UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(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, 2021~~March 31, 2022

☐ 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

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

6721 Columbia Gateway Drive, Suite 400

Columbia, MD

(Address principal executive offices)

21046

(Zip Code)

(410) 762-0800

(~~Registrant’s~~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 15, 2021,~~May 16, 2022, the Registrant had ~~43,977,218~~46,486,596 shares of common stock, $0.0001 par value per share outstanding.

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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, ~~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 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.

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~~Table of Content~~

REKOR SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~SEPTEMBER 30, 2021~~March 31, 2022

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’ 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	31	29
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45	41
ITEM 4.	CONTROLS AND PROCEDURES	45	41

PART II - OTHER INFORMATION		46	42
ITEM 1.	LEGAL PROCEEDINGS	46	42
ITEM 1A.	RISK FACTORS	47	43
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48	43
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	49	44
ITEM 4.	MINE SAFETY DISCLOSURES	49	44
ITEM 5.	OTHER INFORMATION	49	44
ITEM 6.	EXHIBITS	50	45

SIGNATURES		51	46

~~Table of Contents~~

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts)

(Unaudited)

		September 30, 2021			December 31, 2020				*March 31, 2022*			*December 31, 2021*
ASSETS	ASSETS							*ASSETS*
Current assets
Cash and cash equivalents		$	35,102		$	20,595			$	14,606		$	25,796
Restricted cash and cash equivalents			1,063			412				987			804
Accounts receivable, net			2,434			1,038				1,455			1,173
Inventory			1,822			1,264				1,228			1,194
Note receivable, current portion			340			340				368			340
Other current assets, net			2,156			469				1,966			1,374
Current assets of discontinued operations			1			2				1			1
Total current assets			42,918			24,120				20,611			30,682
Long-term assets
Property and equipment, net			8,614			1,047				10,168			9,929
Right-of-use lease assets, net			6,256			426				9,548			6,163
Goodwill			49,860			6,336				53,451			53,451
Intangible assets, net			22,768			7,038				20,405			21,406
Investments in unconsolidated companies			0			75
Note receivable, long-term			1,105			1,360				935			1,020
SAFE investment			1,000			0				1,400			1,250
Other long-term assets			127			0
Deposits										3,578			1,978
Total long-term assets			89,730			16,282				99,485			95,197
Total assets		$	132,648		$	40,402			$	120,096		$	125,879
LIABILITIES AND SHAREHOLDERS' EQUITY	LIABILITIES AND SHAREHOLDERS' EQUITY							*LIABILITIES AND SHAREHOLDERS' EQUITY*
Current liabilities
Accounts payable and accrued expenses		$	6,492		$	1,772			$	4,337		$	7,087
Notes payable, current portion			994			0				1,000			998
Loan payable, current portion			911			517				37			37
Lease liability, short-term			101			253				676			229
Contract liabilities			2,738			1,126				2,189			2,437
Other current liabilities			3,478			2,126				3,074			2,904
Current liabilities of discontinued operations			129			124				129			129
Total current liabilities			14,843			5,918				11,442			13,821
Long-term Liabilities
Notes payable, long-term			0			980
Loan payable, long-term			46			469				28			37
Lease liability, long-term			9,994			188				14,259			10,061
Contract liabilities, long-term			978			958				878			835
Deferred tax liability, long-term			34			24				38			38
Long-term liabilities of discontinued operations			0			5
Total long-term liabilities			11,052			2,624				15,203			10,971
Total liabilities			25,895			8,542				26,645			24,792
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
Common stock, $0.0001 par value; authorized; 100,000,000 shares; issued: 44,949,939, shares as of March 31, 2022 and 44,007,257 as of December 31, 2021; outstanding: 44,908,417 shares as of March 31, 2022 and 43,987,896 as of December 31, 2021										4			4
Treasury stock, 41,522 and 19,361 shares as of March 31, 2022 and December 31, 2021, respectively										(417	)		(319	)
Additional paid-in capital			169,944			68,238				176,348			171,285
Accumulated other comprehensive income			6			0
Accumulated deficit			(62,882	)		(43,050	)			(82,484	)		(69,883	)
Total stockholders equity			106,753			25,191
Total liabilities and stockholders equity		$	132,648		$	40,402
Total stockholders’ equity										93,451			101,087
Total liabilities and stockholders’ equity									$	120,096		$	125,879

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

4
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REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share amounts)

(Unaudited)

	Three Months ended September 30,						Nine Months ended September 30,						*Three Months Ended March 31,*
	2021			2020			2021			2020			*2022*			*2021*
Revenue	$	2,615		$	2,126		$	11,105		$	6,399		$	3,608		$	4,216
Cost of revenue, excluding depreciation and amortization		1,402			979			4,705			2,745			1,983			1,922

Operating expenses:
General and administrative expenses		6,813			2,676			16,094			7,518			7,388			4,829
Selling and marketing expenses		1,125			560			3,044			1,356			1,352			937
Research and development expenses		2,000			781			4,741			2,143			4,092			1,222
Depreciation and amortization		930			497			2,169			1,386			1,399			614
Operating expenses		10,868			4,514			26,048			12,403
Total operating expenses														14,231			7,602

Loss from operations		(9,655	)		(3,367	)		(19,648	)		(8,749	)		(12,606	)		(5,308	)
Other income (expense):
Loss on extinguishment of debt		0			(3,081	)		0			(3,281	)
Interest expense		(21	)		(218	)		(72	)		(2,468	)		(9	)		(32	)
Gain on the sale of business		0			0			0			3,631
Other income		66			6			103			27			14			16
Total other income (expense)		45			(3,293	)		31			(2,091	)		5			(16	)
Loss before income taxes		(9,610	)		(6,660	)		(19,617	)		(10,840	)
Loss before income taxes and equity method investments														(12,601	)		(5,324	)
Income tax provision		(3	)		(7	)		(10	)		(20	)		0			(3	)
Equity in loss of investee		0			0			(150	)		0			0			(76	)
Net loss from continuing operations		(9,613	)		(6,667	)		(19,777	)		(10,860	)		(12,601	)		(5,403	)
Net loss from discontinued operations		0			(2	)		(4	)		(215	)		0			(3	)
Net loss		(9,613	)		(6,669	)		(19,781	)		(11,075	)	$	(12,601	)	$	(5,406	)
Comprehensive loss:
Net loss from continuing operations		(9,613	)		(6,667	)		(19,777	)		(10,860	)		(12,601	)		(5,403	)
Change in unrealized gain on short-term investments		3			0			6			0			0			2
Total comprehensive loss from continuing operations		(9,610	)		(6,667	)		(19,771	)		(10,860	)		(12,601	)		(5,401	)
Total comprehensive loss	$	(9,610	)	$	(6,669	)	$	(19,775	)	$	(11,075	)	$	(12,601	)	$	(5,404	)
Loss per common share from continuing operations - basic and diluted		(0.23	)		(0.26	)		(0.52	)		(0.52	)		(0.29	)		(0.15	)
Loss per common share discontinued operations - basic and diluted		0.00			(0.00	)		(0.00	)		(0.01	)		0			(0.00	)
Loss per common share - basic and diluted	$	(0.23	)	$	(0.26	)	$	(0.52	)	$	(0.53	)	$	(0.29	)	$	(0.15	)

Weighted average shares outstanding
Basic and diluted		41,938,863			26,907,069			38,357,167			22,781,807			44,087,911			35,944,355

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

~~Table of Contents~~

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REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS’~~SHAREHOLDERS’ EQUITY (DEFICIT)

(Dollars in thousands, except share amounts)

(Unaudited)

	Shares of Common Stock		Common Stock		Shares of Treasury Stock			Treasury Stock at Cost			Shares of Series B Preferred Stock			Series B Preferred Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income		Accumulated Deficit			Total Stockholders Equity (Deficit)			*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*
Balance as of June 30, 2021		41,012,766	$	4		(19,361	)	$	(319	)		-		$	0	$	148,754		$	3	$	(53,269	)	$	95,173
Balance as of December 31, 2021																												43,987,896	$	4		(19,361	)	$	(319	)		0		$	0	$	171,285		$	0	$	(69,883	)	$	101,087
Stock-based compensation		-		0		-			0			-			0		694			0		0			694			-		0		-			0			-			0		1,900			0		0			1,900
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 of common stock pursuant to at the market offering, net																												728,452		0		0			0			0			0		3,134			0		0			3,134
Issuance upon exercise of stock options		130,380		0		-			0			-			0		208			0		0			208			12,971		0		0			0			0			0		29			0		0			29
Issuance upon vesting of restricted stock units		19,448		0		-			0			-			0		0			0		0			0			179,098		0		0			0			0			0		0			0		0			0
Change in unrealized gain on short-term investments		-		0		-			0			-			0		0			3		0			3
Shares withheld upon vesting of restricted stock units																												0		0		(22,161	)		(98	)		0			0		0			0		0			(98	)
Net loss		-		0		-			0			-			0		0			0		(9,613	)		(9,613	)		-		0		-			0			-			0		0			0		(12,601	)		(12,601	)
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 March 31, 2022																												44,908,417	$	4		(41,522	)	$	(417	)		0		$	0	$	176,348		$	0	$	(82,484	)	$	93,451

Balance as of December 31, 2020		33,013,271	$	3		-		$	0			240,861		$	0	$	68,238		$	0	$	(43,050	)	$	25,191			33,013,271	$	3		0		$	0			240,861		$	0	$	68,238		$	0	$	(43,050	)	$	25,191
Stock-based compensation		-		0		-			0			-			0		2,600			0		0			2,600			-		0		-			0			-			0		781			0		0			781
Exercise of cashless warrants in exchange for common stock		62,921		0		-			0			-			0		0			0		0			0			47,612		0		0			0			0			0		0			0		0			0
Exercise of warrants in exchange for common stock		54,235		0		-			-			-			0		307			0		0			307			52,013		0		0			0			0			0		294			0		0			294
Exercise of warrants related to series A preferred stock		97,805		0		-			0			-			0		101			0		0			101			95,864		0		0			0			0			0		99			0		0			99
Public underwriting		6,126,939		1		-			0			-			0		70,124			0		0			70,125			6,126,939		1		0			0			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			899,174		0		0			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			517,611		0		0			0			(240,861	)		0		179			0		0			179
Issuance upon exercise of stock options		195,782		0		-			0			-			0		434			0		0			434			65,402		0		0			0			0			0		226			0		0			226
Issuance upon vesting of restricted stock units		196,069		0		-			0			-			0		0			0		0			0			134,991		0		0			0			0			0		0			0		0			0
Shares withheld upon vesting of restricted stock units		-		0		(19,361	)		(319	)		-			0		0			0		0			(319	)		0		0		(19,361	)		(319	)		0			0		0			0		0			(319	)
Preferred stock dividends		-		0		-			0			-			0		0			0		(51	)		(51	)		-		0		-			0			-			0		0			0		(51	)		(51	)
Accretion of Series A preferred stock		-		0		-			0			-			0		(101	)		0		0			(101	)		-		0		-			0			-			0		(101	)		0		0			(101	)
Change in unrealized gain on short-term investments		-		0		-			0			-			0		0			6		0			6			-		0		-			0			-			0		0			2		0			2
Net loss		-		0		-			0			-			0		0			0		(19,781	)		(19,781	)		-		0		-			0			-			0		0			0		(5,406	)		(5,406	)
Balance as of September 30, 2021		43,948,281	$	4		(19,361	)	$	(319	)		-		$	0	$	169,944		$	6	$	(62,882	)	$	106,753
Balance as of March 31, 2021																												40,952,877	$	4		(19,361	)	$	(319	)		0		$	0	$	147,615		$	2	$	(48,507	)	$	98,795

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.

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REKOR SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months ended September 30,						*Three Months Ended March 31,*
	2021			2020			*2022*			*2021*
Cash Flows from Operating Activities
Cash Flows from Operating Activities:
Net loss from continuing operations	$	(19,777	)	$	(10,860	)	$	(12,601	)	$	(5,403	)
Net loss from discontinued operations		(4	)		(215	)		0			(3	)
Net loss		(19,781	)		(11,075	)		(12,601	)		(5,406	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense		24			36			0			24
Depreciation		431			270			298			131
Amortization of right-of-use lease asset		209			139			100			74
Provision for deferred taxes		10			0			0			3
Share-based compensation		2,600			539			1,900			781
Amortization of financing costs		14			653			2			5
Amortization of intangible assets		1,529			977			1,001			409
Loss due to change in value of equity investments		150			0			0			76
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	)		637			(1,460	)
Inventory		(558	)		(289	)		(34	)		163
Other current assets		(1,537	)		(186	)		(592	)		(157	)
Other long-term assets		(127	)		0
Accounts payable and accrued expenses and other current liabilities		4,275			940
Deposits								(323	)		0
Accounts payable, accrued expenses and other current liabilities								(2,580	)		1,947
Contract liabilities		1,596			646			(205	)		323
Lease liability		(218	)		(149	)		241			(75	)
Net cash used in operating activities - continuing operations		(12,321	)		(7,860	)		(12,156	)		(3,159	)
Net cash used in by operating activities - discontinued operations		(4	)		(3,884	)
Net cash used in operating activities - discontinued operations								0			(4	)
Net cash used in operating activities		(12,325	)		(11,744	)		(12,156	)		(3,163	)
Cash Flows from Investing Activities
Cash paid for Waycare acquisition, net		(40,699	)		0
Cash Flows from Investing Activities:
SAFE Investment		(1,000	)		0			(150	)		0
Capital expenditures		(1,618	)		(544	)		(1,814	)		(425	)
Proceeds from sale of AOC Key Solutions		0			3,400
Proceeds from sale of TeamGlobal		0			2,300
Short-term investment activity, net								0			(23,994	)
Investment in unconsolidated company		(75	)		(75	)		0			(75	)
Net cash (used in) provided by investing activities - continuing operations		(43,392	)		5,081			(1,964	)		(24,494	)
Cash Flows from Financing Activities
Cash Flows from Financing Activities:
Proceeds from public offering		70,125			0			0			70,125
Proceeds from PPP loans		0			874
Payment of notes payable		(29	)		0
Proceeds from notes receivable		255			600			57			85
Payment of stock issuance costs associated with the Note Exchange transaction		0			(73	)
Repayments of notes payable		0			(7,266	)
Repayments of loans payable								(9	)		(11	)
Net proceeds from exercise of options		434			640			29			226
Net proceeds from exercise of warrants		307			874			0			294
Net proceeds from exercise of warrants associated with the Series A Preferred Stock		101			77			0			99
Net proceeds from at-the-market agreement		0			29,930			3,134			0
Repurchases of common stock		(319	)		0			(98	)		(319	)
Payment of debt modification costs		0			(300	)
Net cash provided by financing activities - continuing operations		70,874			25,356			3,113			70,499
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			(11,007	)		42,846
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations		(4	)		287
Net decrease in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations								0			(4	)
Net increase in cash, cash equivalents and restricted cash and cash equivalents		15,157			22,864			(11,007	)		42,842
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period		21,009			1,866			26,601			21,009
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$	36,166		$	24,730		$	15,594		$	63,851

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents at end of period - continuing operations	$	35,102		$	24,154		$	14,606		$	62,845
Restricted cash and cash equivalents at end of period - continuing operations		1,063			573			987			1,005
Cash and cash equivalents at end of period - discontinued operations		1			3			1			1
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$	36,166		$	24,730		$	15,594		$	63,851

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

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REKOR SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1– GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These unaudited condensed consolidated interim financial statements of Rekor Systems, Inc. and its subsidiaries (collectively, the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they do not contain all information and notes required by U.S. GAAP for annual financial statements. In the opinion of management, these unaudited condensed consolidated interim financial statements reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the Company’s unaudited condensed consolidated financial position as of ~~September 30, 2021,~~March 31, 2022, the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity ~~(deficit)~~ and unaudited condensed consolidated statements of cash flows for the three ~~and nine~~ month periods ended ~~September 30, 2021~~ March 31, 2022 and ~~2020.~~

~~On August 18,~~ 2021 the Company completed its acquisition of Waycare Technologies Ltd. (“Waycare”) by acquiring 100% of the issued and outstanding capital stock of Waycare, which is now a wholly owned subsidiary of the Company. Since the acquisition of Waycare occurred on August 18, 2021, the results of operations for Waycare from the date of acquisition have been included in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2021..

