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 March 31, ~~2022~~2023

☐ 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 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 May ~~16, 2022,~~15, 2023, the Registrant had ~~46,486,596 shares~~61,807,685 shares of ~~common~~common stock, $0.0001 par value per share outstanding.

Table of Contents

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, ~~2021~~2022 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.

		*March 31, 2022*			*December 31, 2021*				*March 31, 2023*			*December 31, 2022*
*ASSETS*	*ASSETS*							*ASSETS*
Current assets
Cash and cash equivalents		$	14,606		$	25,796			$	12,066		$	1,924
Restricted cash and cash equivalents			987			804				378			254
Accounts receivable, net			1,455			1,173				4,298			3,238
Inventory			1,228			1,194				2,016			1,986
Note receivable, current portion			368			340				340			340
Other current assets, net			1,966			1,374				1,653			1,202
Current assets of discontinued operations			1			1				579			331
Total current assets			20,611			30,682				21,330			9,275
Long-term assets
Property and equipment, net			10,168			9,929				16,007			16,733
Right-of-use lease assets, net			9,548			6,163				9,509			9,662
Goodwill			53,451			53,451				20,593			20,593
Intangible assets, net			20,405			21,406				20,258			21,299
Note receivable, long-term			935			1,020				737			822
SAFE investment			1,400			1,250				2,005			2,005
Deposits			3,578			1,978				3,329			3,451
Total long-term assets			99,485			95,197				72,438			74,565
Total assets		$	120,096		$	125,879			$	93,768		$	83,840
*LIABILITIES AND SHAREHOLDERS' EQUITY*	*LIABILITIES AND SHAREHOLDERS' EQUITY*							*LIABILITIES AND SHAREHOLDERS' EQUITY*
Current liabilities
Accounts payable and accrued expenses		$	4,337		$	7,087			$	6,158		$	5,963
Notes payable, current portion			1,000			998				-			1,000
Related party notes										-			1,000
Loan payable, current portion			37			37				97			106
Lease liability, short-term			676			229				1,074			1,069
Contract liabilities			2,189			2,437
Contract liabilities, short-term										4,246			3,044
Other current liabilities			3,074			2,904				2,202			2,772
Current liabilities of discontinued operations			129			129				579			490
Total current liabilities			11,442			13,821				14,356			15,444
Long-term Liabilities
Notes payable, long-term										2,000			2,000
2023 Promissory Notes, net of debt discount of $1,507										2,493			-
2023 Promissory Notes - related party, net of debt discount of $3,201										5,299			-
Loan payable, long-term			28			37				331			349
Lease liability, long-term			14,259			10,061				13,867			14,237
Contract liabilities, long-term			878			835				1,345			1,005
Deferred tax liability, long-term			38			38
Deferred tax liability										52			52
Other non-current liabilities										2,048			1,416
Total long-term liabilities			15,203			10,971				27,435			19,059
Total liabilities			26,645			24,792				41,791			34,503
Commitments and contingencies
Commitments and contingencies (Note 9)
Stockholders' equity
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	)
Common stock, $0.0001 par value; authorized; 100,000,000 shares; issued: 61,122,128, shares as of March 31, 2023 and 54,446,602 as of December 31, 2022; outstanding: 61,030,637 shares as of March 31, 2023 and 54,405,080 as of December 31, 2022.										6			5
Preferred stock, $0.0001 par value, 2,000,000 authorized, 505,000 shares designated as Series A and 240,861 shares designated as Series B as of March 31, 2023 and December 31, 2022, respectively. No preferred stock was issued or outstanding as of March 31, 2023 or December 31, 2022, respectively.
Treasury stock, 91,491 and 41,522 shares as of March 31, 2023 and December 31, 2022, respectively.										(506	)		(417	)
Additional paid-in capital			176,348			171,285				218,157			202,747
Accumulated deficit			(82,484	)		(69,883	)			(165,680	)		(152,998	)
Total stockholders’ equity			93,451			101,087				51,977			49,337
Total liabilities and stockholders’ equity		$	120,096		$	125,879			$	93,768		$	83,840

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

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ 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*			*Shares of Common Stock*			*Common Stock*		*Shares of Treasury Stock*		*Treasury Stock at Cost*			*Additional Paid-In Capital*		*Accumulated Deficit*			*Total Stockholders' Equity*
Balance as of December 31, 2021		43,987,896	$	4		(19,361	)	$	(319	)		0		$	0	$	171,285		$	0	$	(69,883	)	$	101,087
Balance as of January 1, 2023																												54,405,080		$	5		41,522	$	(417	)	$	202,747	$	(152,998	)	$	49,337
Stock-based compensation																												-			-		-		-			1,112		-			1,112
Issuance upon exercise of stock options																												18,333			-		-		-			15		-			15
Issuance upon vesting of restricted stock units																												557,193			-		-		-			-		-			-
Fair value allocated to warrants with 2023 Promissory Notes																												-			-		-		-			5,125		-			5,125
Shares withheld upon vesting of restricted stock units																												(49,969	)		-		49,969		(89	)		-		-			(89	)
Issuance of common stock and warrants																												6,100,000			1		-		-			9,158		-			9,159
Net loss																												-			-		-		-			-		(12,682	)		(12,682	)
Balance as of March 31, 2023																												61,030,637		$	6		91,491	$	(506	)	$	218,157	$	(165,680	)	$	51,977

