These ~~subscription~~ contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately ~~27%~~36% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the ~~subscription~~ contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.

~~We have experienced growth of 69%~~

Lease Obligations

At September 30, 2021, we leased building space at the following locations in the ~~unaudited remaining contract value~~U.S. and Israel:

●

Columbia, Maryland – The corporate headquarters

●

Linthicum, Maryland

	●	Orlando, Florida

	●	Tel Aviv, Israel

We believe our facilities are in good condition and adequate for their current use. We expect to improve, replace and increase facilities as considered appropriate to meet the needs of ~~licensing~~our planned operations.

Liquidity and ~~subscription contracts from September 30, 2019 through September 30, 2020.~~

Capital Resources

The following table ~~below shows~~sets forth the ~~quarter by quarter growth is such contract value~~components of our cash flows for the period included (dollars in thousands):

~~Series A Preferred Stock~~

~~The holders of Rekor Series A Preferred Stock are entitled to quarterly dividends~~

	Nine Months ended September 30,
	2021			2020			Change
							$			%
Net cash used in operating activities - continuing operations	$	(12,321	)	$	(7,860	)	$	(4,461	)		-57	%
Net cash (used in) provided by investing activities - continuing operations		(43,392	)		5,081			(48,473	)		-954	%
Net cash provided by financing activities - continuing operations		70,874			25,356			45,518			180	%
Net increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations	$	15,161		$	22,577		$	(7,416	)		-33	%

Net cash used in ~~the amount of $0.175 (7% per annum) per share. Dividends accrue quarterly and dividend payments~~operating activities – continuing operations for ~~declared dividends are due within five business days following the end of a quarter.~~

~~Series B Preferred Stock~~

As part of the acquisition of TeamGlobal, we 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 with a conversion price of $5.00 per share. Each Series B Preferred Stock has an automatic conversion feature based on our common stock share price. The Series B Preferred Stock is entitled to quarterly cash dividends of 1.121% (4.484% per annum) per share. Dividends accrue quarterly and dividend payments for declared dividends are due within five business days following the end of a quarter.

~~At-the-MarketOffering~~

On August 14, 2019, we entered into the Sales Agreement with B. Riley FBR, Inc. (“B. Riley FBR”) to create an at-the-market equity program under which we, from time to time offered and sold shares of our common stock, having an aggregate offering price of up to $15,000,000, through or to B. Riley FBR. Subject to the terms and conditions of the Sales Agreement, B. Riley FBR used its commercially reasonable efforts to sell the shares of our common stock from time to time, based upon our instructions. B. Riley FBR was entitled to a commission equal to 3.0% of the gross proceeds from each sale. We incurred issuance costs of approximately $226,000 related to legal, accounting, and other fees in connection with the Sales Agreement. These costs were charged against the gross proceeds of the Sales Agreement and presented as a reduction to additional paid-in capital on the unaudited condensed consolidated balance sheets.

On August 28, 2020, we filed Amendment No. 1 to the Sales Agreement dated August 14, 2019 to increase the size of the market equity program under which we, from time to time offered and sold shares of our common stock, from an aggregate offering price of up to $15,000,000 to an amended maximum aggregate offering price of up to $40,000,000 through or to B. Riley FBR.~~We incurred issuance costs of approximately $25,000 related to legal fees in connection with the amendment to the Sales Agreement.~~

Sales of the Company’s common stock under the Sales Agreement were issued and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No 333-224423), previously filed with the Securities and Exchange Commission (“SEC”) on April 24, 2018 and declared effective by the SEC on April 30, 2018. For the nine months ended September 30, ~~2020, based on settlement date, we sold 5,216,562~~2021 had a net decrease of $4,461,000, which was attributable to the increase in the loss from continuing operations of $8,871,000. This amount was partially offset by an increase in share-based compensation expense, a non-cash adjustment, which increased $2,061,000 from $2,600,000 for the nine months ended September 30, 2021 compared to $539,000 for the nine months ended September 30, 2020. This increase is due to the number of shares ~~of common~~that were issued as well as the increase in our stock ~~at a weighted-average selling price of $5.92 per share in accordance with the Sales Agreement. Net cash provided~~price. Additionally, for the nine months ended September 30, 2020, there was a $3,631,000 gain on the sale of AOC Key Solutions and TeamGlobal. The gain on the sale is shown as a decrease in cash flow from operations and an increase in cash flow from investing activities to reflect the nature of the transactions.