The financial data and other information disclosed in these notes are unaudited. The results for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, are not necessarily indicative of the results to be expected for the year ending December 31, ~~2021.~~2022.

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~~10-K for the year ended December 31, ~~2020.~~2021. 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.~~$1,000.

Rekor is a ~~provider of roadway~~global leader in intelligent infrastructure focused on addressing the world’s most critical challenges across transportation management, public safety, and key commercial markets. With a real-time intelligence ~~through intelligent infrastructure. The~~platform driven by deep access to data, AI-powered software, and smart optical devices at-the-edge, the Company ~~delivers integrated solutions, actionable~~combines its industry expertise and advanced proprietary technologies to deliver insights ~~and predictions~~ that increase roadway safety, ~~with its disruptive technology. With a global footprint across 65 countries,~~ efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.

On August 18, 2021, the Company ~~provides actionable~~completed its acquisition of Waycare Technologies Ltd. (“Waycare”) by acquiring 100% of the issued and ~~real-time insights to commercial clients, as well as government entities. Rekor’s capabilities appeal to businesses and governmental entities in solving~~outstanding capital stock of Waycare, which is now a ~~wide variety~~wholly-owned subsidiary of ~~real-world mobility and infrastructure-related operational challenges. Currently, customers use~~ the Company’s solutions for a multitude of applications, including roadway safety and incident management, traffic and infrastructure analytics, sustainability and green initiatives, public safety and contactless compliance.Company.

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Use of Estimates

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires the extensive use of management’s estimates. Management uses estimates and assumptions in preparing consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. ~~Actual amounts may differ from these estimates.~~ On an ~~on-going~~ongoing basis, the Company evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from those estimates under different assumptions or ~~conditions.~~conditions

~~Reclassifications~~

Reclassifications

Certain amounts in the prior year's financial statements have been reclassified to conform to the current year's presentation. Beginning in the third quarter of 2021, depreciation and amortization is presented separately from cost of revenue, general and administrative expenses, selling and marketing expenses and research and development expenses on the unaudited condensed consolidated statements of operations, whereas in prior periods these amounts were included together with the aforementioned financial statement captions. Additionally, as of September 30, 2021, the Company began to present other current liabilities separately from accounts payable and accrued expenses. Other current liabilities primarily consist of payroll and payroll related accounts. Amounts for the three ~~and nine~~ month period ending ~~September 30, 2020~~March 31, 2021 and the period ended December 31, ~~2020,~~2021, have been reclassified to conform to the current year’s presentation.

Liquidity

For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand, capital raises and working capital, ~~including available borrowings on loans,~~ to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections and estimates and will make certain key assumptions. These assumptions include, among other factors, its ability to raise additional capital, ~~if necessary,~~ the expected timing and nature of the Company’s programs and projected cash expenditures and its ability to delay or curtail these programs or expenditures to the extent management has the proper authority to do so and considers it probable that those implementations can be achieved within the look-forward period.

The Company has generated losses since its inception and has relied on cash on hand, external bank lines of credit, the sale of a note, proceeds from the sale of common stock, proceeds from the private sale of the Company’s non-core subsidiaries, proceeds from note receivables, debt financings and a public offering of its common stock to support ~~cashflow~~cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, the Company had working capital from continuing operations of ~~$28,203,000~~$9,297,000 and a comprehensive loss from continuing operations of ~~$19,771,000.~~$12,601,000.

The Company’s cash ~~increased~~decreased by ~~$15,157,000~~$11,007,000 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 primarily due to the ~~net proceeds~~loss from continuing operations of ~~$70,125,000 from the completion of the Public Offering (see NOTE 10 -~~ ~~STOCKHOLDERS’ EQUITY~~ ~~for details on the Public Offering).~~$12,601,000. This amount was offset by the net ~~cash outlay~~proceeds of ~~$40,699,000 in connection with~~$3,134,000 from the ~~acquisition of Waycare~~2022 Sales Agreement (see NOTE ~~2 –~~ ~~ACQUISITIONS~~10 - STOCKHOLDERS’ EQUITY for details on the ~~Waycare acquisition)~~2022 Sales Agreement).

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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,~~10-Q, indicate the Company’s ability to continue operations as a going concern for at least that ~~one-year~~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 orif additional financing ~~if needed,~~ is not available.

Goodwill

The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. ~~As if September 30, 2021 the~~The Company ~~has not completed~~performs its annual impairment ~~assessment.~~assessment on October 1, or more frequently, when events or circumstances indicate impairment may have occurred. During the ~~nine~~three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020, we have~~ 2021, the Company did not ~~recognized~~ recognize any impairment to goodwill from continuing operations.

~~Equity Method Investments~~

Investments in the common stock of entities other than the Company’s consolidated subsidiaries are accounted for under the equity method in accordance with the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) 323, ~~Investments – Equity Method and Joint Ventures~~. Under the equity method, the initial investment is recorded at cost and the investment is subsequently adjusted for its proportionate share of earnings or losses, including consideration of basis differences resulting from the difference between the initial carrying amount of the investment and the underlying equity in net assets. The difference between the carrying amount of the investment and the underlying equity in net assets is primarily attributable to goodwill and other intangible assets. When the fair value or income information is not readily determinable, the Company has elected to apply the measurement alternative, and report the investment at cost, less impairment.

~~Treasury Stock~~

Treasury stock is recorded at acquisition cost. Upon disposition of treasury shares gains and losses are recorded as increases or decreases to additional paid-in capital with losses in excess of previously recorded gains charged directly to retained earnings.

Fair Value of Financial Instruments

The carrying amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, restricted cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate fair value as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt and long-term receivables approximates fair value as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

The determination of fair value is based upon the fair value framework established by ASC Topic 820,Fair Value Measurements and Disclosures (“ASC 820”). Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. ASC 820 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

Level 1– Quoted prices in active markets for identical assets or liabilities.

Level 2– Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

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Level 3– Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level 3 inputs.
~~The Company considers its note receivable and Simple Agreement for Future Equity (“SAFE”) investment to be Level 3 investments and that the fair value approximates the carrying value.~~
There were no changes in levels during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

~~Note Receivables~~
In connection with the sale of TeamGlobal in June 2020, the Company received a $1,700,000, five and a half year promissory note due December 2025, that carries an interest rate of 4.0% and is secured by a first priority security interest in the shares of TeamGlobal. Monthly principal payments on the promissory note began in January 2021. Based on general market conditions, the security interest held by the Company and the credit quality of the buyer at the time of the sale, the Company determined that the fixed interest rate approximates current market rates.
Interest income recognized for the three and nine months ended September 30, 2021 was $15,000 and $48,000, respectively, and is included as part of other income on the unaudited condensed consolidated statements of operations. Interest income recognized for the three and nine months ended September 30, 2020 was $19,000 and $31,000, respectively.
Revenue Recognition

The Company derives its revenues primarily from ~~Software as a Service (“SaaS”), subscriptions, customer support services, contactless compliance solutions, implementation services, perpetual license sales and~~ the sale of software, hardware and related services, including customer support and implementation services and management services in connection with ~~its software~~our traffic safety solutions. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.

~~The~~To determine revenue recognition for arrangements that the Company determines are within the ~~amount~~scope of ~~revenue to be recognized through application of~~ASC 606, the Company performs the followingfive 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

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

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Three Months ended September 30,

Nine Months ended September 30,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

Recurring revenue

$ 1,233

$ 964

$ 3,142

$ 2,876

$ 1,695 $ 864
Product and service revenue

1,382

1,162

7,963

3,523

1,913 3,352
Total revenue

$ 2,615

$ 2,126

$ 11,105

$ 6,399

$ 3,608 $ 4,216

Revenues

Recurring revenue
Recurring revenue ~~is defined as~~includes the Company’s SaaS revenue, ~~licensing and~~ subscription revenue, eCommerce revenue and customer support revenue. The Company generates recurring revenue from long-term contracts with customers that ~~include fixed recurring revenue or~~provide periodic payments and short-term contracts that are automatically invoiced on a monthly basis. The Company’s recurring revenue is ~~driven~~generated by ~~the Company’s go-to-market model, which includes~~ a combination of direct sales, partner-assisted sales, and eCommerce sales.

Recurring revenues are generated through the Company’s SaaS ~~revenue represents software products and solutions that provide~~model, where the Company provides customers with the right to access the Company’s software solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services may vary at the customer’s discretion. The Company's contracts with customers are generally for a term of one to five years. The payment for SaaS solutions may be received either at the inception of the arrangement or over the term of the arrangement. These SaaS solutions are considered to have a single performance obligation where the customer simultaneously receives and consumes the benefit, and as such, we recognize revenue for these ~~solutions~~arrangements ratably over the term of the contractual agreement.

~~Subscription~~The Company also currently receives recurring revenues under contracts entered into using a subscription model for bundled hardware and software over a period. Payments for these subscriptions are received periodically over the term of the agreement and revenue is recognized ratably over the term of the agreement. In addition, some of our subscription revenue includes providing, through a web server, access to the Company’s ~~proprietary vehicle recognition~~ software solutions, a self-managed database, and a ~~powerful~~ cross-platform application programming interface. The subscription arrangements with these customers typically do not provide the customer with the right to take possession of the Company’s software at any time. Instead, customers are granted continuous access to the Company’s ~~software or services~~solutions over the contractual period. The Company’s subscription services arrangements are non-cancelable and do not contain refund-type provisions. Accordingly, ~~the~~any fixed consideration related to ~~recurring revenue~~the arrangement is generally recognized as recurring revenue on a straight-line basis over the contract term beginning on the date access to the Company’s software is provided.

eCommerce revenue is defined by the Company as revenue obtained through direct sales on the Company’s eCommerce platform. The Company’s eCommerce revenue generally includes subscriptions to the Company’s vehicle recognition software which can be purchased ~~online.~~online and activated through a digital key. 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 licenses and long-term 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 supportarrangements and 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.product updates. The Company’s customer support team is ready to provide these maintenance services, as needed, to the customer during the contract term. The customer benefits evenly throughout the contract period from the guarantee that the customer support resources and personnel will be available to them. As customer support is not critical to the customers' ability to derive benefit from their right to use the Company’s software, customer support is considered a distinct performance obligation when sold together with a long-term license for the software. Customer support for perpetual and term licenses is renewable, generally on an annual basis, at the option of the customer. Customer support for subscription licenses is renewable concurrently with such licenses for the same duration of time. Revenue for customer support is recognized ratably over the contract period based on the start and end dates of the ~~maintenance term,~~customer support obligation, 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.

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Contactless compliance solutions revenues reflect arrangements to provide traffic safety systems to several ~~municipalities~~jurisdictions in North America. These systems include hardware that identifies red light and school safety zone traffic violations and software that captures and records forensic images and analyzes the images to provide data and ~~supports~~support citation management services. In the first quarter of 2021, the Company launched a new service offering for the State of Oklahoma to support its Uninsured Vehicle Enforcement Diversion (“UVED”) Program. Rekor provides hardware, software and services to identify uninsured motor vehicles, notify owners of non-compliance and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of citations collected by the relevant ~~municipality.~~jurisdiction.

Implementation revenue is ~~incurred~~recognized when the Company provides pilot programs to customers. Pilot programs may involve a ~~one-time~~one-time fee for a defined period in which the customer can use the Company’s software in connection with a previously installed camera network or connected vehicle data. At the end of the pilot program, the customer can convert from a pilot program to a subscription model which has a typical term between one and five years. The Company’s pilot program revenue is recognized at various stages of completion.

In addition to the recurring software sales, the Company will recognize revenue related to the sale of perpetual software licenses. The Company sells perpetual licenses which provide customers the right to use software for an indefinite period in exchange for a ~~one-time~~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.~~channels and direct sales. The Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon transfer of control of the hardware to its customers. The Company offers hardware installment to customers which ranges from one to six months. The revenue related to the installation component is recognized at various stages of completion.

Revenue by Customer Type

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

Three Months ended June 30,

Six Months ended June 30,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

Government customers

$ 1,548

$ 1,254

$ 4,186

$ 4,047

$ 2,003 $ 3,105
Commercial customers

1,067

872

6,919

2,352

1,605 1,111
Total revenue

$ 2,615

$ 2,126

$ 11,105

$ 6,399

$ 3,608 $ 4,216

Performance obligations

The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some contracts include performance obligations for several distinct services. For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This may result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation. When the Company recognizes revenue due to the sale of hardware or perpetual software licenses, the impact on the overall unsatisfied performance obligations is relatively small as the Company satisfies most of its performance obligations at the point in time that the control of the hardware or software has transferred to the customer.

Where performance obligations for a contract with a customer are not yet satisfied or have only been partially satisfied as of a particular date, the unsatisfied portion is to be recognized as revenue in the future. As of ~~September 30, 2021,~~March 31,2022, the Company ~~had~~had approximately ~~$23,845,000~~$21,288,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately ~~36.0%~~41% of this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized over the next two to four years thereafter.

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Unbilled accounts receivable

The timing of revenue recognition, billings and cash collections ~~results~~result in billed accounts receivable, unbilled accounts receivables, and contract liabilities on the unaudited condensed consolidated balance sheets. Billed and unbilled accounts receivable are presented as part of accounts receivable, net, on the unaudited condensed consolidated balance sheets. When billing occurs after services have been provided, such unbilled amounts will generally be billed and collected within 60 to 120 days, but typically no longer than over the next twelve months. Unbilled accounts receivables of ~~$425,000~~$400,000 and ~~$600,000~~ $415,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

Contract liabilities

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next nine months to five years, depending on the subscription or licensing period. These assets and liabilities are reported on the unaudited condensed consolidated balance sheets on a contract-by-contract basis at the end of each reporting period. Changes in the contract asset and liability balances during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 were not materially impacted by any other factors. Contract liabilities as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020 were $3,716,000~~2021 were $3,067,000 and ~~$2,084,000, respectively.~~$3,272,000, respectively. During the ~~nine~~three months ended ~~September 30, 2021, $920,000~~March 31, 2022, $949,000 of the contract liabilities balance as of December 31, ~~2020~~2021 was recognized as revenue.

The services due for contract liabilities described above are shown below as of ~~September 30, 2021~~March 31, 2022 (dollars in thousands):

2021

$ 1,068

2022

1,839

2022, remaining
$ 1,927
2023

474

651
2024

234

303
2025

82

124
2026
56
Thereafter

19

6
Total

$ 3,716

$ 3,067

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~~When the amortization period would be one year or less, the Company ~~elected~~elects to use the practical expedient election to expense the costs to obtain a contract as ~~incurred when the amortization period would have been one year or less.~~they are incurred.

In connection with the Company’s services for Oklahoma’s UVED program, the Company installs hardware and software at no additional charge to the end customer. The costs associated with the hardware and software installations are expected to be recouped by the Company over the course of the estimated contract period and thus are capitalized as a cost to fulfill a customer contract and amortized over the estimated contract period. As of September 30, 2021 the Company has capitalized $218,000 of such fulfillment costs, of which $196,000 are presented as part of property and equipment, net in the unaudited condensed consolidated balance sheets. As of December 31, 2020 costs incurred to fulfill contracts in excess of one year had been immaterial.
Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents

The Company considers all highly liquid debt instruments, including U.S. Treasury Bills purchased with a maturity of three months or less, to be cash equivalents.

Cash subject to contractual restrictions and not readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were ~~$1,063,000~~$987,000 and ~~$412,000, respectively,~~$804,000, 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.
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Concentrations of Credit Risk

The Company deposits its temporary cash investments with highly rated quality financial institutions that are located in the United States and Israel. The United States deposits are federally insured up to ~~$250,000~~$250,000 per account. As of ~~September 30,~~March 31, 2022 and December 31, 2021, the Company had deposits from continuing operations totaling ~~$36,165,000~~$15,593,000 and $26,600,000, respectively, in three U.S. financial institutions and one Israeli ~~financial institution. As of December 31, 2020 the Company had deposits from continuing operations totaling $21,007,000 in one U.S.~~ financial institution.