Balance as of January 1, 2022																												43,968,535		$	4		19,361	$	(319	)	$	171,285	$	(69,883	)	$	101,087
Stock-based compensation		-		0		-			0			-			0		1,900			0		0			1,900			-			-		-		-			1,900		-			1,900
Issuance of common stock pursuant to at the market offering, net		728,452		0		0			0			0			0		3,134			0		0			3,134			728,452			-		-		-			3,134		-			3,134
Issuance upon exercise of stock options		12,971		0		0			0			0			0		29			0		0			29			12,971			-		-		-			29		-			29
Issuance upon vesting of restricted stock units		179,098		0		0			0			0			0		0			0		0			0			179,098			-		-		-			-		-			-
Shares withheld upon vesting of restricted stock units		0		0		(22,161	)		(98	)		0			0		0			0		0			(98	)		(22,161	)		-		22,161		(98	)		-		-			(98	)
Net loss		-		0		-			0			-			0		0			0		(12,601	)		(12,601	)		-			-		-		-			-		(12,601	)		(12,601	)
Balance as of March 31, 2022		44,908,417	$	4		(41,522	)	$	(417	)		0		$	0	$	176,348		$	0	$	(82,484	)	$	93,451			44,866,895		$	4		41,522	$	(417	)	$	176,348	$	(82,484	)	$	93,451

Balance as of December 31, 2020		33,013,271	$	3		0		$	0			240,861		$	0	$	68,238		$	0	$	(43,050	)	$	25,191
Stock-based compensation		-		0		-			0			-			0		781			0		0			781
Exercise of cashless warrants in exchange for common stock		47,612		0		0			0			0			0		0			0		0			0
Exercise of warrants in exchange for common stock		52,013		0		0			0			0			0		294			0		0			294
Exercise of warrants related to series A preferred stock		95,864		0		0			0			0			0		99			0		0			99
Public underwriting		6,126,939		1		0			0			0			0		70,124			0		0			70,125
Conversion of series A preferred stock		899,174		0		0			0			0			0		7,775			0		0			7,775
Conversion of series B preferred stock		517,611		0		0			0			(240,861	)		0		179			0		0			179
Issuance upon exercise of stock options		65,402		0		0			0			0			0		226			0		0			226
Issuance upon vesting of restricted stock units		134,991		0		0			0			0			0		0			0		0			0
Shares withheld upon vesting of restricted stock units		0		0		(19,361	)		(319	)		0			0		0			0		0			(319	)
Preferred stock dividends		-		0		-			0			-			0		0			0		(51	)		(51	)
Accretion of Series A preferred stock		-		0		-			0			-			0		(101	)		0		0			(101	)
Change in unrealized gain on short-term investments		-		0		-			0			-			0		0			2		0			2
Net loss		-		0		-			0			-			0		0			0		(5,406	)		(5,406	)
Balance as of March 31, 2021		40,952,877	$	4		(19,361	)	$	(319	)		0		$	0	$	147,615		$	2	$	(48,507	)	$	98,795

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

	*Three Months Ended March 31,*						*Three Months Ended March 31,*
	*2022*			*2021*			*2023*			*2022*
Cash Flows from Operating Activities:
Net loss from continuing operations	$	(12,601	)	$	(5,403	)	$	(12,682	)	$	(12,673	)
Net loss from discontinued operations		0			(3	)
Net income from discontinued operations								-			72
Net loss		(12,601	)		(5,406	)		(12,682	)		(12,601	)
Adjustments to reconcile net loss to net cash used in operating activities:
Bad debt expense		0			24			18			-
Depreciation		298			131			914			282
Amortization of right-of-use lease asset		100			74			153			97
Provision for deferred taxes		0			3
Share-based compensation		1,900			781			1,112			1,900
Amortization of financing costs		2			5
Amortization of debt discount								444			2
Amortization of intangible assets		1,001			409			1,041			983
Loss due to change in value of equity investments		0			76
Loss due to the remeasurement of the STS Contingent Consideration								45			-
Gain on extinguishment of debt								(527	)		-
Changes in operating assets and liabilities:
Accounts receivable		637			(1,460	)		(1,078	)		628
Inventory		(34	)		163			(728	)		(22	)
Other current assets		(592	)		(157	)		(451	)		(592	)
Deposits		(323	)		0			6			(323	)
Accounts payable, accrued expenses and other current liabilities		(2,580	)		1,947			1,066			(2,581	)
Contract liabilities		(205	)		323			1,542			(205	)
Lease liability		241			(75	)		(365	)		244
Net cash used in operating activities - continuing operations		(12,156	)		(3,159	)		(9,490	)		(12,260	)
Net cash used in operating activities - discontinued operations		0			(4	)
Net cash provided by operating activities - discontinued operations								130			104
Net cash used in operating activities		(12,156	)		(3,163	)		(9,360	)		(12,156	)
Cash Flows from Investing Activities:
SAFE Investment		(150	)		0			-			(150	)
Capital expenditures		(1,814	)		(425	)		(728	)		(1,760	)
Short-term investment activity, net		0			(23,994	)
Investment in unconsolidated company		0			(75	)
Net cash (used in) provided by investing activities - continuing operations		(1,964	)		(24,494	)
Net cash used in investing activities - continuing operations								(728	)		(1,910	)
Net cash used in investing activities - discontinued operations								-			(54	)
Net cash used in investing activities								(728	)		(1,964	)
Cash Flows from Financing Activities:
Proceeds from public offering		0			70,125
Net proceeds 2022 Promissory Notes - related party, exchanged for 2023 Promissory Notes - related party								400			-
Net proceeds 2023 Promissory Notes								4,000			-
Net proceeds 2023 Promissory Notes - related party								7,100			-
Net proceeds 2023 Registered Direct Offering								9,159			-
Proceeds from notes receivable		57			85			85			57
Net proceeds from exercise of options								15			29
Repayments of loans payable		(9	)		(11	)		(27	)		(9	)
Net proceeds from exercise of options		29			226
Net proceeds from exercise of warrants		0			294
Net proceeds from exercise of warrants associated with the Series A Preferred Stock		0			99
Net proceeds from at-the-market agreement		3,134			0			-			3,134
Repurchases of common stock		(98	)		(319	)		(89	)		(98	)
Net cash provided by financing activities - continuing operations		3,113			70,499
Net increase in cash, cash equivalents and restricted cash and cash equivalents - continuing operations		(11,007	)		42,846
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		(11,007	)		42,842
Net cash provided by financing activities								20,643			3,113
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents - continuing operations								10,425			(11,057	)
Net increase in cash, cash equivalents and restricted cash and cash equivalents - discontinued operations								130			50
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents								10,555			(11,007	)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period		26,601			21,009			2,468			26,601
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$	15,594		$	63,851		$	13,023		$	15,594