The net increase in net cash used in investment activities – continuing operations of $48,473,000 was primarily due to the net cash outlay in relation to the acquisition of Waycare of $40,699,000 and the $1,000,000 SAFE investment in Roker. During the nine months ended September 30, 2020, the cash provided by investing activities from continuing operations was primarily due to the cash proceeds of the sale of AOC Key Solutions and TeamGlobal.

Net cash provided by financing activities – continuing operations for the nine months ended September 30, 2021 increased $45,518,000 from the ~~Sales Agreement was $29,930,000~~prior nine month period ended September 30, 2020. In the current year, through our Public Offering, we received net proceeds, after ~~paying 3.0% or $926,000 related~~deducting the underwriting discounts and commissions and offering expenses payable by us, of $70,125,000.

For the three and nine months ended September 30, 2021 and 2020, we funded our operations primarily through cash from operating activities, the sale of our subsidiaries and the sale of equity. As of September 30, 2021, we had cash and cash equivalents from continuing operations of $35,102,000 and working capital of $28,203,000, as compared to cash ~~commissions provided to B. Riley FBR.~~

and cash equivalents of $20,595,000 and working capital of $18,324,000 as of December 31, 2020.

Table of Contents

Public Offering

On ~~September 21, 2020,~~February 9, 2021, we ~~elected to voluntarily terminate its Sales Agreement with B. Riley FBR pursuant to the terms of the Sales Agreement. As of the termination, we had offered~~issued and sold ~~an aggregate~~6,126,939 shares of ~~6,509,202~~our common stock (which included 799,166 shares of common stock sold pursuant to the ~~Sales Agreement, which resulted in aggregate gross~~exercise of an overallotment option) (the “Public Offering”). The net proceeds to us, after deducting the underwriting discounts and commissions and offering expenses payable by the us, were approximately $70,125,000.

Waycare Acquisition

On August 18, 2021, we entered into a share purchase agreement (the “Purchase Agreement”) by and among the Company, Waycare, the sellers of ~~$34,154,000.~~

~~No additional sources of capital have been obtained or committed through the date of this Quarterly Report on Form 10-Q. There are currently no anticipated changes~~Waycare named in the ~~mix~~Purchase Agreement (the “Sellers”) and ~~relative cost~~Shareholder Representative Services LLC, solely in its capacity as the representative of the Sellers, pursuant to which we acquired 100% of the issued and outstanding capital ~~resources. Due~~stock of Waycare from the Sellers (the “Acquisition”). The aggregate purchase price for the shares of Waycare was $61,100,000, less the amount of Waycare’s debt and certain transaction expenses and subject to a customary working capital adjustment. The purchase price was comprised of $40,813,000 of cash and 2,784,474 shares of our common stock, valued at $20,287,000. As a result of the operating costs associated with being a public company and expenses related to product development and commercialization costs at other subsidiaries, we anticipate that we may operate at a loss in the near-term.

transaction, Waycare became our wholly-owned subsidiary.

As of September 30, ~~2020,~~2021, we ~~did not have any material~~had commitments ~~for capital expenditures.~~

I~~TEM~~to purchase $2,479,000 in property and equipment. This commitment has been recognized and recorded in our financial statements as of September 30, 2021.

ITEM 3. ~~QUANTITAIVE~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

I~~TEM~~

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

Based on management’s review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, ~~2020.~~

~~Management’s Report on Internal Control Over Financial Reporting~~

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of unaudited condensed consolidated financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP and that our receipts and expenditures are being made only in accordance with authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our unaudited condensed consolidated financial statements.

Under the supervision and with the participation with our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this report based on the framework in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this assessment, management concluded that our internal control over financial reporting was effective as of September 30, 2020.

In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.

2021.

Changes to Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

P~~ART~~

Table of Contents

PART II – OTHER INFORMATION

I~~TEM~~

ITEM 1. LEGAL PROCEEDINGS

On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company ~~and~~who were founders of Firestorm (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al.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 ~~us.~~the Company. The Complaint requests equitable rescission of that transaction, or, alternatively, monetary damages.