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

Customer A accounted for less than ~~10.0%~~10% and 40% of the Company’s total revenues for the three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020,~~2021, respectively. ~~Customer A~~
No other single customer accounted for ~~19.0% and less~~more than ~~10.0%~~10% of the Company’s ~~total~~unaudited condensed consolidated revenues for the ~~nine~~three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020, respectively.~~
~~Customer B accounted for less than 10.0% of the Company’s total revenues for the three months ended September 30,~~ 2021 ~~and 2020, respectively. Customer B accounted for 13.0% and less than 10.0% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively.~~
Customer C accounted for less than 10.0% and 17.0% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer C accounted for less than 10.0% and 20.0% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively.
Customer E accounted for 13.0% and less than 10.0% of the Company’s total revenues for the three months ended September 30, 2021 and 2020, respectively. Customer E accounted for less than 10.0% of the Company’s total revenues for the nine months ended September 30, 2021 and 2020, respectively..

As of ~~September 30, 2021, accounts receivable from Company A and Company D totaled 18.0% and 14.0%~~March 31, 2022, 0 single customer accounted for more than 10% of the unaudited condensed consolidated accounts receivable balance. As of December 31, ~~2020, Company A and~~2021, Company B accounted for ~~43.0% and 20.0%, respectively,~~13% of the unaudited condensed consolidated accounts receivable balance.

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

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~~10-K for the year ended December 31, ~~2020.~~2021.

~~New Accounting Pronouncements Effective in the Nine months ended September 30, 2021~~
~~In January 2020, the FASB issued ASU 2020-01,~~ ~~Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)~~ (“ASU 2020-01”). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company adopted this guidance in the first quarter of 2021. The adoption of ASU 2020-01 did not have a material impact on the Company’s unaudited condensed consolidated financial statements or notes.
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~~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~~Accounting Standards Update ("ASU") 2016-13Financial Instruments-Credit Losses (Topic ~~326)~~326): Measurement of Credit Losses on Financial Instruments (“ASU ~~2016-13”~~2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU ~~2016-13~~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~~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~~2016-13 and based on the Company’s analysis of ASU ~~2016-13~~2016-13 and the historical, current and expected credit quality of the Company’s customers, the Company does not expect ASU ~~2016-13~~2016-13 to have a material impact on its unaudited condensed consolidated statements of operations and balance sheets.

The Company does not believe that any recently issued, but not yet effective, accounting standards, other than the standards discussed above, could have a material effect on the accompanying unaudited condensed consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
NOTE 2– ACQUISITIONS

On August 18, 2021, the Company completed its acquisition of Waycare by acquiring ~~100.0%~~100% of the issued and outstanding capital stock of Waycare. The aggregate purchase price for the shares of Waycare was ~~$61,100,000,~~$60,171,000, 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~~$39,884,000 of cash and 2,784,474 shares of the Company’s common stock, valued at $20,287,000. As a result of the transaction, Waycare has become a wholly-owned subsidiary of the Company.

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The purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition of Waycare occurred on August 18, 2021, the results of operations for Waycare from the date of acquisition have been included in the Company’s consolidated statement of operations for the three and nine months ended September 30, 2021. The table below shows the breakdown related to the preliminary purchase price allocation for the acquisition (dollars in thousands):

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Cash paid

$ 40,813

$ 39,884
Common stock issued

20,287

20,287
Total consideration

$ 61,100

Total Consideration
$ 60,171
Assets

Cash and cash equivalents

$ 25

$ 25
Restricted cash and cash equivalents

89

89
Accounts receivable

472

486
Other current assets

150

150
Property and equipment

72

72
Acquired technology

17,255

16,897
Total assets acquired

18,063

17,719
Liabilities

Accounts payable and accrued expenses

451

794
Contract liabilities

36

36
Deferred tax liability
3,833
Total liabilities assumed

487

4,663
Fair value of identifiable net assets acquired

17,576

13,056
Goodwill

$ 43,524

$ 47,115

The technology acquired by the Company as part of the acquisition has an estimated useful life of seven years and is presented as part of intangible assets, net on the unaudited condensed consolidated balance sheets.

~~During the three and nine months ended September 30, 2021, $260,000 of revenue was attributed to Waycare, which was reported in the consolidated income statement.~~
Operations of Combined Entities

The following unaudited pro forma combined financial information gives effect to the acquisition of Waycare as if it was consummated as of January 1, ~~2020.~~ 2021. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, ~~2020 (the~~2021 (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,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

(Dollars in thousands except for per share data)

(Dollars in thousands except for per share data)

(Dollars in thousands, except per share data)

Total revenue from continuing operations

$ 2,834

$ 2,499

$ 13,050

$ 7,491

$ 3,608 $ 4,599
Net loss from continuing operations

(10,186 )

(4,347 )

(21,629 )

(11,840 ) $ (12,601 ) $ (6,183 )
Basic and diluted loss per share continuing operations

$ (0.23 )

$ (0.27 )

$ (0.54 )

$ (0.59 )
Basic and diluted loss per share from continuing operations
$ (0.29 ) $ (0.17 )
Basic and diluted number of shares

44,723,337

29,691,543

41,141,641

25,566,281

44,087,911 38,728,829

NOTE 3– INVESTMENTS

Investments in Unconsolidated Companies

In February 2017, the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business to Global Public Safety (the “GPS Closing”). After the GPS Closing, the Company continues to own 19.9% of the units of Global Public Safety. This equity investment does not have a readily determinable fair value and the Company reports this investment at cost, less impairment. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 the investment in Global Public Safety had a value of $0.

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In June 2020, the Company announced a joint venture in which the Company would have a 50 percent equity interest in Roker Inc. (“Roker”). In the third quarter of 2020 and the first quarter of 2021, the Company contributed $75,000 for its 50 percent equity interest for a total investment of $150,000. This investment is accounted for under the equity method. During the three ~~and nine~~ months ended ~~September 30,~~ March 31, 2022 and 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 no0 distributions or earnings received from either investment in the three ~~or nine~~ months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020.~~2021.

Roker SAFE

In April 2021, in exchange for $1,000,000 the Company entered into a SAFE with Roker (the “Roker SAFE”). In October 2021and March 2022, the Company invested an additional $250,000 and $150,000, respectively, in the Roker SAFE. The Roker SAFE allows the Company to participate in future equity financings of Roker, through a share-settled redemption of the amount invested (such notional being the “invested amount”). Alternatively, upon the occurrence of a change of control or an initial public offering (other than a qualified financing), the Company has the option to receive either (i) cash payment equal to the invested amount under the SAFE, or (ii) a number of shares of common stock equal to the invested amount divided by the liquidity price set forth in the Roker SAFE. The Company’s investment in the Roker SAFE is recorded on the cost method of accounting and included under SAFE investment on the unaudited condensed consolidated balance sheets and is shown as long-term, as it is not readily convertible into cash. If the Company identifies factors that may be indicative of impairment the Company will review the investment for impairment.No factors indicative of impairment were identified during the three months ended March 31, 2022.

~~NOTE 4 – DISCONTINUED OPERATIONS~~
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During the first quarter of 2020, in connection with the Company’s plan to concentrate on its Technology segment, the Company determined that all of the historical Professional Services segment should be classified as discontinued operations. As part of this plan TeamGlobal, AOC Key Solutions and Firestorm were classified as discontinued operations and presented as part of discontinued operations.
~~AOC Key Solutions Sale~~
On April 2, 2020, the Company entered into a Stock Purchase Agreement (the “AOC Key Solutions Purchase Agreement”) by and among the Company, AOC Key Solutions, and PurpleReign, LLC, a Virginia limited liability company owned by the members of AOC Key Solutions management (the “AOC Key Solutions Buyer”), by which the Company agreed to sell AOC Key Solutions, to the AOC Key Solutions Buyer.
The AOC Key Solutions Buyer agreed to purchase all of the outstanding equity interests of AOC Key Solutions for a purchase price of $4,000,000, comprising (i) $3,400,000 in cash, and (ii) a subordinated promissory note (the “Subordinated Note”) in the initial principal amount of $600,000.
~~As of December 31, 2020, the AOC Key Solutions Subordinated Note had been paid in full by the AOC Key Solutions Buyer.~~
~~TeamGlobal Sale~~
On June 29, 2020, the Company entered into a Stock Purchase Agreement (the “TeamGlobal Purchase Agreement”) by and among the Company, TeamGlobal, and Talent Teams LLC, a Texas limited liability company owned by the members of TeamGlobal’s management (the “TeamGlobal Buyer”), pursuant to which the Company agreed to sell TeamGlobal to the TeamGlobal Buyer.
Subject to the terms and conditions of the TeamGlobal Purchase Agreement, the TeamGlobal Buyer agreed to purchase all of the outstanding equity interests of TeamGlobal for a purchase price of $4,000,000, comprising (i) an aggregate of $2,300,000 in cash, and (ii) a secured promissory note (the “Secured Note”) in the initial principal amount of $1,700,000, with such Secured Note secured by a Pledge and Security Agreement with respect to all the outstanding shares of TeamGlobal being acquired by the TeamGlobal Buyer.
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The dispositions of AOC Key Solutions and TeamGlobal are the result of the Company’s strategic decision to concentrate resources on the development of its Technology Segment and will result in material changes in the Company’s operations and financial results. As a consequence, the Company is reporting the operating results and cash flows of TeamGlobal, AOC Key Solutions and Firestorm as discontinued operations, including for all prior periods reflected in the unaudited condensed consolidated financial statements and these notes.
~~Pursuant to ASC Topic 205-20,~~ ~~Presentation of Financial Statements - Discontinued Operations~~, the results of operations from TeamGlobal, AOC Key Solutions and Firestorm for the three and nine months ended September 30, 2021 and 2020 have been classified as discontinued operations and presented as part of loss from discontinued operations in the accompanying unaudited condensed consolidated statements of operations presented herein. The assets and liabilities also have been classified as discontinued operations under the line captions of current and long term assets discontinued operations and current and long term liabilities discontinued operations in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020.
The assets and liabilities classified as discontinued operations in the Company’s unaudited condensed consolidated financial statements as of September 30, 2021 and December 31, 2020 are shown below (dollars in thousands):

September 30, 2021

December 31, 2020

ASSETS

Cash and cash equivalents

$ 1

$ 2

Current assets of discontinued operations

1

2

Total assets of discontinued operations

$ 1

$ 2

LIABILITIES

Accounts payable and accrued expenses

$ 30

$ 31

Lease liability, short term

99

93

Current liabilities of discontinued operations

129

124

Lease liability, long term

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,

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 )
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NOTE 5 4– SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Supplemental disclosures of cash flow information for the ~~nine~~three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020~~2021 were as follows (dollars in thousands):

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 )

Three Months Ended March 31,

2022

2021

Cash paid for interest
$ 0 $ 0
Cash paid for taxes
5 0
Financing activities:

Series A Cumulative Convertible Redeemable Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock
0 (1,005 )
Series A Cumulative Convertible Redeemable Preferred stock included in temporary equity, settled in common stock
0 (6,770 )
Series B Cumulative Convertible Preferred stock dividends included in accounts payable and accrued expenses, settled in common stock
0 (179 )
New Leases under ASC-842:

Recognition of operating lease - right-of-use lease asset
3,485 0
Lease incentive recognized in other current assets, net
919 0
Recognition of operating lease - lease liability
$ (4,404 ) $ 0

NOTE 6 5– OPERATING LEASES

~~We have~~The Company has operating leases for office facilities in various locations throughout the United States and Israel. The Company’s leases have remaining terms of one to ~~four~~ten years. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments.

Operating lease expense from continuing operations for the three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020~~2021 was ~~$105,000~~$411,000 and ~~$72,000, and for the nine months ended September 30, 2021 and 2020 was $278,000 and $175,000,~~$89,000, 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~~$25,000 and ~~$168,000 for~~$85,000 for the ~~nine~~three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020,~~2021, respectively.

In the ~~third~~first quarter of ~~2021,~~2022, the Company entered into a lease agreement for its ~~new headquarters.~~Israeli operations. As part of the lease agreement, there were ~~$3,833,000~~$919,000 in lease incentives provided to the Company which ~~were~~will be used to update ~~and~~ the structure of the leased space and furnish the leased space.

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Supplemental balance sheet information related to leases as of ~~September 30, 2021~~March 31, 2022 was as follows (dollars in thousands):

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Operating lease right-of-use lease assets
$ 9,548

Current portion of lease liability
$ 676
Long-term portion of lease liability
14,259
Total lease liability
$ 14,935

Weighted average remaining lease term - operating leases (years)
9.88

Weighted average discount rate - operating leases
9.0 %

2022, remaining
$ 837
2023
2,293
2024
2,254
2025
2,271
2026
2,306
Thereafter
13,628
Total lease payments
$ 23,589
Less imputed interest
8,654
Maturities of lease liabilities
$ 14,935

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 6– INTANGIBLE ASSETS

Intangible Assets Subject to Amortization

The following summarizes the change in intangible assets from December 31, ~~2020~~2021 to ~~September 30, 2021~~March 31, 2022 (dollars in thousands):

December 31, 2020

Additions

Amortization

September 30, 2021

December 31, 2021

Additions

Amortization

March 31, 2022

Intangible assets subject to amortization from continuing operations

Intangible assets subject to amortization

Customer relationships

$ 362

$ 0

$ (25 )

$ 337

$ 328 $ 0 $ (8 ) $ 320
Marketing related

159

0

(51 )

108

97 0 (10 ) 87
Technology based

5,361

17,255

(1,089 )

21,527

20,304 0 (860 ) 19,444
Internally capitalized software

1,156

4

(364 )

796

677 0 (123 ) 554
Intangible assets subject to amortization from continuing operations

$ 7,038

$ 17,259

$ (1,529 )

$ 22,768

Intangible assets subject to amortization
$ 21,406 $ 0 $ (1,001 ) $ 20,405

The following provides a breakdown of identifiable intangible assets as of ~~September 30, 2021~~March 31, 2022 (dollars in thousands):

Customer Relationships

Marketing Related

Technology Based

Internally Capitalized Software

Total

Customer Relationships

Marketing Related

Technology Based

Internally Capitalized Software

Total

Identifiable intangible assets

$ 461

$ 327

$ 24,465

$ 1,452

$ 26,705

$ 461 $ 327 $ 24,107 $ 1,452 $ 26,347
Accumulated amortization

(124 )

(219 )

(2,938 )

(656 )

(3,937 ) (141 ) (240 ) (4,663 ) (898 ) (5,942 )
Identifiable intangible assets from continuing operations, net

$ 337

$ 108

$ 21,527

$ 796

$ 22,768

Identifiable intangible assets, net
$ 320 $ 87 $ 19,444 $ 554 $ 20,405

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~~ March 31, 2022 and ~~2020~~2021 was ~~$713,000~~$1,001,000 and ~~$343,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $1,529,000 and $977,000, respectively~~$409,000, respectively and is presented as part of depreciation and amortization in the accompanying unaudited condensed consolidated statements of operations.