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents at end of period - continuing operations	$	14,606		$	62,845		$	12,066		$	14,606
Restricted cash and cash equivalents at end of period - continuing operations		987			1,005			378			616
Cash and cash equivalents at end of period - discontinued operations		1			1			579			372
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$	15,594		$	63,851		$	13,023		$	15,594

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

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 March 31, ~~2022~~2023, the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity and unaudited condensed consolidated statements of cash flows for the three month periods ended March 31, ~~2022~~2023 and ~~2021~~2022.

The financial data and other information disclosed in these notes are unaudited. The results for the three months ended March 31, ~~2022~~2023, are not necessarily indicative of the results to be expected for the year ending December 31, ~~2022.~~2023.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

Dollar amounts, except per share data, in the notes to these unaudited condensed consolidated financial statements are rounded to the closest $1,000.

~~Rekor~~The Company provides products and services for the collection, distribution and analysis of transportation data and is a global leader in ~~intelligent~~the development and implementation of advanced roadway intelligence infrastructure focused on addressing the world’s most critical challenges across transportation management, public safety, and key commercial markets. With a real-time intelligence platform driven by deep access to data, AI-powered software, and smart optical devices at-the-edge, the Company combines its industry expertise and advanced proprietary technologies to deliver insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities.

On ~~August 18, 2021,~~December 6, 2022, the Company divested its Automated Traffic Safety and Enforcement ("ATSE") business, a non-core business unit. As of December 31, 2022, the Company determined that the ATSE business unit met the criteria to be presented as discontinued operations. Amounts for the three months ended March 31, 2022, have been reclassified to conform to the current year’s presentation.

On June 17, 2022, the Company completed ~~its~~the acquisition of ~~Waycare Technologies Ltd. (“Waycare”)~~STS by acquiring 100% of the issued and outstanding capital stock of ~~Waycare,~~STS, which is now a wholly-owned subsidiary of the Company. Since the acquisition of STS occurred on June 17,2022, the results of operations for STS from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for thethree months ended March 31, 2023.

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

Certain amounts in the prior year's unaudited condensed consolidated financial statements have been reclassified to conform to the current year's presentation. ~~Beginning in~~Amortization related to the ~~third~~ ~~quarter of~~ ~~2021,~~ ~~depreciation and amortization~~Company's right-of-use assets is presented ~~separately from cost~~as part 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~~presented as part of depreciation and amortization on the ~~aforementioned financial statement captions.~~unaudited condensed consolidated statements of operations. Additionally, as of ~~September 30, 2021,~~December 31,2022,the Company began to present interest income and interest expense as a net amount on the unaudited condensed consolidated statements of operations, whereas in prior periods, interest income was presented as part of other ~~current liabilities separately from accounts payable and accrued expenses. Other current liabilities primarily consist~~expense, net on the unaudited condensed consolidated statements of ~~payroll and payroll related accounts.~~operations. Amounts for the three ~~month period ending~~months ended March 31, ~~2021~~2022, ~~and the period ended~~ ~~December 31, 2021~~, have been reclassified to conform to the current year’s presentation.

For all annual and interim periods, management will assess going concern uncertainty in the Company’s unaudited condensed consolidated financial statements to determine whether there is sufficient cash on hand and capital raises and working capital, to operate for a period of at least one year from the date the unaudited condensed consolidated financial statements are issued, which is referred to as the “look-forward period”, as defined in U.S. 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, 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~~sources 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 stockfinancing to support 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 three months ended March 31, ~~2022~~2023, the Company had working capital from continuing operations of ~~$9,297,000~~$6,974,000 and a ~~comprehensive~~ loss from continuing operations of ~~$12,601,000.~~$12,682,000.

The Company’s cash ~~decreased~~increased by ~~$11,007,000 for~~$10,555,000 during the three months ended March 31, ~~2022~~2023, primarily due external financing related to the 2023 Promissory Notes and the 2023 Registered Direct Offering. These cash inflows were partially offset by the loss from continuing operations of ~~$12,601,000. This amount was offset by the net proceeds of $3,134,000~~$12,682,000. (see NOTE 7 - DEBT and ~~from the~~ ~~2022~~ ~~Sales Agreement (see~~ NOTE 10 - STOCKHOLDERS’ EQUITY for details on the ~~2022~~2023 ~~Sales Agreement)~~Promissory Notes and 2023 Registered Direct Offering, respectively).