Following an initial amended complaint, answer and counterclaims, and defendants’ motion for judgment on the pleadings, on January 30, 2020, we filed a Second Amended Complaint, which the Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, we moved to dismiss certain counterclaims against certain ~~executives~~directors and officers named as counterclaim-defendants, which resulted in the Firestorm Principals voluntarily dismissing ~~those~~the counterclaims against those parties. ~~We thereafter~~Thereafter we filed our response and affirmative defenses to the Counterclaims on April ~~22.~~22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which we have opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. ~~That~~With respect to the Firestorm Principals’ motion ~~was fully briefed as~~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 ~~February~~motion for partial summary judgment, seeking summary judgment on several of our claims and the Firestorm Principals’ counterclaims, along with supporting declarations and exhibits. After the Court decided to allow the proposed motion to proceed, we, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed their opposition to the partial summary judgment motion on June 21, ~~2020. It remains~~ ~~sub judice, and no argument has been scheduled upon it.~~

2021. The Firestorm Principals filed their reply in support of their partial summary judgment motion on July 9, 2021.

In ~~the year~~ 2020, the Firestorm Principals filed ~~suit~~various suits in New York, ~~Supreme Court in Sullivan County~~Delaware and Virginia against our directors ~~of the Company,~~and officers, alleging breach of fiduciary duty and libel. ~~We believe that~~The defendants in the suits moved to dismiss the amended complaint. At this ~~suit is without merit~~stage of these litigations, suits against two of the directors have been dismissed and ~~intend~~one has been permitted to ~~vigorously litigate this matter.~~

At this stage of these litigations, we are unable to render an opinion regarding the likelihood of a favorable outcome. WeThe we intend to continue vigorously litigating its claims against the Firestorm Principals and believe that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit.

Vigilant Solutions, LLC, a subsidiary of Motorola Solutions, Inc., filed a complaint on February 21, 2020 against us and certain of our subsidiaries in the US District Court for the District of Maryland. The complaint alleged that certain of our products violated a patent held by Vigilant. On June 10, 2020, we filed an Answer to the complaint denying the pertinent allegations and asserting substantial defenses to the allegations contained in the complaint, including that the patent underlying the complaint is invalid. ~~On September 23, 2020, we filed a Motion to Stay Pending~~ ~~Inter Partes~~ ~~Review in light of a Petition for~~ ~~Inter Partes~~ ~~Review filed by us and certain subsidiaries against Vigilant in the U.S. Patent and Trademark Office (as discussed below). Vigilant opposed the Motion.~~

~~On September 8, 2020, we and certain of our subsidiaries that were defendants in the Vigilant Solutions, LLC Litigation discussed above filed a Petition for~~ ~~Inter Partes~~ Review at the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (“PTAB”) requesting that the PTAB review and find unpatentable certain claims of the patent asserted by Vigilant in the Vigilant Solutions, LLC Litigation. The PTAB was expected to decide whether to institute review in March or April 2021.

In November of 2020, we and Vigilant Solutions, LLC agreed to resolve the district court litigation and intellectual property rights action between the parties pursuant to a confidential settlement agreement. We will have no material effect from its obligations under the agreement.

On January 31, 2020, our 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 us 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. ~~The parties are currently awaiting~~On November 23, 2020, the ~~Court’s decision~~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 ~~joinder. Nevertheless, we believe~~August 31, 2021. We consider this matter closed.

On September 18, 2020, Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against us in the Supreme Court for the State of New York, New York County. Fordham alleges that we 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 to us on September 25, 2020. We issued a motion to dismiss counterclaims on June 23, 2021, our opposition has been filed and Fordham’s reply will be due on August 19, 2021. The Court granted Fordham’s motion to dismiss our counterclaims on October 21, 2021.

Table of Contents

At this stage of the Fordham litigation, we are unable to render an opinion regarding the likelihood of a favorable outcome. However, we maintain that Fordham’s claims have ~~substantial defenses to the claims and~~no merit. To that end we intend to vigorously ~~defend~~litigate this action.

In June 2021, a putative shareholder class action lawsuit (captioned Miller v. Rekor Systems, Inc. et al.) was filed in in the ~~allegations~~United States District Court for the District of ~~those claims.~~

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 our automatic license plate recognition technology and uninsured vehicle enforcement diversion related business and seeks damages on behalf of shareowners who acquired our stock between April 12, 2019 and May 25, 2021. The court has appointed a lead plaintiff. In November 2021, the plaintiff filed an order of dismissal, seeking to voluntarily dismiss without prejudice the Lawsuit that it had filed against us and several of our executives.

In addition, from time to time, we 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 we accrue reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is our ~~management’s~~ opinion that the outcome of these proceedings, individually and collectively, will not be material to our consolidated financial statements as a whole.

I~~TEM~~

ITEM 1A. RISK FACTORS

~~There~~

Other than the risk factors listed below, there have been no material changes to the risk factors disclosed in “Risk Factors” in our Annual Report on Form 10-K as filed with the SEC on March ~~30, 2020,~~12, 2021, and in our Quarterly ~~Report~~Reports on Form 10-Q as filed with the SEC on May ~~13, 2020, except for the following supplemental risk factors.~~10, 2021 and August 16, 2021. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K and Form 10-Q, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.