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As of ~~September 30, 2021,~~March 31, 2022, the estimated impact on continuing operations from annual amortization from intangible assets for each of the next five fiscal years and thereafter is as follows (dollars in thousands):

2021

$ 1,017

2022

4,008

2022, remaining
$ 2,953
2023

3,828

3,777
2024

3,525

3,474
2025

3,516

3,465
2026
2,653
Thereafter

6,874

4,083
Total

$ 22,768

$ 20,405

NOTE 8 7– DEBT

Firestorm Notes

On January 25, 2017, pursuant to the terms of the Company’s acquisition of Firestorm, the Company issued $1,000,000 in the aggregate form of four unsecured, subordinated promissory notes with interest payable over five years. The principal amount of one of the notes payable is $500,000 payable at an interest rate of 2.0% and the remaining three notes are evenly divided over the remaining $500,000 and payable at an interest rate of 7.0%. The notes mature on January 25, 2022. The aggregate balance of these notes ~~payable~~payable was ~~$994,000~~$1,000,000 and ~~$980,000,~~$998,000, net of unamortized interest, as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, to reflect the amortized fair value of the notes issued due to the difference in interest ~~rates~~rates of ~~$6,000~~$0 and ~~$20,000, respectively.~~$2,000, respectively. The Company is not paying current interest on these notes and ~~does~~ did not ~~expect to~~ pay the principal due in January 2022 as the Company has requested rescission in connection with the Firestorm acquisition and is currently in litigation with the sellers (see NOTE ~~10-~~9- COMMITMENTS AND CONTINGENCIES)
~~Paycheck Protection Program Loan~~
On May 26, 2020, the Company entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $221,000 (the “Rekor PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for nine months after the date of disbursement.
On June 3, 2020, the Company’s wholly owned subsidiary, Rekor Recognition Systems, Inc., entered into a loan agreement with Newtek Small Business Finance, LLC, which provides for a loan in the principal amount of $653,000 (the “Rekor Recognition PPP Loan”) pursuant to the Paycheck Protection Program under the CARES Act. The Rekor Recognition PPP Loan has a two-year term and bears interest at a rate of 1.0% per annum. Monthly principal and interest payments are deferred for nine months after the date of disbursement.
The Rekor PPP Loan and the Rekor Recognition PPP Loan (collectively the “Loans”) may be prepaid at any time prior to maturity with no prepayment penalties. The Loans contain events of default and other provisions customary for a loan of this type. The Paycheck Protection Program provides that the Loans may be partially or wholly forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company used the entire Loans amount for qualifying expenses and has to applied for forgiveness of the Loans in accordance with the terms of the CARES Act. The Loans are presented in loan payable, current portion on the accompanying unaudited consolidated balance sheets.
In October 2021, the Company was informed the Loans forgiveness was processed by the Small Business Administration (“SBA”) and the Company’s Loans have been fully forgiven. The Loans are now considered paid in full by SBA.
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~~2019 Promissory Notes~~
On March 12, 2019, the Company entered into a note purchase agreement pursuant to which investors, including OpenALPR Technology, Inc. (the “2019 Lenders”) loaned $20,000,000 to the Company (the “2019 Promissory Notes”) and the Company issued to the 2019 Lenders warrants to purchase 2,500,000 shares of Rekor common stock (the “March 2019 Warrants”). The loan bore interest at 16% per annum, of which at least 10.0% per annum was required to be paid in cash. Any remaining interest accrued to be paid at maturity or earlier upon redemption. The notes also required a $1,000,000 exit fee due at maturity, or a premium if paid before the maturity date, and compliance with affirmative, negative and financial covenants, including a fixed charge coverage ratio and minimum liquidity and maximum capital expenditures covenants. Transaction costs included $403,000 for a work fee payable over 10 months, $290,000 in legal fees and a $200,000 closing fee. As of December 31, 2020, the Company had settled the full amount of the 2019 Promissory Notes. The loan was secured by a security interest in substantially all of the assets of Rekor. The March 2019 Warrants are exercisable over a period of five years, at an exercise price of $0.74 per share, and were valued at $706,000, at the time of issuance. The warrants became exercisable commencing March 12, 2019 and expire on March 12, 2024. The 2019 Promissory Notes had an effective interest rate of 24.87%.

As
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Table 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.
Contents
~~2019 Promissory Note Retirement~~
On June 30, 2020, the Company entered into Exchange Agreements with certain 2019 Lenders of the Company’s 2019 Promissory Notes. Subject to the terms and conditions set forth in the Exchange Agreements, approximately $17,398,000 was redeemed in exchange for 4,349,497 shares of the Company’s common stock, at a rate of $4 per share, which was the closing price of the common stock on the date of the Exchange Agreements. On July 15, 2020, the Company completed the Note Exchange. At the time of the Exchange Agreement the net amount of long-term debt redeemed for common stock was $14,688,000. This included the existing principal balance subject to conversion, the portion of the exit fee associated with the which notes subject to conversion, offset by the portion of unamortized issuance costs associated with the notes subject to conversion. There was also $226,000 related to the paid-in-kind (“PIK”) interest associated with the notes subject to conversion that was exchanged as part of the Exchange Agreements. The difference between the market value of the shares issued and the net carrying amount of the obligations above of $2,484,000 was recorded as part of debt extinguishments costs in the accompanying consolidated statements of operations. Following the Note Exchange, approximately $4,398,000 aggregate principal amount of the 2019 Promissory Notes remained outstanding, plus an additional $216,000 related to the exit fee.
The Company incurred stock issuance costs of approximately $73,000 related to legal, accounting, and other fees in connection with the Exchange Agreements. These costs are presented as a reduction to additional paid-in capital on the accompanying consolidated balance sheets.
On September 16, 2020, the Company issued a cash payment of $5,284,000 to complete the retirement of the remaining aggregate principal balance of the 2019 Promissory Notes. As a result of this optional prepayment, the 2019 Promissory Notes have been fully redeemed pursuant to their terms, and as a result the Company has no further obligations under the Note Purchase Agreement, as amended. The warrants previously issued pursuant to the Note Purchase Agreement remain outstanding pursuant to their terms.
Interest Expense

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

Three Months ended September 30,

Nine Months ended September 30,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

Contractual interest

$ 17

$ 176

$ 58

$ 1,815

$ 7 $ 27
Amortization of debt issuance costs

4

42

14

653

2 5
Total interest expense

$ 21

$ 218

$ 72

$ 2,468

$ 9 $ 32

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Schedule of Principal Amounts Due of Debt

The principal amounts due for long-term notes payable are shown below as of ~~September 30, 2021~~March 31, 2022 (dollars in thousands):

2021

$ 489

2022

1,432

2022, remaining
$ 1,028
2023

36

37
Total

1,957

Less unamortized interest

(6 )
Total notes payable

$ 1,951

$ 1,065

Loan payable, current portion

$ 911

$ 37
Loan payable, long-term

46

28
Notes payable, current portion

994

1,000
Total notes payable

$ 1,951

$ 1,065

NOTE 9 8– INCOME TAXES
The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company reviewed both positive and negative evidence pursuant to the requirements of ASC Topic 740, including current and historical results of operations, future income projections, and the overall prospects of the Company’s business.

The Company established a valuation allowance against deferred tax assets during 2017 and has continued to maintain a full valuation allowance, outside of the deferred tax liability related to the indefinite lived intangible, through the three months ended ~~September 30, 2021.~~March 31, 2022.

The Company files income tax returns in the United States and in various states. No U.S. Federal, state or foreign income tax audits were in process as of ~~September 30, 2021.~~March 31, 2022.

The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite lived intangible, because the Company believes that it is not more likely than not that their benefits will be realized in future periods. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s net deferred income tax assets satisfy the realization standard, the valuation allowance will be reduced accordingly.

For the ~~nine~~three months ended ~~September 30,~~ March 31, 2022 and 2021, the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax expense. The ~~2017~~2018 through ~~2019~~2020 tax years remain subject to examination by the Internal Revenue Service.

NOTE 10 9– COMMITMENTS AND CONTINGENCIES

On August 19, 2019, the Company filed suit in the United States District Court for the Southern District of New York against three former executives of the Company who were founders of Firestorm (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no.1:~~19-cv-07767-VEC. The~~19-cv-07767-VEC. On January 30, 2020, the Company filed a Second Amended Complaint ~~alleges~~(the “Complaint’) alleging that the Firestorm Principals fraudulently induced the execution of the Membership Interest Purchase Agreement wherein Firestorm was acquired by the Company. The Complaint also alleges claims for breach of fiduciary duty, violations of the Computer Fraud and Abuse Act (“CFAA”), conversion, and trespass to chattels arising from the Firestorm Principals’ alleged deletion of company email records. The Complaint requests equitable rescission of ~~that~~the acquisition transaction ~~or, alternatively,~~and monetary damages.

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~~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~~The Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, the Company moved to dismiss ~~certain~~the counterclaims against certain directors and officers named as counterclaim-defendants, ~~which resulted~~resulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. ~~The~~Thereafter the Company ~~thereafter~~ filed its response and affirmative defenses to the Counterclaims on April 22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which the Company ~~has~~ opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. With respect to the Firestorm Principals’ motion for judgment on the pleadings, the Court’s November 23, 2020 order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion.

On In April ~~27,~~ 2021, the Firestorm Principals filed a notice of motion for partial summary judgment, seeking summary judgment on several of the Company’s claims and the Firestorm Principals’ counterclaims, ~~along with supporting declarations and exhibits. After the Court decided to allow the proposed motion to proceed,~~which the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed ~~their~~its opposition to the partial summary judgment motion on June 21, 2021. The Firestorm Principals filed their reply in support of their partial summary judgment motion on July 9, 2021.On March 14, 2022, the Court issued an opinion and order which denied summary judgment to the Firestorm Principals on the Company's main fraudulent omission claim, the conversion and trespass to chattels claims as to Defendants Loughlin and Rhulen and the breach of fiduciary duty claim as to Defendant Loughlin. The Court also denied summary judgment to the Firestorm Principals on their breach of warrants, anticipatory breach of warrants, and anticipatory breach of promissory notes counterclaims and the breach of contract counterclaim asserted by Defendant Satterfield. In March 2022, the Court granted summary judgment to the Firestorm Principals on our CFAA claims, based on recent case law clarifying that such claims do not apply to employees who have authorized access to an employer’s computer and misuse that access, and granted summary judgment on our CFAA, conversion, and trespass to chattels claims against one defendant because Rekor represented it was prepared to dismiss those claims. The Court also granted summary judgment on one breach of contract counterclaim asserted by a company related to the Firestorm Principals, holding that the $25,500 amount at issue could not be set off by or recouped from our damages in this case.

In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel. The defendants in the suits moved to dismiss the amended complaint. At this stage of these litigations, the suits against two of the directors have been dismissed and one has been permitted to proceed. On September 28, 2021, the Court issued an order denying the motion to dismiss. On October 21, 2021, the Delaware Action defendants filed a motion for reconsideration of the Court’s ~~September~~dismissal order; that reconsideration motion was denied on February 28, ~~2021 order.~~2022. On March 16, 2022, the court in the Virginia Action dismissed the breach of fiduciary duty claim without prejudice (so it can be refiled in Delaware Chancery Court) and denied the motion with respect to the defamation claim on jurisdictional grounds. The defamation claim will now be challenged on substantive grounds.

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

On January 31, 2020, the Company’s ~~wholly owned~~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~~counterclaims against OpenALPR for defamation, fraud and intentional interference with existing and future business relationships. On July 13, 2020, OpenALPR filed an opposition to the motion for joinder. On November 23, 2020, the court denied PCS’s Motion for Joinder with prejudice. On August 30, 2021, OpenALPR and PCS filed a joint stipulation of dismissal with prejudice, and the court ordered dismissal of the case with prejudice on August 31, 2021. The Company considers this matter closed.

On September 18, 2020, Fordham Financial Management, Inc. (“Fordham”) commenced a lawsuit against the Company in the Supreme Court for the State of New York, New York County. Fordham alleges that the Company breached an underwriting agreement with Fordham. Fordham has brought claims for breach of contract, a declaratory judgment, and attorneys’ fees and expenses, and seeks damages. The Complaint was served on the Company on September 25, 2020. The Company issued a motion to dismiss counterclaims on June 23, ~~2021, Rekor’s opposition has been filed and Fordham’s reply will be due on August 19,~~ 2021. The Court granted Fordham’s motion to dismiss Rekor’s counterclaims on October ~~21,~~23, 2021.On November 29, 2021, the Company filed a notice of appeal with the Appellate Division and a motion to reargue that decision and order, arguing that the court misunderstood the nature and purpose of the prospectus supplement, which was actually prepared by the plaintiff after it set the prices for the 2018 offering. On March 3, 2022, the court denied the motion to reargue. In doing so, however, the court clarified that the dismissal was without prejudice, which would permit the Company to refashion the counterclaims in the future. Meanwhile, the Company’s deadline to perfect its concurrent appeal in the appellate division is May 30, 2022.

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.

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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)~~10(b) and ~~20(a)~~20(a) and Rule ~~10b-5~~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 the class action lawsuit without ~~prejudice the Lawsuit that it had filed against the Company and several of its executives.~~prejudice. This matter was voluntarily dismissed without prejudice.

In addition, from time to time, the Company may be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated. It is the Company’s opinion that the outcome of these proceedings, individually and collectively, will not be material to the Company’s consolidated financial statements as a whole.

NOTE 11 10– ~~STOCKHOLDERS’~~ STOCKHOLDERS’ EQUITY

Common Stock

Effective March 18, 2020, the Company adopted and approved an amendment to increase the number of authorized shares of common stock from 30,000,000 to 100,000,000, $0.0001 par value. The rights and privileges terms of the additional authorized shares of common stock are identical to those of the currently outstanding shares of common stock. However, because the holders of common stock do not have preemptive rights to purchase or subscribe ~~for~~to any new issuances of common stock, the subsequent potential issuance of additional shares of common stock will reduce the current stockholders’ percentage ownership interest in the total outstanding shares of common stock. The Amendment and the creation of additional shares of authorized common stock will not alter current stockholders’ relative rights and limitations.

~~Form S-3 Registration Statement~~At-the-Market Offering

On ~~September 13, 2021~~February 24,2022, the Company ~~filed a Form S-3 Registration Statement SEC, using a “shelf” registration process. By using a shelf registration statement,~~entered into an At-the-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which the Company ~~may sell securities~~ from time to time may offer and ~~in one or more offerings~~sell shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $50,000,000 (the “Shares”) through or to the Agent. The Agent is entitled to a ~~total dollar amount~~commission equal to 3.0% of ~~$350,000,000.~~the gross proceeds from each sale. The Company incurred issuance costs of approximately $169,000 related to legal, accounting, and other fees in connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets.

For the three months ended March 31, 2022, based on the settlement date, the Company sold 728,452 shares of common stock at a weighted-average selling price of $4.67 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was $3,134,000 after paying $169,000related to the issuance cost, as well as, 3.0% or $102,000 related to cash commissions provided to the Agent.
Waycare Acquisition

In connection with the acquisition as described in NOTE 2– ACQUISITIONS, the Company issued2,784,474 shares of the Company’s common stock as part of the consideration.

2021Public Offering

On February 9, 2021, the Company issued and sold 6,126,939 shares of its common stock (which includes 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the ~~“Public~~“2021 Public Offering”). The net proceeds to the Company, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, were approximately $70,125,000. The shares were sold pursuant to an underwriting agreement with B. Riley Securities, Inc. and Lake Street Capital Markets, LLC, as representatives of the several underwriters named therein under the Company’s shelf registration statement on Form S-3 (Registration Statement No. 333-224423) filed by the Company with the SEC that became effective on April 30, 2018. On February 4, 2021, a prospectus supplement and accompanying prospectus were filed with the SEC in connection with the offering and a related registration statement (File No. 333-252735) was filed pursuant to Rule 462(b) promulgated under the Securities Act.

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Preferred Stock

The Company is authorized to issue up to 2,000,000 shares of preferred stock, $0.0001 par value. The Company’s preferred stock may be entitled to preference over the common stock with respect to the distribution of assets of the Company in the event of liquidation, dissolution or winding-up of the Company, whether voluntarily or involuntarily, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of the winding-up of its affairs. The authorized but unissued shares of the preferred stock may be divided into and issued in, designated series from time to time by one or more resolutions adopted by the Board of Directors of the Company. The Board of Directors of the Company, in its sole discretion, has the power to determine the relative powers, preferences and rights of each series of preferred stock.

Series A Cumulative Convertible Redeemable Preferred Stock

Of the 2,000,000 authorized shares of preferred stock, 505,000 shares were designated as $0.0001 par value Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”). The holders of Series A Preferred Stock were entitled to quarterly dividends of 7.0% per annum per share.

Based on the terms of the Series A Preferred Stock, the Company concluded that the Series A Preferred Stock should be classified as temporary equity in the accompanying unaudited condensed consolidated balance ~~sheets as of December 31, 2020.~~sheets.