~~Management~~Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that ~~based on relevant conditions and events that are known and reasonably knowable, its current forecasts and projections~~the existing cash is insufficient to fund operations for the next ~~one~~twelve ~~year from~~months following the ~~date~~issuance of ~~the filing of the~~these unaudited condensed ~~consolidated~~ financial ~~statements in this Quarterly Report on Form~~ 10~~-Q, indicate~~statements. These factors raise substantial doubt regarding the Company’s ability to continue ~~operations~~ as a going ~~concern for at least that~~ ~~one~~~~-year period.~~ concern.

The Company is actively monitoring its operations, the cash on hand and working capital. ~~Should access~~The Company is currently in the process of reviewing external financing options in order to ~~funds be unavailable,~~sustain its operations. If additional financing is not available, the Company ~~will need to seek out additional sources of funding. Furthermore, the Company~~also has contingency plans to continue to reduce or defer expenses and cash outlays should operations weaken in the look-forward ~~period if additional financing is~~ ~~not~~ ~~available.~~period.

The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. The Company will assess goodwill for impairment annually, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. The Company performs its annual impairment assessment on October 1, or more frequently, when events or circumstances indicate impairment may have occurred. ~~During the~~ ~~three~~ ~~months ended~~As of March 31, ~~2022~~ ~~and~~ ~~2021~~2023, the Company did not ~~recognize~~identify any ~~impairment~~events that would cause it to assess goodwill ~~from continuing operations.~~for impairment.

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 March 31, ~~2022~~2023 and December 31, ~~2021~~2022, because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt, contingent consideration and long-term receivables approximates fair value as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

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

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

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

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

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

There were no changes in levels during the three months ended March 31, ~~2022~~2023.

The Company derives its revenues primarily from the licensing and sale of ~~software, hardware~~its roadway data and ~~related services, including~~traffic management product and service offerings. These offerings include a mixture of data collection, implementation, engineering, customer support and ~~implementation~~maintenance services, as well as software and ~~management services in connection with our traffic safety solutions.~~hardware. Revenue is recognized upon transfer of control of promised products and services to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:

Recurring revenue includes the Company’s SaaS revenue, subscription revenue, eCommerce revenue and customer support revenue. The Company generates recurring revenue from long-term contracts with customers that provide periodic payments and short-term contracts that are automatically invoiced on a monthly basis. The Company’s recurring revenue is generated by a combination of direct sales, partner-assisted sales, and eCommerce sales.

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

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

eCommerce revenue is defined by the Company as revenue obtained through direct sales on the Company’s eCommerce platform. The Company’s eCommerce revenue generally includes subscriptions to the Company’s vehicle recognition software which can be purchased online and activated through a digital key. The Company's contracts with customers are generally for a term of one month with automatic renewal each month. The Company invoices and receives fees from its customers monthly.

Customer support revenue is associated with perpetual licenses and long-term subscription arrangements and consists primarily of technical support and product updates. The Company’s customer support team is ready to provide these maintenance services, as needed, to the customer during the contract term. The customer benefits evenly throughout the contract period from the guarantee that the customer support resources and personnel will be available to them. As customer support is not critical to the customers' ability to derive benefit from their right to use the Company’s software, customer support is considered a distinct performance obligation when sold together with a long-term license for ~~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 customer support obligation, in line with how the Company believes services are provided.

Product and service revenue is defined as the Company’s ~~contactless compliance revenue,~~ implementation revenue, perpetual license sales, hardware sales, engineering services and ~~hardware sales.~~

~~Contactless~~contactless compliance solutions revenues reflect arrangements to provide traffic safety systems to several 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 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 jurisdiction.revenue.

Implementation revenue is recognized when the Company provides ~~pilot programs~~implementation or construction services to its customers. ~~Pilot programs~~ ~~may~~ These services, involve a ~~one~~~~-time~~ fee for ~~a defined period in which~~ the ~~customer can use~~implementation services and are typically associated with the sale of the Company’s data collection services, 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.~~hardware. The Company’s ~~pilot program~~implementation revenue is recognized ~~at various stages of completion.~~over time as the implementation is completed.

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~~that provide customers the right to use software for an indefinite period in exchange for a one-time license fee, which is generally paid at contract inception. The Company’s perpetual licenses provide a right to use intellectual property (“IP”) that is functional in nature and ~~have~~has significant stand-alone functionality. Accordingly, for perpetual licenses of functional IP, revenue is recognized at the point-in-time when the customer has access to the software, which normally occurs once software activation keys have been made available to the customer.

The Company also generates revenue through the sale of hardware through its partner program and internal sales force distribution ~~channels and direct sales.~~channels. The Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon transfer of control of the hardware to its customers. The Company ~~offers~~provides hardware ~~installment~~installation services to customers which ~~ranges~~range from one to six months. The revenue related to the installation component is recognized over time as the implementation is completed.

Contactless compliance revenues reflect arrangements to provide hardware systems and services that identify uninsured motor vehicles, notify owners of non-compliance through a diversion citation, and assist them in obtaining the required insurance as an alternative to traditional enforcement methods. Revenue is recognized monthly based on the number of diversion citations collected by the relevant jurisdiction.