~~Rekor is~~

We rely, in part, on third party date providers and existing camera networks to grow our business. If we are unable to ~~predict~~enter into agreements with third party data providers or successfully maintain them, our growth may be adversely impacted.

We rely, in part, on access the ~~extent~~third party data and access to ~~which~~existing camera networks to grow our business. The majority of the ~~global COVID-19 pandemic~~third party data agreements allow us to access connected vehicle data, existing camera networks or other data services, thereby increasing the data points used in our solutions.

Any agreement we enter into with a third party may ~~adversely impact~~not be on favorable terms, and the expected benefits and growth from these agreements may not materialize as planned. Despite our past experience, opportunities to grow our business ~~operations, financial~~through third party data may not be available to us in the future.

The market for our Rekor One platform is new and unproven, and may decline or experience limited growth and is dependent in part on data consumers continuing to adopt its platform and use its services.

The market for an ecosystem that connects government agencies, service providers and, ultimately, drivers is relatively new and some aspects of it are unproven. Therefore, it is subject to a number of risks and uncertainties. We believe that our future success will significantly depend in large part on the growth, if any, of this market. The use of advanced vehicle recognition systems and marketplace data to obtain data on vehicles, drivers and the environment is still relatively new and consumers may not recognize the need for, or benefits of, our platform and solutions. Moreover, if they do not recognize the need for and benefits of our platform and solutions, they may decide to adopt alternative services to satisfy some portion of their business needs.

Table of Contents

In order to grow its business and extend our market position, we intend to focus on educating potential customers about the benefits of its services and platform, expanding the range of our services and bringing new technologies to market to increase market acceptance and use of our platform. Our ability to expand the market that our platform and solutions address depends upon a number of factors, including the cost, performance and perceived value associated with them. The market for our platform and solutions could fail to grow significantly or there could be a reduction in demand for its services as a result of a lack of acceptance, technological challenges, competing services, decreases in spending by current and prospective customers, weakening economic conditions and other causes. If our market does not experience significant growth, or demand for its services decreases, then its business, results of operations, and ~~stock price.~~

~~The coronavirus COVID-19 pandemic~~financial condition could be adversely affected.

Our internal investments and ~~efforts~~go-to-market strategy may place downward pressure on our operating margins.

To increase our revenue growth, we continue to ~~control its spread have significantly curtailed the movement of people, goods and services worldwide, including~~invest in ~~many of the regions in which we sell our products and services and conduct~~ our business, ~~operations. The magnitude~~including investments into new markets as part of our go-to-market strategy and ~~duration~~investment in continued innovation and product development to expand the suite of solutions we provide to our customers. Our operating margins may experience downward pressure in the ~~resulting decline in business activity cannot currently be estimated with any degree~~short term as a result of ~~certainty and threatens~~these investments. Furthermore, our investments may not produce the expected results. If we are unable to ~~(1) negatively impact the demand for~~successfully execute our products and services, especially in those locations subject to “shelter in place” restrictions or similar government orders, (2) restrict our sales operations and marketing efforts, and (3) disrupt other important business activitiesgo-to-market strategy, we may experience decreases in our ~~various locations, some of which are also in areas affected by COVID-19. For example, in response to the COVID-19 pandemic, certain industry events at which we present~~revenues and participate certain customer events have been canceled, postponed or moved to virtual-only experiences; we are encouraging all of our employees to work remotely; and we may deem it advisable to similarly alter, postpone or cancel entirely additional customer, employee or industry events in the future. Additionally, we may see our services carrying less revenue-generating traffic in areas subject to “shelter in place” restrictions or related government orders as the population of those areas refrain from traveling and normal commerce activities. Accordingly, we expect the COVID-19 pandemic to potentially have a negative impact on our sales and our results of operations in those areas adversely affected by COVID-19, the size and duration of which we are currently unable to predict. Additionally, concerns over the economic impact of COVID-19 have caused extreme volatility in financial and other capital markets which has and may continue to adversely impact our stock price and our ability to access capital.

~~We may not qualify for forgiveness of our PPP Loan. We face risks associated with such PPP Loan~~

As set forth above in Note 7 - Debt - 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 six 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 six 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 Loan Notes may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company intends to use the entire Loans amount for qualifying expenses and to apply for forgiveness of the Loans in accordance with the terms of the CARES Act.