Rekor adjusted the value of the Series A Preferred Stock to redemption value at the end of each reporting period. The adjustment to the redemption value was recorded through additional ~~paid in capital~~paid-in capital of $0 and ~~$220,000~~$101,000 for ~~the~~ the three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020, respectively, and $101,000 and $638,000 for the nine months ended September 30,~~ 2021 ~~and 2020,~~, respectively.

As a result of the closing of the 2021Public Offering in the first quarter of 2021, all of the issued and outstanding Series A Preferred Stock was converted pursuant to the original terms of the agreement into 899,174 shares of the Company’s common stock.

Series B Cumulative Convertible Preferred Stock

Of the 2,000,000 authorized shares of preferred stock, 240,861 shares were designated as $0.0001 par value Rekor Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”). As part of the TeamGlobal Merger, the Company issued 240,861 shares of $0.0001 par value Series B Preferred Stock. All Series B Preferred Stock was issued at a price of $10.00 per share as part of the acquisition of TeamGlobal. The Series B Preferred Stock had a conversion price of $5.00 per share. Each Series B Preferred Stock had an automatic conversion feature based on the share price of Rekor.

As a result of the volume weighted average share price of the Company’s common stock being over $7.50 for thirty consecutive days, in the first quarter of 2021, all of the Company’s issued and outstanding Series B Preferred Stock was converted pursuant to the original terms of the agreement into 517,611 shares of the Company’s common stock.

Warrants

A summary of the warrant activity for the Company for the period ended ~~September 30, 2021~~March 31, 2022 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

Series A Preferred Stock Warrants (1)

Firestorm Warrants (2)

Secure Education Warrants (3)

2018 Public Offering Warrants (4)

Total

Active warrants as of January 1, 2022
41,996 631,254 15,556 3,505 692,311
Exercised warrants
0 0 0 0 0
Outstanding warrants as of March 31, 2022
41,996 631,254 15,556 3,505 692,311
Weighted average strike price of outstanding warrants as of March 31, 2022
$ 1.03 $ 3.09 $ 6.06 $ 1.00 $ 3.02

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~~(1)~~)
As part of a Regulation A Offering in fiscal ~~year~~ years 2016 and 2017, the Company issued warrants to the holders of Series A Preferred Stock (the “Series A Preferred Stock Warrants”). The exercise price for these warrants is $1.03. The expiration date of the Series A Preferred Stock Warrants is November 8, 2023.

~~(2)~~(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~~$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 was 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 - 109 COMMITMENTS AND CONTINGENCIES).

~~(3)~~(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)~~(4)
On November 1, 2018, in connection with an underwritten public offering of its common stock, the Company issued to the underwriters warrants to purchase 206,250 shares of its common stock (the ~~“2018~~“2018 Public Offering Warrants”), exercisable over a period of five years, at an exercise price of $1.00 per share. These warrants were exercisable commencing April 27, 2019 and expire on October 29, 2023.

~~(5)~~
On March 12, 2019, in connection with the 2019 Promissory Notes, the Company issued warrants to purchase 2,500,000 shares of its common stock (the “2019 Promissory Note Warrants”), which were immediately exercisable at an exercise price of $0.74 per share, to certain individuals and entities. Of the 2,500,000 warrants, 625,000 were issued as partial consideration for the OpenALPR Technology Acquisition.
NOTE 12 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. In October 2021, the Company announced it had registered an additional 4,368,733 shares of its common stock available for issuance under the 2017 Plan.Stock Options

~~Stock Options~~
Stock options granted under the 2017 Plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs may be granted to employees and NSOs may be granted to employees, directors, or consultants. Stock options are granted at exercise prices as determined by the Board of Directors. The vesting period is generally three years with a contractual term of ten years.

Stock compensation expense related to stock options for the three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020 was~~2021 was $28,000 and $30,000, ~~and $63,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $90,000 and $208,000, respectively,~~respectively, and is presented, based on the awardees operating department, as ~~part of~~ general administrative, selling and ~~administrative~~marketing and research and development expenses in the accompanying unaudited condensed consolidated statements of operations.

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A summary of stock option activity under the Company’s 2017 Plan for the period ended ~~September 30, 2021~~March 31, 2022 is as follows:

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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

Number of Shares Subject to Option

Weighted Average Exercise Price

Weighted Average Remaining Contractual Term (Years)

Aggregate Intrinsic Value

Outstanding Balance as of December 31, 2021
1,012,336 $ 1.28 6.50 $ 5,002,000
Exercised
(12,971 ) 2.26
Forfeited
(2,500 ) 0.80
Outstanding balance as of March 31, 2022
996,865 $ 1.27 6.30 $ 3,063,000
Exercisable as of March 31, 2022
842,530 $ 1.30 6.15 $ 2,602,000

As of ~~September 30, 2021,~~March 31, 2022, there was ~~$82,000~~ $19,000 of unrecognized stock compensation expense related to unvested stock options granted under the 2017 Plan that will be recognized over a weighted average period of ~~0.69~~0.23 years.

Restricted Stock Units

Stock compensation expense related to RSU’s for the three months ended ~~September 30, 2021~~ March 31, 2022 and ~~2020 was $664,000~~2021 was $1,872,000 and ~~$139,000, respectively, and for the nine months ended September 30, 2021 and 2020 was $2,510,000 and $331,000, respectively,~~$751,000, respectively, and is presented, based on the awardees operating department, as ~~part of~~ general administrative, selling and ~~administrative~~marketing and research and development 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~~three months ended ~~September 30, 2021~~March 31, 2022 is as follows:

Number of Shares

Weighted Average Unit Price

Weighted Average Remaining Contractual Term (Years)

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

Outstanding balance as of December 31, 2021
1,347,879 $ 10.94 2.20
Granted

482,040

12.36

1.86

1,085,680 4.62 2.48
Vested

(215,430 )

7.43

(201,259 ) 9.21
Forfeited

(93,940 )

5.74

(63,256 ) 11.29
Outstanding Balance at September 30, 2021

652,654

$ 9.12

1.92

Outstanding balance as of March 31, 2022
2,169,044 $ 8.07 2.33

The grant date fair value is based on the estimated fair value of the Company’s common stock on the date of grant. All RSUs granted vest upon the satisfaction of a service-based vesting condition.

As of ~~September 30, 2021, there~~March 31, 2022, there was ~~$4,552,000~~$15,030,000 of ~~unrecognized~~unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining ~~period~~period of ~~1.92~~2.20 years.

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NOTE 13 12– LOSS PER SHARE

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

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Three Months ended September 30,

Nine Months ended September 30,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

(Dollars in thousands, except per share data)

(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 ) $ (12,601 ) $ (5,403 )
Less: preferred stock accretion

0

(220 )

(101 )

(638 ) 0 (101 )
Less: preferred stock dividends

0

(115 )

(51 )

(345 ) 0 (51 )
Net loss attributable to shareholders from continuing operations

$ (9,613 )

$ (7,002 )

$ (19,929 )

$ (11,843 ) $ (12,601 ) $ (5,555 )
Net loss from discontinued operations

0

(2 )

(4 )

(215 )
Net loss attributable to shareholders from discontinued operations
0 (3 )
Net loss attributable to shareholders

$ (9,613 )

$ (7,004 )

$ (19,933 )

$ (12,058 ) $ (12,601 ) $ (5,558 )
Weighted average common shares outstanding - basic and diluted

41,938,863

26,907,069

38,357,167

22,781,807

44,087,911 35,944,355
Basic and diluted loss per share from continuing operations

$ (0.23 )

$ (0.26 )

$ (0.52 )

$ (0.52 ) $ (0.29 ) $ (0.15 )
Basic and diluted loss per share from discontinued operations

0.00

(0.00 )

(0.00 )

(0.01 ) 0 0
Basic and diluted loss per share

$ (0.23 )

$ (0.26 )

$ (0.52 )

$ (0.53 ) $ (0.29 ) $ (0.15 )
Common stock equivalents excluded due to anti-dilutive effect

2,429,924

4,134,979

2,429,924

4,134,979

Common stock equivalents excluded due to the anti-dilutive effect
3,858,220 2,436,750

As the Company had a net loss for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, the ~~following 2,429,924~~following 3,858,220 potentially dilutive securities were excluded from diluted loss per share: ~~694,299~~692,311 for outstanding warrants, ~~1,082,971~~996,865 related to outstanding options and ~~652,654~~2,169,044 related to outstanding RSUs.

As the Company had a net loss for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, the following ~~4,134,979~~2,436,750 potentially dilutive securities were excluded from diluted loss per share: ~~1,004,155~~714,293 for outstanding warrants, ~~923,844 related to the Series A Preferred Stock, 509,325 related to the Series B Preferred Stock, 1,287,921~~1,167,852 related to outstanding options and ~~409,734~~554,605 related to outstanding RSUs.

NOTE 14 13– SUBSEQUENT EVENTS

~~Forgiveness of PPP Loans~~
~~In October 2021, the Company was informed the Loans,~~ ~~as described in NOTE 8 – DEBT,~~ ~~forgiveness was processed by the Small Business Administration (“SBA”) and the Company’s Loans have been fully forgiven. These Loans are now considered paid in full by SBA.~~
~~S-8 Amendment to the 2017 Plan~~At-the-Market Issuance Sales Agreement

The Company ~~previously filed a Registration Statement on Form S-8 (File No. 333-220864) with the SEC in connection with the registration of an aggregate of 3,000,000 shares of the Company’s common stock, to be~~ issued ~~under the 2017 Plan. Pursuant to General Instruction E of Form S-8, the Company filed a registration statement on Form S-8 solely to register~~ an additional ~~4,368,733~~1,521,755 shares of its common stock ~~available~~in exchange for ~~issuance~~net cash of $4,928,000 under the ~~2017 Plan. This increase was approved by the Company’s Board of Directors on May 7, 2021, and by the Company’s stockholders on September 14, 2021 at the Company’s annual meeting.~~2022 Sales Agreement.

~~Form S-3 Registration Statement Resale Shares~~
~~On October 29, 2021 the Company filed a prospectus related to the resale from time to time~~
28
Table of ~~up to 2,186,931 shares (the “Resale Shares”) of our common stock, by the selling stockholders in connection with the acquisition.~~
Contents
The Company issued the Resale Shares to the selling stockholders on August 18, 2021, as a portion of the purchase price consideration. The Company registered the Resale Shares on behalf of the selling stockholders pursuant to the Waycare purchase agreement.
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~~Table of Contents~~
ITEM 2.~~MANAGEMENT’S~~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, ~~2020 and our Quarterly Reports for the quarter’s ended March 31, 2021 and June 30,~~ 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”) 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, 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;

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●
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
●
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.

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, ~~2020~~2021 (the ~~“2020~~“2021 Annual Report”)~~, our Quarterly Reports for the quarters ended March 31, 2021 and June 30, 2021~~ and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.

General

Overview

~~Rekor Systems, Inc. develops innovative products~~We are a global leader in the development and ~~services for the~~implementation of intelligent infrastructure ~~market~~focused on addressing critical challenges across transportation management, public safety, and ~~is working~~key commercial markets. With a real-time intelligence platform driven by deep access to ~~drive the world~~data, AI-powered software, and smart optical devices at-the-edge, we combine our industry expertise and advanced proprietary technologies to bedeliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more efficient. As a 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 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 people using AI and other advanced technologies. Our capabilities appeal to businesses and governmental entities in solving a wide variety of real-world mobility and infrastructure-related operational challenges. Using the latest technology that gathers and collates comprehensive data and transforms this data into actionable insights, the Company delivers useable solutions that empower smartconnected 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~~communities. We provide products and services ~~contribute~~across 80 countries as we deliver transformative mission-critical intelligent infrastructure solutions and services for government agencies and commercial clients in the United States and around the world.
Digital Divide
Society is increasingly digital, automated, and information flows occur in real-time. Technological advancements in the past decade have transformed the way people connect, interact, and transact with others and with the world around them. Infrastructure is the backbone of a functioning economy: people, vehicles, materials, and information all require 24/7 mobility, something that depends on well-maintained, synchronized networks and systems. Unfortunately, many areas of the world are faced with aging and legacy infrastructure today resulting from decades of neglect and underinvestment, particularly in the sectors of transportation, mobility, and public safety. The cost, complexity and interdependency of these systems have made many organizations slow to ~~building environmentally friendly~~adopt advances in technology. This creates a digital divide between what is made possible by technology, and the current reality of infrastructure today.
Continued population growth and increased urbanization present unprecedented economic, mobility, public safety, and environmental challenges to cities, states, and metropolitan areas. Today’s challenges cannot be solved by simply replicating existing approaches and adding more legacy technology. For the ongoing mobility transformation to keep up with fast-changing global dynamics requires inventive approaches. Enhancements in data collection, analytics and communications can be employed.
Smarter, data-driven solutions can make better use of existing infrastructure, rather than tearing it up and starting over. Roads, bridges, tunnels, and residential areas have much “to tell us” about how to optimally serve the public with an efficient, safe, and healthy living environment if we tap into the data it can provide and exploit that knowledge intelligently. Successful approaches will leverage AI-powered software, smart devices, data, and solutions that can integrate into existing infrastructure and workflows. We see this as the path to intelligence-driven infrastructure and one that gives us a clear market advantage.
Bridging the Divide
Spurred by the 2021 Infrastructure Investment and Jobs Act in the United States, we expect the world to see a once-in-a-generation surge of investment in infrastructure and competitiveness. The bill allocates $550 billion in new spending, spread out over five years, to rebuild roads, bridges and rails, and airports, in addition to providing high-speed internet access and addressing climate concerns. As part of this, federal, state, and local governments are prioritizing strategic investments dedicated to improving existing transportation management and increasing public safety through modern, efficient and connected infrastructure. Officials are also planning for roadways of the future that ~~leverage~~can account for connected and autonomous vehicles. With these investments, we estimate an addressable global intelligent infrastructure market of $148 billion by 2026.
With access to multiple sources of data and our ~~insights~~award winning AI-driven innovations, we believe we have established a leadership position in intelligent infrastructure solutions that puts us at the center of this emerging opportunity. With our advanced technology and domain expertise, we have developed solutions that address diverse use cases across a number of public and private sector segments. Using our proprietary centralized platform to ~~operate more efficiently and sustainably. Customers can operate~~maximize the value of our technology to customers, we are well positioned to help governments and businesses collect, analyze and turn infrastructure data into insights with new products and services that increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.
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Intelligence-Driven Innovation
As described below, we have concentrated on ~~existing systems or use~~developing our ~~advanced sensors~~intelligent infrastructure solutions to work through a single integrated platform, which creates a unique, market-advantaged position for us. The volume, variety, velocity, and ~~third-party~~veracity of data that we capture and apply to our proprietary artificial intelligence and machine learning models provide us with an even greater advantage. From the very beginning, we have been collecting, aggregating, cleansing, extracting, transforming, and using data to ~~create a holistic view of~~build and improve our models.
Today, we can look at the roadway and ~~infrastructure. Currently, customers use~~extract and process a deeply detailed picture of the environment and what is moving in that environment with an unmatched level of accuracy in our ~~solutions for a variety of applications, including roadway safety~~inferences, predictive analytics, and ~~incident management, traffic and infrastructure analytics, sustainability and green initiatives, public safety and contactless compliance.~~insights. We ~~create safer communities~~are rapidly growing the geographic area connected by ~~providing government agencies with~~smart optical IoT devices at-the-edge to the 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 data feeds from third party vendors such as connected vehicles, weather, construction, and traffic data. Our tech stack, with its open architecture ~~allows seamless integration with any Internet Protocol (“IP”) optical device, reducing~~of our Rekor One intelligence platform. In addition to digitizing existing infrastructure by capturing real-time data from new and existing roadway devices, our platform enables us to extend the scope of our knowledge via proprietary algorithms that pull the data and process it through our models. This reduces our clients’ need to invest in legacy system upgrades and ~~affording~~gives them the ability to gain additional value from existing infrastructure. ~~Our advanced sensors use edge processing to capture, store,~~Beyond this, we are augmenting our data through a growing network of data partners. This provides multiple trillions of additional data points that unlock further real-time and ~~process real-time~~predictive operational insights about what is happening in a given transportation environment at every moment. Example data ~~close to the source, allowing them to provide almost instant actionable insights~~sources from ~~the roadway. We use artificial intelligence~~our partner network include mobility, navigation, and ~~machine learning to process the large amounts~~traffic applications, in-vehicle data, connected, autonomous vehicles (“CAV”) datasets, weather, supply chain, event management, and a rapidly growing list of ~~information~~customer-provided and crowd-sourced data. The more data we capture and ~~integrate~~inject into our machine learning models, the smarter and more accurate they become. Due to the incredible strength and accuracy of our models, we can extract more data from the roadways than ever before possible, and generate rich multi-dimensional insights for our customers about what is happening in real-time. In addition, we use itAI-driven predictive analytics to ~~provide tailored solutions to~~forecast what will happen in the next five minutes, in 12 or 24 hours, and even days and months into the future. From these insights, customers can make better informed proactive decisions and achieve improved operational efficiency through a more strategic allocation of resources. All of this is facilitated by our ~~clients. Our sophisticated~~proprietary Rekor One™ intelligence platform.
Fueled by Data and ~~proprietary personally identifiable information (“PII”) filter de-identifies relevant data in an irreversible way so that it is incorporated into~~Artificial Intelligence
At the core of all our intelligent infrastructure ~~platform in full compliance with~~solutions is the ~~security~~Rekor One intelligence platform. Fueled by rich data and ~~privacy requirements~~powered by AI, Rekor One is purpose-built to be a single source of ~~each end user. Authorized entities~~truth and insights serving multiple customer segments and multiple missions. From Rekor One, we can ~~also leverage our operational data to improve~~simultaneously deliver vertical-specific solutions for traffic management, public safety, and ~~institute contactless compliance programs.~~commercial markets.
With the Rekor One platform as our foundation, we collect and transform data into information, and information into knowledge to give governments and businesses a comprehensive picture of roadways, vehicles, traffic, incidents, and more. Our solutions deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.
Built on the foundation of Rekor One, we deliver vertical-specific solutions for traffic management, public safety, and commercial markets.
Example use-cases we can support include:

32
●
Traffic management and analytics
~~Table of Contents~~
●
Predictive traffic congestion modeling and forecasting
●
Roadway monitoring and incident detection and response
●
Support systems for integrated corridor management
●
Electric vehicle adoption and charge station planning
●
Commercial vehicle and tonnage monitoring and analysis
●
Real-time emissions analysis, sustainability, and green initiatives
●
Live and archival HD video management and traffic surveillance
●
Law enforcement and intelligence-based policing
●
Contactless compliance and enforcement
●
Vehicle and license plate recognition for public safety

~~Rekor One™~~The Road Ahead
We believe the world is at an inflection point. In the next five years, governments will make significant investments to improve aging infrastructure, roadway conditions, and public safety via modern, efficient, and connected infrastructure. Recent technological developments such as artificial intelligence, the internet of things, edge- and cloud-based computing, and advances in rich data management have put us in a unique position to help revolutionize mobility through intelligent infrastructure and close the gap between rapidly evolving technology and aging, legacy infrastructure. These are not just our ~~single source platform for intelligent infrastructure. Rekor One provides government agencies with real-time roadway intelligence~~aspirational goals, but things we’re working on now. By aggregating data from optical sensors, connected vehicles, and third-party providers, processing it 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~~packaging it to provide real-time insights and long-term solutions for intelligent infrastructure, we sustainably help governments and businesses address both issues of ~~vehicles, traffic, incidents~~aging infrastructure and ~~more within a particular jurisdiction. Rekor One’s actionable insights improve operations, enable better informed decision making,~~the unprecedented mobility, public safety, economic, and allow for more strategic allocation of resources. The solution is hardware and software agnostic, allowing for seamless integration without interrupting existing systems in place. Our platform was built to allow us to create custom applications for an array of use 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 deliver insights through an expanding software portfolio that not only addresses the~~environmental challenges ~~our customers are currently facing but also empowers them to effectively deal with their evolving challenges in the future.~~they face.

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 operateWe believe our leadership 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~~intelligent infrastructure solutions, advanced technology, and breadth of ~~use-cases~~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 intelligenceputs us in an ~~accurate, real-time,~~advantaged market position at the forefront of developing a new economy and ~~cost-effective manner. We~~poised to unlock massive gains as we provide ~~actionable~~governments and ~~differentiated answers on a single platform~~businesses with new products and services that ~~is built~~use trillions of intelligent infrastructure interactions to ~~serve multiple missions.~~increase safety and sustainability, drive revenue, and power innovation for the benefit of billions of people.

Our operations are conducted by our ~~wholly owned subsidiary,~~wholly-owned subsidiaries, 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 systemsWaycare Technologies, Ltd. (“~~ITS”~~Waycare”) 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.
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~~Recent Developments~~.

~~The most significant developments in our company and business since January 1, 2021 are described below:~~
·
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”).
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●
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.
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Opportunities, Trends and Uncertainties

We look to identify the various trends, market cycles, uncertainties and other factors that may provide us with opportunities and present challenges that impact our operations and financial condition from time to time. Although there are many that we may not or cannot foresee, we believe that our results of operations and financial condition for the foreseeable future will be primarily affected by the following:

●
Growing Smart City Market – According to a United ~~Nation’s~~Nations report, about two-thirds of the world population will live in urban areas by 2050. Our cities are getting larger, ~~our commute~~with longer commutes, bigger roads ~~bigger~~ and the resulting impact on the environment and the quality of ~~life is worse than ever been.~~life. This trend requires forward-thinking officials to manage assets and resources more ~~efficiently than they have in the past.~~efficiently. We believe that advancements in “big data”, connected devices and artificial intelligence ~~will allow for ITS~~can provide Intelligent Transportation System (“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~~intelligence-aided solutions provide ~~the necessary~~useful tools ~~to more~~that can effectively tackle the challenges cities and communities are facing today and will face over the coming decades.
●
AI for Infrastructure – We believe that the application of AI to the analysis of ~~infrastructure, including~~conditions on roadways and ~~roadway conditions will~~other infrastructure can significantly affect the safety and efficiency of 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 local vehicular flow as well as data ~~around~~about the vehicles on the roadway.
●
Connected Vehicle Data – Today’s new vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors. This data is 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~~data from existing ~~city~~ infrastructure and providing untapped transportation information ~~in more~~from rural areas that are not ~~currently available from the current~~served by 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~~many users who could not afford the cost, or adapt to the restrictions of, conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions and municipalities that are testing ~~automated license plate~~vehicle recognition ~~(“ALPR”)~~ systems or that issued requests for proposals to install a network of ~~ALPR cameras.~~vehicle recognition sensors. We also expect the availability of faster, ~~higher accuracy, lower cost~~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.~~competitors. However, large users of existing ~~ALPR~~ technology, such as toll ~~roads,~~road operators, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. 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 their own or secure ~~their~~ advanced vehicle recognition ~~systems.~~systems from others who are also working to develop them. 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.

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●
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,~~expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial. We believe that future legislation will increasingly allow for automated enforcement ~~is beneficial. In addition,~~of regulations such as motor vehicle insurance requirements. Communities are currently searching for better means of achieving compliance with minor vehicle offenses, such as lapsed registrations, and safety issues such as motorists who fail to stop for school buses. For example, 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~~To the extent that legislative implementation is required, a deliberative and necessarily time-consuming ~~process.~~process is involved. 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”~~(“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,~~unlocked new capabilities with each ~~advancement unlocking new capabilities thereby fueling growth.~~advancement. Further, cellular networks ~~are~~have been optimized for downloading data ~~not for~~rather than uploading ~~data, and~~data. As a result, while download speeds have improved ~~over time, what amounts~~significantly due to large investments in cellular infrastructure, ~~changes~~this has resulted in relatively small improvements to cellular upload speeds. With ~~road-side~~roadside deployments experiencing explosive growth in count and density, scalability, ~~has~~latency and bandwidth have become ~~an obstacle for~~aspects of competition in the market. ~~All~~Our systems have been designed to address these issues through the use of ~~these factors mean that scalability, latency and bandwidth concerns require~~more effective edge processing, ~~which are~~ enabled both by ~~the continued growth of~~incorporating the increasingly effective ~~graphic processing units~~new GPUs into our systems and continual improvements in the efficiency of our AI algorithms. ~~Edge~~Our edge processing ~~ingests~~systems ingest local ~~high definition (“HD”)~~HD video streams at the source and ~~converts~~convert the raw video data to text data, ~~thus~~dramatically reducing the volume of data that needs to be ~~transferred.~~transferred through the network. Edge processing allows ~~massive~~us to scale a network dramatically without the bandwidth, cost, latency and dependability limitations that ~~would~~are experienced by other networks where raw video needs to be ~~experienced with streaming~~streamed to the cloud ~~solution.~~for processing.
●
Accelerated Business Development and Marketing – Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a visible leadership position. As a result, we have 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.

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●
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~~economies. As such, we are unable to determine the full impact toon 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 the adoption of ~~technology across businesses~~new technologies by ~~several years.~~businesses. 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~~innovative solution providers such as Rekor.

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●
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 with 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~~citizen's quality of life with limited capital expenditure. In addition, states adopting contactless compliance programs may be able to garner significant net cash contributions to their annual budgets while reducing the number of ~~noncompliant~~non-compliant vehicles on their roadways.
●
~~American~~Infrastructure Investment and Jobs ~~Plan (“AJP”~~Act (“IIJA”) - ~~Through the AJP, President Biden is calling~~ The IIJA, signed into law on ~~Congress to make a~~November 15, 2021, provides for significant national ~~investment~~investments in the ~~transit~~transportation systems in the United ~~States. The current legislative text provides approximately $1 trillion in total spending, with approximately $550~~States, including over $150 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~~roadway 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, forincluding 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~~positions the Company well to emerge as a technology leader in the expanded market for intelligent infrastructure that will benefit from this ~~proposed transformation~~legislation. We have identified opportunities to access federal funding streams, and ~~development~~we are working to implement a program that capitalizes on this unprecedented U.S. federal investment in public safety, homeland security, and transportation infrastructure and ensures that our customers are positioned to capture as much of this ~~nascent~~extraordinary government spending as possible. Beyond the many recurring federal grant programs that could support customer purchases, and ~~rapidly expanding market~~the $350 billion in American Rescue Plan Act allocations that public agencies are receiving now, we are particularly excited about the prospect of ~~intelligent infrastructure.~~engaging in the following new funding streams that are contained in the IIJA.
●$200 million annually for a “Safe Streets and Roads for All” program that would make competitive grants for state projects that significantly reduce or eliminate transportation-related fatalities.
●$150 million for the current administration to establish a grant program to modernize state data collection systems
●$500 million for the Strengthening Mobility and Revolutionizing Transportation (“SMART”) Grant Program that would support demonstration projects on smart technologies that improve transportation efficiency and safety
Components of Operating Results

Revenues

We derive revenues substantially from ~~Software-as-a-Service products (“SaaS”), licensing and subscriptions, customer support services, contactless compliance solutions, implementation services, perpetual license sales, and~~ the sale of software, hardware and related services.
Software sales include subscriptions for the use of our software as a service (“SaaS”) and software licenses. SaaS revenues are treated as recurring revenue and provided both through negotiated agreements with larger governmental and commercial customers and through subscriptions from smaller customers. License sales are typically term agreements, including agreements for perpetual licenses, that may include maintenance obligations for software updates that keep up with changes in ~~connection~~vehicle models and license plate designs.
Hardware is sold through direct sales or subscriptions and is typically sold with a software subscription or license arrangement. Revenue from direct sales is generally recognized when the hardware is delivered, or installation is completed in accordance with the terms of the contract. Subscription revenues may include hardware and software subscriptions and are recognized as recurring revenue throughout the term of the lease agreement.
Our related services include customer support and implementation services, as well as management services such as violation notices, billing and collections, website portals and call centers related to programs that employ our software solutions. ~~Revenue is recognized upon transfer~~In addition, we engage in pilot programs with governmental and commercial entities that include extension or renewal features that may result in recurring revenues and/or additional point-in-time revenues at the completion of ~~control of promised products and services to our customers, in an amount that reflects~~ the ~~consideration the Company expects to receive in exchange for those products and services.~~pilot program.

Costs of revenues, excluding depreciation and amortization

Direct costs of revenues consist primarily of the portion of technical and non-technical salaries and wages and payroll-related costs incurred in connection with ~~revenue generating~~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~~revenue-generating activities. Direct costs of revenues exclude 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.

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Operating Expenses

Our operating expenses consist of general and administrative expenses, sales and marketing, research and 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 expenses. Operating expenses also include depreciation, amortization and impairment of assets.

General and Administrative

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

We expect our general and administrative expenses to continue to ~~increase in absolute dollars~~remain high for the foreseeable future due to ~~additional~~the costs associated with our growth and the costs of 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~~Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term.

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.

Research and Development

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

We expect our research and development 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 solutions. However, we expect our research and development expenses to decrease as a percentage of our revenue over the long term, although our research and development ~~expense~~expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these ~~expenses.~~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) consists primarily of interest expense in connection with our debt arrangements, costs associated with the extinguishment of our debt arrangements, gains on the sale of subsidiaries, gains or losses on the sale of fixed assets, and interest income earned on cash and cash equivalents, short-term investments and 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.

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Critical Accounting Estimates and Assumptions

A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

New Accounting 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 are presented below. The analysis of operation is solely related to continuing operations and does not consider the results of discontinued operations.

Three Months ended September 30,

Nine Months ended September 30,

Three Months Ended March 31,

(dollars in thousands)

2021

2020

2021

2020

(Dollars in thousands)

2022

2021

Revenue

$ 2,615

$ 2,126

$ 11,105

$ 6,399

$ 3,608 $ 4,216
Cost of revenue, excluding depreciation and amortization

1,402

979

4,705

2,745

1,983 1,922

Operating expenses:

General and administrative expenses

6,813

2,676

16,094

7,518

7,388 4,907
Selling and marketing expenses

1,125

560

3,044

1,356

1,352 937
Research and development expenses

2,000

781

4,741

2,143

4,092 1,222
Depreciation and amortization

930

497

2,169

1,386

1,399 536
Operating expenses

10,868

4,514

26,048

12,403

Total operating expenses
14,231 7,602

Loss from operations

(9,655 )

(3,367 )

(19,648 )

(8,749 ) (12,606 ) (5,308 )
Other income (expense):

Loss on extinguishment of debt

-

(3,081 )

-

(3,281 )
Interest expense

(21 )

(218 )

(72 )

(2,468 ) (9 ) (32 )
Gain on the sale of business

-

-

-

3,631

Other income

66

6

103

27

14 16
Total other income (expense)

45

(3,293 )

31

(2,091 ) 5 (16 )
Loss before income taxes

(9,610 )

(6,660 )

(19,617 )

(10,840 )
Loss before income taxes and equity method investments
(12,601 ) (5,324 )
Income tax provision

(3 )

(7 )

(10 )

(20 ) - (3 )
Equity in loss of investee

-

-

(150 )

-

- (76 )
Net loss from continuing operations

(9,613 )

(6,667 )

(19,777 )

(10,860 ) $ (12,601 ) $ (5,403 )
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 )

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Comparison of the Three ~~and Nine~~ months ended ~~September 30, 2021~~March 31, 2022 and the Three ~~and Nine~~ months ended ~~September 30, 2020~~March 31, 2021

Total Revenue

Three Months ended September 30,

Change

Nine Months ended September 30,

Change

Three Months Ended March 31,

Change

(dollars in thousands)

2021

2020

$

%

2021

2020

$

%

(Dollars in thousands)

2022

2021

$

%

Revenue

$ 2,615

$ 2,126

$ 489

23 %

$ 11,105

$ 6,399

$ 4,706

74 % $ 3,608 $ 4,216 $ (608 ) -14 %

The ~~increase~~decrease in revenue for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, compared to the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, was a result of ~~additional products~~a decrease in product and ~~programs~~service revenue in the current period. As part of our change in selling strategy, we ~~offered, increases in our direct~~have focused on a sales model that employs contracts with recurring revenue. We expect these contracts to provide a more predictable stream of revenues, compared to one-time sales of hardware and ~~Partners Program sales.~~
~~In 2021, we initiated services for Oklahoma’s UVED Program~~software licenses which ~~has generated revenue of $345,000 and $975,000 during the three and nine months ended September 30, 2021.~~
are generally more difficult to predict. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021, ~~$260,000~~there was one customer who accounted for $1,673,000 of revenue ~~was attributed to Waycare.~~
~~Additionally, during the nine months ended September 30, 2021, we had~~as a ~~higher volume~~result of ~~agreements with significant customers in which the revenue recognition was bifurcated into point in time revenue recognition related to the~~a one-time sale of hardware and ~~perpetual licenses, as well as~~software. The decrease in one-time sale revenues during the three months ended March 31, 2022, was partially offset by an $831,000 increase in recurring revenue ~~recognition related~~during the period. The increase in recurring revenue is primarily attributable to our Waycare acquisition and our current land and expand strategy, which involves expanding the ~~software~~services and ~~customer support fees.~~solutions we provide to existing customers, and also facilitating cooperation between our existing customers and new customers as part of a broader information network.