The Company also generates revenue through its engineering services. These services are provided at ~~various stages~~the request of ~~completion.~~its customers and the revenue related to these services is recognized over time as the service is completed.

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

Urban mobility revenue consists of revenue derived from the Company's roadway data aggregation activities. These activities include the use of software applications that are part of the Rekor Discover™ platform, the primary application being Rekor’s count, class & speed application. The application fully automates the aggregation of Federal Highway Administration (“FHWA”) 13-bin vehicle classification, speed, and volume data. Revenues associated with the deployment of other traffic sensors, traffic studies, or construction associated with traffic data collection are also part of data aggregation revenue, which is generated through both recurring pay-for-data contracts and hardware sales with a recurring software maintenance component. The Company initiated these traffic data collection activities in June of 2022.

Traffic management revenue is associated with the Rekor Command™ platform and the associated applications underneath the platform. These provide traffic operations and traffic management centers with support through actionable, real-time incident reports integrated into a cross-agency communication and response system. Revenue is generated through contracts that include an upfront as well as recurring component.

Licensing and other revenue consists of licensing of the Rekor Scout™ platform, licensing of Rekor CarCheck™ API, licensing of Rekor’s vehicle recognition software, as well as systems deployed for security, contactless compliance and public safety. Revenue is generated through recurring and perpetual license sales as well as one-time hardware sales.

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 March 31, 2023~~31,~~~~2022,~~, the Company hadhad approximately ~~$21,288,000~~$24,330,000 of remaining performance obligations not yet satisfied or partially satisfied. The Company expects to recognize approximately ~~41%~~67% 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.

The timing of revenue recognition, billings and cash collections 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 ~~$400,000~~$1,149,000 and ~~$415,000~~ $935,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022, respectively.

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the next ~~nine~~six 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 three months ended March 31, ~~2022~~2023 were not materially impacted by any other factors. Contract liabilities as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 were were $~~3,067,000~~5,591,000 and $~~3,272,000~~4,049,000, ~~respectively.~~respectively. During the three months ended March 31, ~~2022~~2023, ~~$949,000~~$1,134,000 of the contract liabilities balance as of December 31, ~~2021~~2022 was recognized as revenue.

The services due for contract liabilities described above are shown below as of March 31, ~~2022~~2023 (dollars in thousands):

~~Practical Expedients Election~~ ‒ ~~Costs to Obtain and Fulfill a Contract~~ ~~‒ The Company’s incremental costs to obtain a contract consist of sales commissions. When the amortization period would be~~ ~~one~~ ~~year or less, the Company elects to use the practical expedient election to expense the costs to obtain a contract as they are incurred.~~

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~~Restricted cash and cash equivalents for these client jurisdictions as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 were ~~$987,000~~$378,000 and $~~804,000~~254,000, ~~respectively,~~respectively, and correspond to equal amounts of related accounts payable and are presented as part of accounts payable and accrued expenses in the accompanying unaudited condensed consolidated balance sheets.

The Company deposits its temporary cash investments with highly rated ~~quality~~ financial institutions that are located in the United States and Israel. The United States deposits are federally insured up to $250,000 per account. As of March 31, 2023~~2022~~ and December 31, ~~2021,~~2022, the Company had deposits from continuing operations totaling ~~$15,593,000~~$12,444,000 and ~~$26,600,000,~~$2,178,000, respectively, in ~~three~~multiple U.S. financial institutions and one Israeli financial institution.

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

Customer A accounted for 13% and less than 10% ~~and 40%~~ of the Company’s ~~total~~unaudited condensed consolidated revenues for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022, respectively.

No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated revenues for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022.

As of March 31, 2023, Customer B accounted for more than 14% of the unaudited condensed consolidated accounts receivable balance. As of December 31, 2022, 0no single customer accounted for more than 10% of the Company's unaudited condensed consolidated accounts receivable balance. ~~As of~~ ~~December 31, 2021~~~~, Company B accounted for 13% of the unaudited condensed consolidated accounts receivable balance.~~

No other single customer accounted for more than 10% of the Company’s unaudited condensed consolidated accounts receivable balance as of March 31, 2023 and December 31, ~~2021~~2022.

As of March 31, 2023 and December 31, 2022, amounts owed to related parties of $280,000 and $253,000 were presented as part of accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets.

~~Additional significant accounting policies of the Company are also described in Note~~ 1 ~~of the Company’s Annual Report on Form~~ 10~~-K for the year ended~~ ~~December 31, 2021~~.

New Accounting Pronouncements Effective in ~~Future Periods~~the Current Period

In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2022. Upon adoption of the new standard, the Company ~~will begin~~began recognizing an allowance for credit losses based on the estimated lifetime expected credit loss related to the Company’s financial assets. Due to the nature and extent of the Company’s financial instruments (primarily accounts receivable and a note receivable) currently within the scope of ASU 2016-13 and based on the Company’s analysis of ASU 2016-13 and the historical, current and expected credit quality of the Company’s customers, ~~the Company does~~ ~~not~~ ~~expect~~ ASU 2016-13 todid not 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.

On ~~August 18, 2021,~~ Additional significant accounting policies of the Company completed its acquisition of Waycare by acquiring 100% of the issued and outstanding capital stock of Waycare. The aggregate purchase price for the shares of Waycare was $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 $39,884,000 of cash and 2,784,474 sharesare also described in Note 1 of the Company’s ~~common stock, valued at $20,287,000. As a result of~~Annual Report on Form 10-K for the ~~transaction, Waycare has become a wholly-owned subsidiary of the Company.~~year ended December 31, 2022.