Notwithstanding that, the Company may not qualify for forgiveness of the Loans in whole or part and may be required to repay such Loans in full. With respect to any portion of the Loans that are not forgiven, the Loans will be subject to customary provisions for Loans of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the PPP Notes and cross-defaults on any other loan with the PPP Lender or other creditors. In the event the Loans are not forgiven, the debt service payments on such Loans may negatively affect our ability to grow our operations, service other debt and/or pay our expenses as they come due. Furthermore, any default under the Loans may require us to pay a significant amount of our available cash and/or cash flow to service such debt, which could have a material adverse effect on our operations. Any failure of the Loans to be forgiven pursuant to their terms, and/or our requirement to repay the Loans in whole or part, could cause the value our common stock to decline in value. Separately, we face risks associated with the fact that the Treasury Department and a House oversight subcommittee has recently requested that certain large public companies return prior PPP Loans which have been obtained by such public companies and Treasury Secretary Steven Mnuchin has warned that public companies receiving loans over $2 million would be audited and could have potential criminal liability if their certifications (required to obtain such loans) were untrue. As a result, we could face penalties in connection with the Loans and/or negative reactions from the public associated with our Loans, either of which could cause the value of our common stock to decline in value.

I~~TEM~~operating margins.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~Sales of Unregistered Securities~~

On March 12, 2019, as partial consideration for its acquisition of certain assets of OpenALPR, Rekor issued 600,000 shares of its common stock to the seller, valued at $397,000. On the same date, Rekor issued senior secured promissory notes in an aggregate principal amount of $20,000,000 and warrants to purchase 2,500,000 shares of its common stock, which are immediately exercisable at an exercise price of $0.74 per share, to certain individuals and entities.

The foregoing issuances were issued in reliance upon the exemptions from registration under the Securities Act of 1933, as amended, provided by Section 4(a)(2) and Rule 506 of Regulation D promulgated thereunder.

~~At-the-Market Agreement~~

Sales of our common stock under the Sales Agreement were issued and sold pursuant to the Company’s shelf registration statement on Form S-3 (File No 333-224423), previously filed with the Securities and Exchange Commission (“SEC”) on April 24, 2018 and declared effective by the SEC on April 30, 2018. For the nine months ended September 30, 2020, based on settlement date, we sold 5,216,562 shares of common stock at a weighted-average selling price of $5.92 per share in accordance with the Sales Agreement. Net cash provided for the nine months ended September 30, 2020 from the Sales Agreement was $29,930,000 after paying 3.0% or $926,000 related to cash commissions provided to B. Riley FBR.

On September 21, 2020, we elected to voluntarily terminate its Sales Agreement with B. Riley FBR pursuant to the terms of the Sales Agreement. As of the termination date, we had offered and sold an aggregate of 6,509,202 shares of common stock pursuant to the Sales Agreement, which resulted in aggregate gross proceeds of $34,154,000.

~~Increase in Authorized Shares~~

On January 28, 2020, the Board of Directors of the Company adopted resolutions of the Board to ratify, approve and recommend stockholder approval of an amendment to the Company’s Amended and Restated Certificate of Incorporation, to increase the authorized number of shares of the Company’s common stock, par value $0.0001 per share, from 30,000,000 to 100,000,000 (“the Amendment”). On February 21, 2020, the Company received approval of the Amendment by written consent in lieu of a meeting from the holders of a majority of issued and outstanding shares of the Company’s common stock. On March 18, 2020, the amendment became effective upon filing the Certificate of Amendment with the Secretary of State of Delaware.

Note Exchange Agreement

In an agreement reached on June 30, 2020, the 2019 Lenders of the 2019 Promissory Notes agreed to a redemption of approximately 77% of the remaining principal balance of the 2019 Promissory Notes as of June 30, 2020. Per the Exchange Agreement, $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 (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~~$14,688,000. This included the existing principal balance subject to conversion, the portion of the exit fee associated with the 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 ~~PIK~~paid-in-kind (“PIK”) interest associated to 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 was recorded as part of debt extinguishments costs in the ~~unaudited condensed~~accompanying consolidated ~~statement~~statements of operations.

On July 15, 2020, ~~the Company~~we completed the Note Exchange by issuing ~~its~~our common stock to the 2019 Lenders in connection with the Note Exchange Transaction in reliance on Section 3(a)(9) of the Securities Act of 1933, as amended.

Automatic Conversion of Series A Cumulative Convertible Redeemable Preferred Stock and Series B Cumulative Convertible Redeemable Preferred Stock

As a result of the closing of the Public Offering, all of our issued and outstanding Series A Cumulative Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) and Series B Cumulative Convertible Redeemable Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”) were automatically converted pursuant to their respective terms into an aggregate of 1,416,785 shares of our common stock. As a result of the automatic conversion of the Series A Preferred, the Series A Preferred is no longer quoted on the OTC Pink. The Series B Preferred was not quoted on any trading market.