Cost of Revenue, Excluding Depreciation and Amortization

Three Months ended September 30,

Change

Nine Months ended September 30,

Change

Three Months Ended March 31,

Change

(dollars in thousands)

2021

2020

$

%

2021

2020

$

%

(Dollars in thousands)

2022

2021

$

%

Cost of revenue, excluding depreciation and amortization

$ 1,402

$ 979

$ 423

43 %

$ 4,705

$ 2,745

$ 1,960

71 % $ 1,983 $ 1,922 $ 61 3 %

For the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, cost of revenue, excluding depreciation and amortization increased by ~~$423,000 and $1,960,000~~$61,000 compared to the corresponding prior ~~periods. The increase was~~periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our ~~increase in revenue.~~new go-to-market strategy.

Operating Expenses

Three Months ended September 30,

Change

Nine Months ended September 30,

Change

Three Months Ended March 31,

Change

(dollars in thousands)

2021

2020

$

%

2021

2020

$

%

(Dollars in thousands)

2022

2021

$

%

Operating expenses:

General and administrative expenses

$ 6,813

$ 2,676

$ 4,137

155 %

$ 16,094

$ 7,518

$ 8,576

114 % $ 7,388 $ 4,829 $ 2,559 53 %
Selling and marketing expenses

1,125

560

565

101 %

3,044

1,356

1,688

124 % 1,352 937 415 44 %
Research and development expenses

2,000

781

1,219

156 %

4,741

2,143

2,598

121 % 4,092 1,222 2,870 235 %
Depreciation and amortization

930

497

433

87 %

2,169

1,386

783

56 % 1,399 614 785 128 %
Operating expenses

$ 10,868

$ 4,514

$ 6,354

141 %

$ 26,048

$ 12,403

$ 13,645

110 %
Total operating expenses
$ 14,231 $ 7,602 $ 6,629 87 %

General and Administrative Expenses

The ~~majority of the~~ increase in general and administrative expenses ~~is attributable to increased headcount and equity award expenses. Additionally, for~~during the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 compared to the three ~~and nine~~ months ended ~~September 30, 2020, we saw~~March 31, 2021, were primarily due to a $2,319,000 increase in personnel costs related to an increase in ~~professional fees mainly associated with our merger and acquisition initiatives.~~headcount, including a $473,000 increase in stock-based compensation.

Selling and Marketing Expenses

The increase in selling and marketing expenses during the ~~year is~~three months ended March 31, 2022, compared to the three months ended March 31, 2021, was attributable mainly to 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~~our growth ~~plan.~~plan which led to a $513,000 increase in personnel costs, including a $125,000 increase in stock-based compensation.

Research and Development Expense

The ~~overall~~ increase in research and development expenses isduring the three months ended March 31, 2022, compared to the three months ended March 31, 2021, was primarily attributable to the development of new products and additional software capabilities, mainly as a result of ~~our increased focus on technology offerings. The increase in research and development expenses is mainly attributable to~~ an increase in headcount and hours associated with research and development activities. In the current period, there was an increase in staffing to support the Company’s new products which led to a $1,811,000 increase in personnel costs, including a $476,000 increase in stock-based compensation.

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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)

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 %

Three Months Ended March 31,

Change

(Dollars in thousands)

2022

2021

$

%

Other income (expense):

Interest expense
$ (9 ) $ (32 ) $ 23 72 %
Other income, net
14 16 (2 ) -13 %
Total other income (expense)
$ 5 $ (16 ) $ 21 131 %

~~The decrease in interest~~Interest expense and debt extinguishment costs for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 is due to the retirement of the 2019 Promissory notes in 2020.other income remained consistent period over period.

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

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

Total comprehensive loss from continuing operations

$ (9,610 )

$ (6,667 )

$ (19,771 )

$ (10,860 )
Net loss from continuing operations
$ (12,601 ) $ (5,403 )
Income taxes

3

7

10

20

- 3
Interest

21

218

72

2,468

9 32
Depreciation and amortization

930

497

2,169

1,386

1,399 614
EBITDA

$ (8,656 )

$ (5,945 )

$ (17,520 )

$ (6,986 ) $ (11,193 ) $ (4,754 )

Loss on extinguishment of debt

$ -

$ 3,081

$ -

$ 3,281

Share-based compensation

694

202

2,600

539

$ 1,900 $ 781
Gain on sale of business

-

-

-

(3,631 )
Loss due to change in value of equity investments

-

-

150

-

- 76
One-time consulting fees

1,249

-

2,025

-

Adjusted EBITDA

$ (6,713 )

$ (2,662 )

$ (12,745 )

$ (6,797 ) $ (9,293 ) $ (3,897 )

Adjusted Gross Profit and Adjusted Gross Margin

Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of 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 can gain efficiencies through the adoption of our technology and successfully cross-selling and upselling our current and future offerings. However, our ability to improve Adjusted Gross Margin ~~over time~~overtime is not guaranteed and could be impacted by the factors affecting our performance. We believe Adjusted Gross Profit and Adjusted Gross Margin are useful to investors, as they eliminate the impact of certain non-cash expenses and allow a direct comparison of these measures between periods without the impact of non-cash expenses and certain other nonrecurring operating expenses.

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

Three Months ended September 30,

Nine Months ended September 30,

Three Months Ended March 31,

2021

2020

2021

2020

2022

2021

(in thousands, except percentages)

(in thousands, except percentages)

(Dollars in thousands, except percentages)

Revenue

$ 2,615

$ 2,126

$ 11,105

$ 6,399

$ 3,608 $ 4,216
Cost of revenue, excluding depreciation and amortization

1,402

979

4,705

2,745

1,983 1,922
Adjusted Gross Profit

$ 1,213

$ 1,147

$ 6,400

$ 3,654

$ 1,625 $ 2,294
Adjusted Gross Margin

46.4 %

54.0 %

57.6 %

57.1 % 45.0 % 54.4 %

~~Adjusted Gross Margin, for the nine months ended September 30, 2021 and 2020 increased to 57.6% from 57.1%, respectively, and~~ Adjusted Gross Margin, for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ decreased to ~~46.4%~~45.0% from ~~54.0%~~54.4%, ~~respectively. The fluctuations~~respectively. Fluctuations in Adjusted Gross Margin ~~were driven~~are primarily ~~by our~~the result of the mix of software and hardware ~~sales.~~sales experienced in the quarter. Software sales ~~will~~ carry a higher margin than hardware sales as there are fewer ~~human~~ costs associated with software ~~sales. Additionally,~~sales, while hardware sales are typically associated with a software component which increases our performance obligations and provides higher margin recurring revenue in the future. However, as part of our planned go-to-market strategy, we ~~offer our~~have recently offered certain customers short-term pilot programs which range from three to six months. Our pilot programs generally have lower margins due to additional upfront costs we incur to ~~lay~~establish the ~~foundation for our solutions.~~program, which will not be incurred again if the pilot program is converted into a long-term program.

Key Performance Indicators

We regularly review several indicators, including the following key indicators, to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and 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. 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 %

Three Months Ended March 31,

Change

2022

2021

$

%

Recurring revenue
$ 1,695 $ 864 $ 831 96 %

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 agreement, such as the success rate of renewal periods, cancellations and usage estimates. For the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 we won contracts ~~valued~~valued at ~~$7,663,000,~~$1,525,000, compared to ~~$3,682,000~~$2,531,000 of contracts won for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. This ~~growth~~decline represents a ~~$3,981,000~~$1,006,000 or ~~108% growth,~~40% decline, period over period.

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~~Unsatisfied~~ Performance Obligations

As of ~~September 30, 2021,~~March 31, 2022, we had ~~approximately $23,845,000~~approximately $21,288,000 of contracts that were closed prior to ~~September 30, 2021~~March 31, 2022 but have a contractual period beyond ~~September 30,~~March 31, 2022. This represents a decline of $1,299,000 or 6% compared to $22,587,000 of performance obligations as of December 31, 2021. These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately ~~36%~~41% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.

~~Lease Obligations~~The decrease in total contract value and performance obligations is partially related to our go-to-market strategy. Our go-to-market strategy involves entering into pilot programs that require low initial commitments by our customers in the short term and develop into larger commitments over time. This helps grow our pipeline and demand for our products. As pilot programs convert into longer term and larger scale contracts, we expect to see our KPIs improve.

~~At September 30, 2021,~~Lease Obligations
As of March 31, 2022, we leased building space at the following locations in the U.S. and Israel:

●
Columbia, Maryland – The corporate headquarters
●
Linthicum, Maryland
●
Orlando, Florida
●
Tel Aviv, Israel
●
Los Angeles, California

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 our planned operations.

Liquidity and Capital Resources

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

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 %

Three Months Ended March 31,

2022

2021

Change

$

%

Net cash used in operating activities
$ (12,156 ) $ (3,159 ) $ (8,997 ) -285 %
Net cash used in investing activities
(1,964 ) (24,494 ) 22,530 92 %
Net cash provided by financing activities
3,113 70,499 (67,386 ) -96 %
Net (decrease) increase in cash, cash equivalents and restricted cash and cash equivalents
$ (11,007 ) $ 42,846 $ (53,853 ) -126 %

Net cash used in operating activities ~~– continuing operations~~ for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 had a net decrease of ~~$4,461,000,~~$8,997,000, which was attributable to the increase in the loss from continuing operations of ~~$8,871,000.~~$12,601,000. 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~~$1,119,000 to $1,900,000 for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~$539,000~~$781,000 for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. This increase is due to the number of equity incentive shares that were issued ~~as well as the increase in our stock price. Additionally, for the nine months ended September 30, 2020, there was a $3,631,000 gain on the sale of AOC Key Solutions~~to employees 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.~~directors.

The net ~~increase~~decrease in net cash used in ~~investment~~investing activities ~~– continuing operations~~ of ~~$48,473,000~~$22,530,000 was primarily due to a decrease in short-term investments that were previously made in during 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~~three months ended ~~September 30, 2020, the cash provided by investing activities from continuing operations was primarily due to the cash proceeds~~March 31, 2021, of ~~the sale of AOC Key Solutions and TeamGlobal.~~$23,994,000 which were previously invested in U.S. Treasury Bills that have maturity dates over three months, but less than a year.

Net cash provided by financing activities ~~– continuing operations~~ for the ~~nine~~three months ended ~~September 30, 2021 increased $45,518,000~~March 31, 2022 decreased by $67,386,000 from the prior ~~nine~~three month period ended ~~September 30, 2020.~~March 31, 2022. During the three months ended March 31, 2022, as part of our 2022 Sales Agreement, we received net proceeds after deducting the underwriting discounts and commissions and offering expenses payable by us, of $3,134,000. In the ~~current year,~~prior comparable quarterly period, through our 2021 Public Offering, we received net proceeds, after 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,~~March 31, 2022 and 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,~~March 31, 2022, we had cash and cash equivalents from continuing operations of ~~$35,102,000~~$15,593,000 and working capital of ~~$28,203,000,~~$9,297,000, as compared to cash and cash equivalents of ~~$20,595,000~~$26,600,000 and working capital of ~~$18,324,000~~$16,989,000 as of December 31, ~~2020.~~2021.

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2021 Public Offering

On February 9, 2021, we issued and sold 6,126,939 shares of our common stock (which included 799,166 shares of common stock sold pursuant to the exercise of an overallotment option) (the ~~“Public~~“2021 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 Waycare named in the Purchase Agreement (the “Sellers”) and 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 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 transaction, Waycare became our wholly-owned subsidiary.

As
At-the-Market Offering
On February 24, 2022, we entered into an At-the-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which we from time to time may offer and sell shares of ~~September 30, 2021, we had commitments~~our common stock, par value $0.0001 per share, having an aggregate offering price of up to ~~purchase $2,479,000~~$50,000,000 (the “Shares”) through or to the Agent. The Agent is entitled to a commission equal to 3.0% of the gross proceeds from each sale. We incurred issuance costs of approximately $169,000 related to legal, accounting, and other fees in ~~property~~connection with the 2022 Sales Agreement. These costs were charged against the gross proceeds of the 2022 Sales Agreement and ~~equipment. This commitment has been recognized and recorded in our financial statements~~presented as ~~of September 30, 2021.~~a reduction to additional paid-in capital on the accompanying unaudited condensed consolidated balance sheets.

For the three months ended March 31, 2022, based on the settlement date, we sold 728,452 shares of common stock at a weighted-average selling price of $4.67 per share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was $3,134,000 after paying $169,000 related to the issuance cost, as well as, 3.0% or $102,000 related to cash commissions provided to the Agent.
As of March 31, 2022, we did not have any material commitments for capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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, 2021.~~March 31, 2022.

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.

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PART II – OTHER INFORMATION

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 who were founders of ~~Firestorm~~two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19-cv-07767-VEC. On January 30, 2020, we filed a Second Amended Complaint (the “Complaint”). 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 also alleges claims for breach of fiduciary duty, violations of the Computer Fraud and Abuse Act (“CFAA”), conversion, and trespass to chattels arising from the Firestorm Principals’ alleged deletion of company email records. The Complaint requests equitable rescission of ~~that~~the acquisition transaction ~~or, alternatively,~~and 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~~The Firestorm Principals answered together with counterclaims on February 28, 2020. Thereafter, on March 30, we moved to dismiss certain counterclaims against certain directors and officers named as counterclaim-defendants, ~~which resulted~~resulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. Thereafter wethe Company filed ~~our~~its response and affirmative defenses to the Counterclaims on April 22, 2020. On April 27, 2020, the Firestorm Principals filed a Motion for Partial Judgment on the Pleadings, which 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. With respect to the Firestorm Principals’ motion for judgment on the pleadings, the Court’s November 23, 2020 order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion.

On April 27, 2021, the Firestorm Principals filed a notice of motion for partial summary judgment, seeking summary judgment on several of ~~our~~the Company’s claims and the Firestorm Principals’ counterclaims, ~~along with supporting declarations and exhibits. After~~which the ~~Court decided to allow the proposed motion to proceed, we,~~Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, ~~filed their opposition~~opposed. On March 14, 2022, the Court issued an opinion and order which denied summary judgment to the ~~partial~~Firestorm Principals on the Company's main fraudulent omission claim, the conversion and trespass to chattels claims as to Defendants Loughlin and Rhulen and the breach of fiduciary duty claim as to Defendant Loughlin. The Court also denied summary judgment ~~motion on June 21, 2021. The~~to the Firestorm Principals ~~filed~~on their ~~reply in support~~breach of ~~their partial~~warrants, anticipatory breach of warrants, and anticipatory breach of promissory notes counterclaims and the breach of contract counterclaim asserted by Defendant Satterfield. The Court granted summary judgment ~~motion~~to the Firestorm Principals on ~~July 9, 2021.~~our CFAA claims, based on recent case law clarifying that such claims do not apply to employees who have authorized access to an employer’s computer and misuse that access, and granted summary judgment on our CFAA, conversion, and trespass to chattels claims against one defendant because Rekor represented it was prepared to dismiss those claims. The Court also granted summary judgment on one breach of contract counterclaim asserted by a company related to the Firestorm Principals, holding that the $25,500 amount at issue could not be set off by or recouped from our damages in the case.