On June 17, 2022, the Company completed its acquisition of Southern Traffic Services ("STS") by acquiring 100% of the issued and outstanding capital stock of STS. The acquisition included total consideration of $12,799,000 including; cash consideration of $6,500,000, $1,001,000 related to an earnout based on the achievement of certain performance metrics ("STS Earnout") and $1,298,000 contingent on the closing of a future contract ("STS Contingent Consideration"), 798,666 shares of the Company’s common stock, valued at $2,000,000, and a $2,000,000 note. As a result of the transaction, STS has become a wholly-owned subsidiary of the Company.

The purchase price has been ~~preliminarily~~ allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. ~~The table below shows~~Since the ~~breakdown related to~~acquisition of STS occurred on June 17,2022, the ~~preliminary~~results of operations for STS from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for the three months ended March 31, 2023. As part of the Company's purchase price allocation for the acquisition, ~~(dollars~~the Company recognized $1,977,000 in ~~thousands):~~goodwill, $3,400,000 in customer relationships and $700,000 of marketing related intangible assets related to the STS tradename.

The ~~technology acquired by~~ STS Contingent Consideration in the amount of $2,000,000 will be paid in cash if on or prior to October 30, 2024, the Company ~~as part~~enters into a multi-year extension of the ~~acquisition has an estimated useful life~~Georgia Department of ~~seven~~ ~~years~~Transportation Contract on substantially similar terms and conditions as the contract being extended. The STS Contingent Consideration shall be payable within 30 days of the effectiveness of the extension of the Georgia Department of Transportation Contract. STS Contingent Consideration is presented as part of ~~intangible assets, net~~other non-current liabilities on the unaudited condensed consolidated balance ~~sheets.~~sheets and remeasured on a quarterly basis. In connection with the Company's purchase price accounting, it evaluated the fair value of the STS Contingent Consideration at the time of acquisition and determined the fair value to be $1,298,000. For the three months ended March 31, 2023, the Company recognized $45,000 in expense related to the remeasurement of the STS Contingent Consideration which is presented with general and administrative expenses on the unaudited condensed consolidated statement of operations.

The Company was to pay the STS Earnout payment, up to $2,000,000, within 60 days of December 31, 2022 based on the STS EBITDA for the twelve month period ended December 31, 2022. In connection with the Company's purchase price accounting, it evaluated the fair value of the STS Earnout at the time of acquisition and determined the fair value to be $1,001,000. As of December 31, 2022, it was determined that the STS Earnout was not achieved and thus the Company recognized a gain related to the remeasurement of the STS Earnout of $1,001,000.

The following unaudited pro forma combined financial information gives effect to the acquisition of ~~Waycare~~STS as if it was consummated as of January 1, ~~2021.~~2022. This unaudited pro forma financial information is presented for information purposes only and is not intended to present actual results that would have been attained had the acquisition been completed as of January 1, ~~2021~~2022 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

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 March 31, ~~2022~~2023 and December 31, ~~2021~~2022 the investment in Global Public Safety had a value of $0.

In June 2020, the Company announced a joint venture in which the Company would have a ~~50 percent~~50% equity interest in Roker Inc. (“Roker”). In the third quarter of 2020 and the first quarter of 2021, the Company contributed $75,000 for its 50 ~~percent~~50% equity interest for a total investment of $150,000. This investment is accounted for under the equity method. ~~During the~~ ~~three~~ ~~months ended~~ As of March 31, 2023 and December 31, 2022 ~~and~~ ~~2021,~~ the ~~Company recognized~~investment in Roker had a ~~loss in its unconsolidated investments~~value of ~~$0 and $150,000, respectively.~~$0.

~~The carrying amount of the Company’s investments are included as part of investments in unconsolidated companies in the unaudited condensed consolidated balance sheets.~~ There ~~were 0~~have been no distributions or earnings received from either ~~investment in the~~ ~~three~~ ~~months ended~~ ~~March 31, 2022~~ ~~and~~ ~~2021~~.investment.

In April 2021, ~~in exchange for $1,000,000~~ the Company entered into a SAFE with Roker (the “Roker SAFE”). InFrom ~~October~~ 2021~~and~~ through ~~March~~ 2022the Company ~~invested an additional $250,000 and $150,000, respectively,~~made multiple investments totaling $2,005,000 in the Roker SAFE. The Roker SAFE allows the Company to participate in future equity ~~financings~~financing of Roker, through a share-settled redemption of the amount invested (such notional being the “invested amount”). Alternatively, upon the occurrence of a change of control or an initial public offering (other than a qualified financing), the Company 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.~~ 2023.

Supplemental disclosures of cash flow information for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 were as follows (dollars in thousands):

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 ~~ten~~nine years. Certain of the Company’s leases include options to extend the term of the lease or to terminate the lease prior to the end of the initial term. When it is reasonably certain that the Company will exercise the option, the Company will include the impact of the option in the lease term for purposes of determining total future lease payments.

Operating lease expense from continuing operations for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 was ~~$411,000~~$524,000 and ~~$89,000,~~$408,000, 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 ~~$25,000~~$594,000 and ~~$85,000 f~~or$22,000 for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022, respectively.