Table of Contents

Waycare Acquisition

On August 18, 2021, the Company completed its acquisition of Waycare by acquiring 100% of the issued and outstanding shares of Waycare. As a result of the acquisition, Waycare is a wholly owned subsidiary of the Company. 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 became a wholly-owned subsidiary of the Company. Additionally, 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.

Use of Proceeds

We have generated losses since our inception ~~in August 2017~~ and have relied on cash on hand, external bank lines of credit, short-term borrowing arrangements, issuance of debt, the sale of a note, sale of our non-core subsidiaries, and the sale of common stock to provide cash for operations. We attribute losses to ~~merger and acquisition costs,~~ financing costs, public company corporate overhead, lower than expected revenue, and lower gross profit of some of our subsidiaries. Our proceeds have been primarily used for research and development and sales and marketing expenses related to new product development and our strategic shift to develop and promote capabilities ~~to the OpenALPR software.~~

I~~TEM~~of our technology offerings.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

I~~TEM~~

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

I~~TEM~~

ITEM 5. OTHER INFORMATION

None.

I~~TEM~~

Table of Contents

ITEM 6. EXHIBITS

(a) Exhibits

Incorporated by Reference
Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Filed/ Furnished Herewith

3.1
Amended and Restated Certificate of Incorporation of Novume Solutions, Inc. as filed with the Secretary of State of Delaware on August 21, 2017 8-K 333-216014 3.1 8/25/17
3.2
Certificate of Designations of Series A Cumulative Convertible Redeemable Preferred Stock as filed with the Secretary of State of Delaware on August 25, 2017 8-K 333-216014 4.1 8/25/17
3.3
Certificate of Designations of Novume Series B Cumulative Convertible Preferred Stock as filed with the Secretary of State of Delaware on August 21, 2017 8-K 000-55833 4.2 10/4/17
3.4
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Novume Solutions, Inc. as filed with the Secretary of State of Delaware on April 26, 2019 8-K 001-38338 3.1 4/30/19
3.5
Second Certificate of Amendment to Amended and Restated Certificate of Incorporation of Rekor Systems, Inc. as filed with the Secretary of State of Delaware on March 18, 2020 8-K 001-38338 3.1 3/18/20
3.6
Amended and Restated Bylaws of Rekor Systems, Inc. 8-K 001-38338 3.2 4/30/19
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer *
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer *
32.1
Section 1350 Certification of Chief Executive Officer **
32.2
Section 1350 Certification of Chief Financial Officer **
101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *

Incorporated by Reference

Filed/Furnished

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

3.1

Amended and Restated Certificate of Incorporation of Rekor Systems, Inc (formerly known as Novume Solutions, Inc.) as filed with the Secretary of State of Delaware on August 21, 2017.

8-K

333-216014

3.1

8/25/17

3.2

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Rekor Systems, Inc. as filed with the Secretary of State of Delaware on April 30, 2019.

8-K

001-38338

3.1

4/30/19

3.3

Second Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Rekor Systems, Inc. as filed with the Secretary of State of Delaware on March 18, 2020.

8-K

001-38338

3.1

3/18/20

3.4

Amended and Restated Bylaws of Rekor Systems, Inc.

8-K

001-38338

3.2

4/30/19

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.1

Section 1350 Certification of Chief Executive Officer.

32.2

Section 1350 Certification of Chief Financial Officer.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

* Filed herewith.

** Furnished herewith.

S~~IGNATURES~~

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Rekor Systems, Inc.

By:	/s/ Robert A. Berman
Name:	Robert A. Berman
Title:	President and Chief Executive Officer ~~Director~~ ( Principal Executive Officer ~~and Authorized Signatory)~~
Date:	November ~~9, 2020~~15, 2021

By:	/s/ Eyal Hen
Name:	Eyal Hen
Title:	Chief Financial Officer ~~(Principal~~ (Principal Financial and Accounting Officer)
Date:	November 15, 2021