In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against our directors and officers, alleging breach of fiduciary duty and libel. The defendants in the suits moved to dismiss ~~the amended complaint.~~these complaints. At this stage of these litigations, suits against two of the directors have been ~~dismissed and one has been permitted to proceed.~~dismissed. On September 28, 2021, the Court issued an order denying the motion to ~~dismiss.~~dismiss one of the actions in Delaware. On October 21, 2021, the Delaware Action defendants filed a motion for reconsideration of the Court’s ~~September~~dismissal order; that reconsideration motion was denied on February 28, ~~2021 order.~~2022. On March 16, 2022, the court in the Virginia Action dismissed the breach of fiduciary duty claim without prejudice (so it can be refiled in Delaware Chancery Court) and denied the motion with respect to the defamation claim on jurisdictional grounds. The defamation claim will now be challenged on substantive grounds.

At this stage of these litigations, we are unable to render an opinion regarding the likelihood of a favorable outcome. ~~The we~~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.

On January 31, 2020, our ~~wholly owned~~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~~counterclaims 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. 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,~~23, 2021. On November 29, 2021, the Company filed a notice of appeal with the Appellate Division and a motion to reargue that decision and order, arguing that the court misunderstood the nature and purpose of the prospectus supplement, which was actually prepared by plaintiff after it set the prices for the 2018 offering. On March 3, 2022, the court denied the motion to reargue. In doing so, however, the court clarified that the dismissal was without prejudice, which would permit the Company to refashion the counterclaims. Meanwhile, the Company’s deadline to perfect its concurrent appeal in the appellate division is May 30, 2022.

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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 no merit. To that end we intend to vigorously 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 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 our automatic license plate recognition technology and uninsured vehicle enforcement diversion related business and ~~seeks~~sought 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.~~prejudice. This matter was voluntarily dismissed without prejudice.

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 opinion that the outcome of these proceedings, individually and collectively, will not be material to our consolidated financial statements as a whole.

ITEM 1A. RISK FACTORS

~~Other than the risk factors listed below, there~~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 ~~12, 2021, and in our Quarterly Reports on Form 10-Q as filed with the SEC on May 10, 2021 and August 16, 2021.~~31, 2022. 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.

We rely, in part, on third party date providers and existing camera networks to grow our business. If we are unable to 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 third party data and access to existing camera networks to grow our business. The majority of the 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 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 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.
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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 financial condition could be adversely affected.
~~Our internal investments and go-to-market strategy may place downward pressure on our operating margins.~~
To increase our revenue growth, we continue to invest in our business, including investments into new markets as part of our go-to-market strategy and 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 short term as a result of these investments. Furthermore, our investments may not produce the expected results. If we are unable to successfully execute our go-to-market strategy, we may experience decreases in our revenues and operating margins.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~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 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 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 accompanying consolidated statements of operations.
On July 15, 2020, we completed the Note Exchange by issuing 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 2021 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.

48
~~Table of Contents~~
43
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~~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 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 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 the capabilities of our technology offerings.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

49
~~Table of Contents~~
44
Table of Contents

ITEM 6. EXHIBITS

(a) Exhibits

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

*

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

12/15/21

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

Inline XBRL Instance Document

*

101.SCH

Inline XBRL Taxonomy Extension Schema Document

*

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

*

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

*

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

*

104 Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

* Filed herewith.

** Furnished herewith.

50
~~Table of Contents~~
45
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
Principal Executive Officer
Date:
~~November 15, 2021~~May 16, 2022
By:
/s/ Eyal Hen
Name:
Eyal Hen
Title:
Chief Financial Officer
(Principal Financial and Accounting ~~Officer)~~Officer
Date:
~~November 15, 2021~~May 16, 2022

51
46

	Three Months ended June 30,				Six Months ended June 30,				*Three Months Ended March 31,*
	2021		2020		2021		2020		*2022*		*2021*
Government customers	$	1,548	$	1,254	$	4,186	$	4,047	$	2,003	$	3,105
Commercial customers		1,067		872		6,919		2,352		1,605		1,111
Total revenue	$	2,615	$	2,126	$	11,105	$	6,399	$	3,608	$	4,216

2021	$	1,068
2022		1,839
2022, remaining			$	1,927
2023		474		651
2024		234		303
2025		82		124
2026				56
Thereafter		19		6
Total	$	3,716	$	3,067

Cash paid	$	40,813	$	39,884
Common stock issued		20,287		20,287
Total consideration	$	61,100
Total Consideration			$	60,171
Assets
Cash and cash equivalents	$	25	$	25
Restricted cash and cash equivalents		89		89
Accounts receivable		472		486
Other current assets		150		150
Property and equipment		72		72
Acquired technology		17,255		16,897
Total assets acquired		18,063		17,719
Liabilities
Accounts payable and accrued expenses		451		794
Contract liabilities		36		36
Deferred tax liability				3,833
Total liabilities assumed		487		4,663
Fair value of identifiable net assets acquired		17,576		13,056
Goodwill	$	43,524	$	47,115

Operating lease right-of-use lease assets	$	9,548

Current portion of lease liability	$	676
Long-term portion of lease liability		14,259
Total lease liability	$	14,935

Weighted average remaining lease term - operating leases (years)		9.88

Weighted average discount rate - operating leases		9.0	%

2022, remaining	$	837
2023		2,293
2024		2,254
2025		2,271
2026		2,306
Thereafter		13,628
Total lease payments	$	23,589
Less imputed interest		8,654
Maturities of lease liabilities	$	14,935

	December 31, 2020		Additions		Amortization			September 30, 2021		*December 31, 2021*		*Additions*		*Amortization*			*March 31, 2022*
Intangible assets subject to amortization from continuing operations
Intangible assets subject to amortization
Customer relationships	$	362	$	0	$	(25	)	$	337	$	328	$	0	$	(8	)	$	320
Marketing related		159		0		(51	)		108		97		0		(10	)		87
Technology based		5,361		17,255		(1,089	)		21,527		20,304		0		(860	)		19,444
Internally capitalized software		1,156		4		(364	)		796		677		0		(123	)		554
Intangible assets subject to amortization from continuing operations	$	7,038	$	17,259	$	(1,529	)	$	22,768
Intangible assets subject to amortization										$	21,406	$	0	$	(1,001	)	$	20,405

	Customer Relationships			Marketing Related			Technology Based			Internally Capitalized Software			Total			*Customer Relationships*			*Marketing Related*			*Technology Based*			*Internally Capitalized Software*			*Total*
Identifiable intangible assets	$	461		$	327		$	24,465		$	1,452		$	26,705		$	461		$	327		$	24,107		$	1,452		$	26,347
Accumulated amortization		(124	)		(219	)		(2,938	)		(656	)		(3,937	)		(141	)		(240	)		(4,663	)		(898	)		(5,942	)
Identifiable intangible assets from continuing operations, net	$	337		$	108		$	21,527		$	796		$	22,768
Identifiable intangible assets, net																$	320		$	87		$	19,444		$	554		$	20,405

2021	$	1,017
2022		4,008
2022, remaining			$	2,953
2023		3,828		3,777
2024		3,525		3,474
2025		3,516		3,465
2026				2,653
Thereafter		6,874		4,083
Total	$	22,768	$	20,405

2021	$	489
2022		1,432
2022, remaining				$	1,028
2023		36			37
Total		1,957

Less unamortized interest		(6	)
Total notes payable	$	1,951		$	1,065

Loan payable, current portion	$	911		$	37
Loan payable, long-term		46			28
Notes payable, current portion		994			1,000
Total notes payable	$	1,951		$	1,065

	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

	*Series A Preferred Stock Warrants (1)*		*Firestorm Warrants (2)*		*Secure Education Warrants (3)*		*2018 Public Offering Warrants (4)*		*Total*
Active warrants as of January 1, 2022		41,996		631,254		15,556		3,505		692,311
Exercised warrants		0		0		0		0		0
Outstanding warrants as of March 31, 2022		41,996		631,254		15,556		3,505		692,311
Weighted average strike price of outstanding warrants as of March 31, 2022	$	1.03	$	3.09	$	6.06	$	1.00	$	3.02

	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

	*Number of Shares Subject to Option*			*Weighted Average Exercise Price*		*Weighted Average Remaining Contractual Term (Years)*		*Aggregate Intrinsic Value*
Outstanding Balance as of December 31, 2021		1,012,336		$	1.28		6.50	$	5,002,000
Exercised		(12,971	)		2.26
Forfeited		(2,500	)		0.80
Outstanding balance as of March 31, 2022		996,865		$	1.27		6.30	$	3,063,000
Exercisable as of March 31, 2022		842,530		$	1.30		6.15	$	2,602,000

	Number of Shares			Weighted Average Unit Price		Weighted Average Remaining Contractual Term (Years)		*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
Outstanding balance as of December 31, 2021									1,347,879		$	10.94		2.20
Granted		482,040			12.36		1.86		1,085,680			4.62		2.48
Vested		(215,430	)		7.43				(201,259	)		9.21
Forfeited		(93,940	)		5.74				(63,256	)		11.29
Outstanding Balance at September 30, 2021		652,654		$	9.12		1.92
Outstanding balance as of March 31, 2022									2,169,044		$	8.07		2.33


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


32
●	Traffic management and analytics
~~Table of Contents~~	●	Predictive traffic congestion modeling and forecasting
	●	Roadway monitoring and incident detection and response
	●	Support systems for integrated corridor management
	●	Electric vehicle adoption and charge station planning
	●	Commercial vehicle and tonnage monitoring and analysis
	●	Real-time emissions analysis, sustainability, and green initiatives
	●	Live and archival HD video management and traffic surveillance
	●	Law enforcement and intelligence-based policing
	●	Contactless compliance and enforcement
	●	Vehicle and license plate recognition for public safety

	·	~~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~~

	·	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”).

	●	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.

	●	Growing Smart City Market – According to a United ~~Nation’s~~Nations report, about two-thirds of the world population will live in urban areas by 2050. Our cities are getting larger, ~~our commute~~with longer commutes, bigger roads ~~bigger~~ and the resulting impact on the environment and the quality of ~~life is worse than ever been.~~life. This trend requires forward-thinking officials to manage assets and resources more ~~efficiently than they have in the past.~~efficiently. We believe that advancements in “big data”, connected devices and artificial intelligence ~~will allow for ITS~~can provide Intelligent Transportation System (“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~~intelligence-aided solutions provide ~~the necessary~~useful tools ~~to more~~that can effectively tackle the challenges cities and communities are facing today and will face over the coming decades.

	●	AI for Infrastructure – We believe that the application of AI to the analysis of ~~infrastructure, including~~conditions on roadways and ~~roadway conditions will~~other infrastructure can significantly affect the safety and efficiency of 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 local vehicular flow as well as data ~~around~~about the vehicles on the roadway.

	●	Connected Vehicle Data – Today’s new vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors. This data is 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~~data from existing ~~city~~ infrastructure and providing untapped transportation information ~~in more~~from rural areas that are not ~~currently available from the current~~served by 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~~many users who could not afford the cost, or adapt to the restrictions of, conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions and municipalities that are testing ~~automated license plate~~vehicle recognition ~~(“ALPR”)~~ systems or that issued requests for proposals to install a network of ~~ALPR cameras.~~vehicle recognition sensors. We also expect the availability of faster, ~~higher accuracy, lower cost~~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.~~competitors. However, large users of existing ~~ALPR~~ technology, such as toll ~~roads,~~road operators, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. 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 their own or secure ~~their~~ advanced vehicle recognition ~~systems.~~systems from others who are also working to develop them. 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.

	●	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,~~expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial. We believe that future legislation will increasingly allow for automated enforcement ~~is beneficial. In addition,~~of regulations such as motor vehicle insurance requirements. Communities are currently searching for better means of achieving compliance with minor vehicle offenses, such as lapsed registrations, and safety issues such as motorists who fail to stop for school buses. For example, 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~~To the extent that legislative implementation is required, a deliberative and necessarily time-consuming ~~process.~~process is involved. 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”~~(“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,~~unlocked new capabilities with each ~~advancement unlocking new capabilities thereby fueling growth.~~advancement. Further, cellular networks ~~are~~have been optimized for downloading data ~~not for~~rather than uploading ~~data, and~~data. As a result, while download speeds have improved ~~over time, what amounts~~significantly due to large investments in cellular infrastructure, ~~changes~~this has resulted in relatively small improvements to cellular upload speeds. With ~~road-side~~roadside deployments experiencing explosive growth in count and density, scalability, ~~has~~latency and bandwidth have become ~~an obstacle for~~aspects of competition in the market. ~~All~~Our systems have been designed to address these issues through the use of ~~these factors mean that scalability, latency and bandwidth concerns require~~more effective edge processing, ~~which are~~ enabled both by ~~the continued growth of~~incorporating the increasingly effective ~~graphic processing units~~new GPUs into our systems and continual improvements in the efficiency of our AI algorithms. ~~Edge~~Our edge processing ~~ingests~~systems ingest local ~~high definition (“HD”)~~HD video streams at the source and ~~converts~~convert the raw video data to text data, ~~thus~~dramatically reducing the volume of data that needs to be ~~transferred.~~transferred through the network. Edge processing allows ~~massive~~us to scale a network dramatically without the bandwidth, cost, latency and dependability limitations that ~~would~~are experienced by other networks where raw video needs to be ~~experienced with streaming~~streamed to the cloud ~~solution.~~for processing.

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

	Three Months ended September 30,						Nine Months ended September 30,						Three Months Ended March 31,
(dollars in thousands)	2021			2020			2021			2020
(Dollars in thousands)													2022			2021
Revenue	$	2,615		$	2,126		$	11,105		$	6,399		$	3,608		$	4,216
Cost of revenue, excluding depreciation and amortization		1,402			979			4,705			2,745			1,983			1,922

Operating expenses:
General and administrative expenses		6,813			2,676			16,094			7,518			7,388			4,907
Selling and marketing expenses		1,125			560			3,044			1,356			1,352			937
Research and development expenses		2,000			781			4,741			2,143			4,092			1,222
Depreciation and amortization		930			497			2,169			1,386			1,399			536
Operating expenses		10,868			4,514			26,048			12,403
Total operating expenses														14,231			7,602

Loss from operations		(9,655	)		(3,367	)		(19,648	)		(8,749	)		(12,606	)		(5,308	)
Other income (expense):
Loss on extinguishment of debt		-			(3,081	)		-			(3,281	)
Interest expense		(21	)		(218	)		(72	)		(2,468	)		(9	)		(32	)
Gain on the sale of business		-			-			-			3,631
Other income		66			6			103			27			14			16
Total other income (expense)		45			(3,293	)		31			(2,091	)		5			(16	)
Loss before income taxes		(9,610	)		(6,660	)		(19,617	)		(10,840	)
Loss before income taxes and equity method investments														(12,601	)		(5,324	)
Income tax provision		(3	)		(7	)		(10	)		(20	)		-			(3	)
Equity in loss of investee		-			-			(150	)		-			-			(76	)
Net loss from continuing operations		(9,613	)		(6,667	)		(19,777	)		(10,860	)	$	(12,601	)	$	(5,403	)
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	)

	Three Months ended September 30,				Change					Nine Months ended September 30,				Change					Three Months Ended March 31,				Change
(dollars in thousands)	2021		2020		$		%			2021		2020		$		%
(Dollars in thousands)																			2022		2021		$			%
Revenue	$	2,615	$	2,126	$	489		23	%	$	11,105	$	6,399	$	4,706		74	%	$	3,608	$	4,216	$	(608	)		-14	%

	●	Orlando, Florida

	●	Tel Aviv, Israel
	●	Los Angeles, California

	Rekor Systems, Inc.

	By:	/s/ Robert A. Berman
	Name:	Robert A. Berman
	Title:	~~President and~~ Chief Executive Officer Principal Executive Officer
	Date:	~~November 15, 2021~~May 16, 2022

	By:	/s/ Eyal Hen
	Name:	Eyal Hen
	Title:	Chief Financial Officer (Principal Financial and Accounting ~~Officer)~~Officer
	Date:	~~November 15, 2021~~May 16, 2022