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

Supplemental balance sheet information related to leases as of March 31, ~~2022~~2023 was as follows (dollars in thousands):

The following summarizes the change in intangible assets, net from December 31, ~~2021~~2022 to March 31, ~~2022~~2023 (dollars in thousands):

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

These intangible assets are amortized on a straight-line basis over their estimated useful life. Amortization expense ~~attributable to continuing operations~~ for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 was $~~1,001,000~~1,041,000 and $~~409,000~~983,000, r~~espectively~~respectively and is presented as part of depreciation and amortization in the ~~accompanying~~ unaudited condensed consolidated statements of operations.

As of March 31, ~~2022~~2023, 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):

On December ~~31, 2021~~20, 2022, the Company entered into a Promissory Note Agreement (the “2022 Promissory Notes”) with (i) Robert A. Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”), ~~respectively, to reflect the amortized fair value~~an affiliate of Arctis Global, LLC, a 10.3% holder of Common Stock of the ~~notes issued due~~Company based on its Schedule 13G filed with the Securities and Exchange Commission on May 20, 2022, pursuant to which the lenders loaned $1,000,000 to the ~~difference in interest rate~~sCompany. During the first quarter of ~~$0 and $2,000, respectively. The Company is~~ ~~not~~2023, ~~paying current interest on these notes and did~~ ~~not~~ ~~pay~~Robert A. Berman invested an additional $400,000 under the ~~principal due in~~ ~~January 2022~~ same terms as the ~~Company has requested rescission~~2022 Promissory Notes. The lenders were determined to be related parties. No2022 Promissory Notes remain outstanding, as all 2022 Promissory Notes were cancelled in connection with the ~~Firestorm acquisition~~private placement of 2023 Promissory Notes described below.

On January 18, 2023, the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company agreed to issue and ~~is currently~~sell to the investors in ~~litigation~~a private placement transaction (i) up to $15,000,000 in aggregate principal amount of senior secured promissory notes (the “2023 Promissory Notes”), and (ii) warrants to purchase, for an exercise price of $2.00 per share, up to an aggregate of 7,500,000 shares of common stock of the Company, par value $0.0001 per share. In connection with the ~~sellers (see~~initial closing on January 18, 2023, the Company issued $12,500,000 in aggregate principal amount of 2023 Promissory Notes and warrants to purchase 6,250,000 shares of Common Stock, resulting in proceeds to the Company of $12,500,000 before reimbursement of expenses. Pursuant to the terms of the Securities Purchase Agreement, the 2022 Promissory Notes were exchanged for equal principal amounts of the 2023 Promissory Notes which are included in the proceeds of $12,500,000.

As a result of the Securities Purchase Agreement, the 2022 Promissory Notes were exchanged for equal principal amounts of 2023 Promissory Notes. As a result, the 2022 Promissory Notes were cancelled with no further force and effect as of the effective date of the Securities Purchase Agreement.

The 2023 Promissory Notes are a senior secured obligation of the Company and rank senior to all indebtedness of the Company, subject to certain exceptions. The 2023 Promissory Notes have a maturity date of July 18, 2025 (the “Maturity Date”), at which time all remaining outstanding principal and accrued but unpaid interest will be due. The 2023 Promissory Notes bear an interest rate of 12% per annum, and the Company will be required to pay interest quarterly during each calendar year through and including the Maturity Date.

At any time, the Company may prepay all, or any portion of, the 2023 Promissory Notes by redemption at a price equal to (i) 120% of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed on or prior to the first anniversary of issuance, (ii) 115% of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed after the first anniversary of issuance and on or prior to the second anniversary of issuance, or (iii) 110% of the then-outstanding principal amount under the 2023 Promissory Notes plus any accrued interest thereon, if redeemed after the second anniversary of issuance and prior to the Maturity Date (the “Early Redemption Schedule”). The Investors will also have the option of requiring the Company to redeem the 2023 Promissory Notes in accordance with the Early Redemption Schedule if the Company undergoes a fundamental change.

The Company determined that the holder redemption and mandatory redemption options would qualify as derivatives and be subject to accounting under ASC Topic 815, ~~NOTE~~Derivatives and Hedging. The Company believes that the fair value associated with the embedded derivatives related to the holder and mandatory redemption rights are inconsequential.

The Securities Purchase Agreement contains customary representations and warranties of the Company and the investors. The Company has a material relationship with 9two~~- COMMITMENTS AND CONTINGENCIES~~ of the investors, (i) Robert A. Berman, the Company’s Chief Executive Officer and Executive Chairman, and (ii) Arctis Global Master Fund Limited (“Arctis”)., an affiliate of Arctis Global, LLC, a 10.51% holder of Common Stock of the Company based on its Schedule 13G filed with the Securities and Exchange Commission on February 14, 2023. Mr. Berman and Arctis invested $2,000,000 and $6,500,000, respectively, in connection with the $12,500,000 initial closing of the private placement. Mr. Berman has an option, upon request of the Company made within six months of the initial closing, to invest up to an additional $2,500,000 million in a subsequent closing, or series of closings, on the same terms. In aggregate, such subsequent closings may result in the issuance of senior secured notes in the original principal amount of up to $2,500,000 and warrants to purchase up to 1,250,000 shares of Common Stock. These lenders were determined to be related parties.

The Securities Purchase Agreement further provides Arctis with the right to designate a director to be seated on the Company’s board of directors (the “Board”) for a term expiring at the Company’s 2023 annual meeting of stockholders, at which meeting such director shall be nominated by the Board to stand for election by the Company’s stockholders to serve for a term to expire at the next annual meeting of the stockholders. Arctis has a right to a Board designee for so long as it holds the 2023 Promissory Notes, and such right may not be sold or transferred to any party not affiliated with Arctis. As of the filing date of this Quarterly Report on Form 10-Q, Arctis has not exercised its right to designate a director to the Board.