51	~~Date:~~	~~November 9, 2020~~

	September 30, 2020	December 31, 2019
ASSETS
Current Assets
Cash and cash equivalents	$24,154	$1,075
Restricted cash and cash equivalents	573	461
Accounts receivable, net	966	776
Inventory	591	302
Note receivable, current portion	255	-
Other current assets, net	361	175
Current assets of discontinued operations	3	7,441
Total current assets	26,903	10,230
Long-term Assets
Property and equipment, net	554	442
Right-of-use lease assets, net	276	283
Goodwill	6,336	6,336
Intangible assets, net	7,429	8,244
Investments in unconsolidated companies	75	-
Note receivable, long-term	1,445	-
Long-term assets of discontinued operations	-	3,457
Total long-term assets	16,115	18,762
Total assets	$43,018	$28,992
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses	$3,834	$3,678
Loan payable, current portion	370	-
Lease liability, short-term	232	148
Contract liabilities	1,234	749
Current liabilities of discontinued operations	114	5,757
Total current liabilities	5,784	10,332
Long-term Liabilities
Notes payable, long-term	976	20,409
Loan payable, long-term	504	-
Lease liability, long-term	60	161
Contract liabilities, long-term	936	775
Other long-term liabilities	10	10
Long term liabilities of discontinued operations	14	536
Total long-term liabilities	2,500	21,891
Total liabilities	8,284	32,223
Series A Cumulative Convertible Redeemable Preferred stock, $0.0001 par value, 505,000 shares authorized and 502,327 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	6,442	5,804
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock, $0.0001 par value, 100,000,000 and 30,000,000 shares authorized, 32,911,854 and 21,595,653 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	3	2
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, 2020 and December 31, 2019, respectively	-	-
Series B Cumulative Convertible Preferred stock, $0.0001 par value, 240,861 shares authorized, issued and outstanding as of September 30, 2020 and December 31, 2019, respectively	-	-
Additional paid-in capital	68,117	19,371
Accumulated deficit	(39,828)	(28,408)
Total stockholders’ equity (deficit)	28,292	(9,035)
Total liabilities and stockholders’ equity (deficit)	$43,018	$28,992

	Three Months ended September 30,		Nine Months ended September 30,
	2020	2019	2020	2019
Revenue	$2,126	$1,536	$6,399	$3,962
Cost of revenue	984	390	2,753	1,152
Gross profit	1,142	1,146	3,646	2,810

Operating expenses:
General and administrative expenses	3,168	2,600	8,896	6,259
Selling and marketing expenses	560	587	1,356	1,081
Research and development expenses	781	450	2,143	757
Operating expenses	4,509	3,637	12,395	8,097

Loss from operations	(3,367)	(2,491)	(8,749)	(5,287)
Other income (expense):
Loss on extinguishment of debt	(3,081)	-	(3,281)	(1,113)
Interest expense	(218)	(1,182)	(2,468)	(2,724)
Other income	6	157	27	123
Gain on sale of business	-	-	3,631	-
Total other expense	(3,293)	(1,025)	(2,091)	(3,714)
Loss before income taxes	(6,660)	(3,516)	(10,840)	(9,001)
Income tax provision	(7)	(12)	(20)	(35)
Net loss from continuing operations	$(6,667)	$(3,528)	$(10,860)	$(9,036)
Net loss from discontinued operations	(2)	(100)	(215)	(2,392)
Net loss	$(6,669)	$(3,628)	$(11,075)	$(11,428)
Loss per common share from continuing operations - basic and diluted	(0.26)	(0.19)	(0.52)	(0.51)
Loss per common share discontinued operations - basic and diluted	-	(0.01)	(0.01)	(0.12)
Loss per common share - basic and diluted	$(0.26)	$(0.20)	$(0.53)	$(0.63)

Weighted average shares outstanding
Basic and diluted	26,907,069	19,878,518	22,781,807	19,592,679

	Shares of Common Stock	Common Stock	Shares of Series B Preferred Stock	Series B Preferred Stock	Additional Paid-In Capital	Accumulated Deficit	Total Stockholders’ Equity (Deficit)
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 June 30, 2019	19,382,185	$2	240,861	$-	$16,496	$(20,094)	$(3,596)
Stock-based compensation	-	-	-	-	76	-	76
Exercise of cashless warrants in exchange for common stock	813,975	-	-	-	-	-	-
Exercise of warrants in exchange for common stock	103,125	-	-	-	103	-	103
Issuance of common stock pursuant to at the market offering, net	103,566	-	-	-	38	-	38
Exercise of warrants related to series A preferred stock	3,638	-	-	-	4	-	4
Preferred stock dividends	-	-	-	-	-	(114)	(114)
Accretion of Series A preferred stock	-	-	-	-	(191)	-	(191)
Net loss	-	-	-	-	-	(3,628)	(3,628)
Balance as of September 30, 2019	20,406,489	$2	240,861	$-	$16,526	$(23,836)	$(7,308)

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

Balance as of December 31, 2018	18,767,619	$2	240,861	$-	$15,518	$(12,064)	$3,456
Stock-based compensation	-	-	-	-	314	-	314
Issuance of warrants in conjunction with notes payable	-	-	-	-	706	-	706
Exercise of cashless warrants in exchange for common stock	828,541	-	-	-	-	-	-
Exercise of warrants in exchange for common stock	103,125	-	-	-	103	-	103
Common stock issued in OpenALPR acquisition	600,000	-	-	-	397	-	397
Issuance of common stock pursuant to at the market offering, net	103,566	-	-	-	38	-	38
Exercise of warrants related to series A preferred stock	3,638	-	-	-	4	-	4
Preferred stock dividends	-	-	-	-	-	(344)	(344)
Accretion of Series A preferred stock	-	-	-	-	(554)	-	(554)
Net loss	-	-	-	-	-	(11,428)	(11,428)
Balance as of September 30, 2019	20,406,489	$2	240,861	$-	$16,526	$(23,836)	$(7,308)

	September 30. 2020				December 31, 2020
	Global	AOC Key Solutions	Firestorm	Total	Global	AOC Key Solutions	Firestorm	Total
ASSETS
Cash and cash equivalents	$-	$-	$3	$3	$225	$93	$12	$330
Accounts receivable, net	-	-	-	-	2,763	4,055	-	6,818
Other current assets, net	-	-	-	-	238	52	3	293
Current assets of discontinued operations	-	-	3	3	3,226	4,200	15	7,441
Property and equipment, net	-	-	-	-	113	41	-	154
Right-of-use lease assets, net	-	-	-	-	130	499	-	629
Goodwill	-	-	-	-	669	-	-	669
Intangible assets, net	-	-	-	-	1,994	-	-	1,994
Deposits and other long-term assets	-	-	-	-	-	11	-	11
Long-term assets of discontinued operations	-	-	-	-	2,906	551	-	3,457
Total assets of discontinued operations	$-	$-	$3	$3	$6,132	$4,751	$15	$10,898
LIABILITIES
Accounts payable and accrued expenses	$-	$-	$31	$31	$461	$1,260	$33	$1,754
Lines of credit	-	-	-	-	1,842	1,894	-	3,736
Lease liability, short term	-	-	83	83	113	100	54	267
Current liabilities of discontinued operations	-	-	114	114	2,416	3,254	87	5,757
Lease liability, long term	-	-	14	14	30	467	39	536
Long-term liabilities of discontinued operations	-	-	14	14	30	467	39	536
Total liabilities of discontinued operations	$-	$-	$128	$128	$2,446	$3,721	$126	$6,293

Operating lease right-of-use lease assets from continuing operations	$276

Current portion of lease liability	$232
Long-term portion of lease liability	60
Total lease liability from continuing operations	$292

Weighted average remaining lease term - operating leases from continuing operations	1.78

Weighted average discount rate - operating leases	9%

2020	$63
2021	195
2022	19
2023	19
2024	18
Total lease payments	314
Less imputed interest	22
Maturities of lease liabilities	$292

	December 31, 2019	Additions	Amortization	September 30, 2020
Intangible assets subject to amortization from continuing operations
Customer relationships	$396	$-	$(25)	$371
Marketing related	230	-	(53)	177
Technology based	6,395	-	(772)	5,623
Internally capitalized software	1,223	162	(127)	1,258
Intangible assets subject to amortization from continuing operations	$8,244	$162	$(977)	$7,429

2020	$343
2021	1,362
2022	1,281
2023	1,148
2024	1,060
Thereafter	1,452
Capitalized software not yet placed in service	783
Total	$7,429

	Number of Shares Subject to Option	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding Balance at December 31, 2019	1,655,383	$1.68	8.33	$3,224
Granted	20,000	4.32	9.41
Exercised	(281,225)	2.28
Forfeited	(62,175)	3.07
Canceled	(44,062)	2.15
Outstanding Balance at September 30, 2020	1,287,921	$1.50	7.84	$5,193
Exercisable at September 30, 2020	799,550	$1.48	7.46	$3,324

	Number of Shares	Weighted Average Unit Price	Weighted Average Remaining Contractual Term (Years)
Outstanding Balance at December 31, 2019	-	$-	-
Granted	413,634	4.12	1.79
Vested	-	-	-
Forfeited	(3,900)	3.81	-
Outstanding Balance at September 30, 2020	409,734	$4.12	1.79

	Three Months ended September 30,		Change		Nine Months ended September 30,		Change
(dollars in thousands)	2020	2019	$	%	2020	2019	$	%
Revenue	$2,126	$1,536	$590	38%	$6,399	$3,962	$2,437	62%