The 2023 Promissory Notes impose certain customary affirmative and negative covenants upon the Company, as well as covenants that restrict the Company and its subsidiaries from incurring any additional indebtedness or suffering any liens, subject to specified exceptions, and restrict the declaration of any dividends or other distributions, subject to specified exceptions. If an event of default under the 2023 Promissory Notes occurs, the investors can elect to redeem the 2023 Promissory Notes for cash in accordance with the Early Redemption Schedule, plus default interest, which accrues at a rate per annum equal to 14% from the date of an event of default.

The warrants issued in connection with the initial closing have an exercise price of $2.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, are immediately exercisable, have a term of five years from the date of issuance and are exercisable on a cash or cashless basis at the election of the holder.

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):

The principal amounts due for long-term notes payable are shown below as of March 31, ~~2022~~2023 (dollars in thousands):

The Company ~~established a valuation allowance against deferred tax assets during~~ ~~2017~~ ~~and has continued to maintain~~maintains a full valuation allowance against its net deferred taxes, outside of the deferred tax liability related to the indefinite lived intangible, through ~~the~~ ~~three~~ ~~months ended~~ March 31, ~~2022~~2023.

The Company files income tax returns in Israel, the United States and in various states. No U.S. Federal, state or foreign income tax audits were in process as of March 31, ~~2022~~2023.

The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the 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 three and three months ended March 31, ~~2022~~2023 and ~~2021,~~2022, the Company did not record any interest or penalties related to unrecognized tax benefits. It is the Company’s policy to record interest and penalties related to unrecognized tax benefits as part of income tax expense. The 2018 through ~~2020~~2021 tax years remain subject to examination by the Internal Revenue Service.

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. On~~ ~~January 30, 2020,~~ the Company filed a Second Amended Complaint (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 the acquisition transaction and monetary damages.

~~The Firestorm Principals answered together with counterclaims on~~ ~~February 28, 2020.~~ ~~Thereafter, on~~ ~~March 30,~~ the Company moved to dismiss the counterclaims against certain directors and officers named as counterclaim-defendants, resulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. Thereafter the Company 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 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.~~

In ~~April 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, which the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, filed 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 dismissal order; that reconsideration motion was denied on~~ ~~February 28, 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 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 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.~~ ~~The Court granted Fordham’s motion to dismiss Rekor’s counterclaims on~~ ~~October 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.~~

InNOTE ~~June 2021,~~ a putative shareholder class action lawsuit (captioned Miller v. Rekor Systems, Inc. et al.) was filed 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~~-59 ~~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. This matter was voluntarily dismissed without prejudice.~~– COMMITMENTS AND CONTINGENCIES

~~In addition, from~~There is no litigation pending against the Company at this time.

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.

~~Effective~~On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company who were founders of two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no.1:19-cv-07767-VEC. The Firestorm Principals answered together with counterclaims on February 28, 2020. In 2020, the Firestorm Principals filed various suits in New York, Delaware and Virginia against directors and officers of the Company, alleging breach of fiduciary duty and libel.

On March ~~18, 2020,~~22, 2023, the Company ~~adopted~~entered into a settlement agreement with the Firestorm Principals. Pursuant to the terms of the settlement agreement, the parties have mutually released and ~~approved an amendment~~discharged all existing and potential actions, causes of action, suits, proceedings, debts, dues, contracts, damages or claims against each other, including certain claims for officer indemnification of the Firestorm Principals. In exchange for the mutual releases, the Company will transfer certain Firestorm assets to ~~increase~~CrisisRisk Strategies, LLC, make a payment of $175,000, and the ~~number~~Firestorm Principals have agreed to the extinguishment of ~~authorized~~all rights to enforce their claims for payment with respect to principal and interest on the promissory notes issued in connection with the Company’s acquisition of Firestorm, and are giving up their rights to exercise the warrants issued in connection with the same.

As a result of the settlement agreement, the Company recorded a reduction to notes payable, the related accrued interest and other assets and liabilities. The Company also cancelled warrants to purchase 631,254 shares of common stock, ~~from 30,000,000 to 100,000,000, $0.0001 par value. The rights~~which were issued in connection with the acquisition of Firestorm.

On March 23,2023, the Company entered into a securities purchase agreement with a single institutional investor that provided for the sale and ~~privileges terms~~issuance by the Company in a registered direct offering of an aggregate of: (i) 6,100,000 shares of the ~~additional authorized~~Company’s common stock, (ii) pre-funded warrants exercisable for up to an aggregate of 772,853 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~~and (iii) warrants to purchase ~~or subscribe~~up 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~~6,872,853 shares of common stock. The ~~Amendment~~offering price per share of common stock and associated warrant was $1.455 and the ~~creation~~offering price per pre-funded warrant and associated warrant was $1.454. Each pre-funded warrant is exercisable for one share of ~~additional~~common stock at an exercise price of $0.001 per share and will expire when exercised in full. The warrants to purchase common stock are exercisable immediately upon issuance, will expire five years following the issuance date and have an exercise price of $1.60 per share. The Company received gross proceeds from the 2023 Registered Direct Offering of approximately $10,000,000. The Offering closed on March 27,2023.

The Company entered into an engagement letter with H.C. Wainwright & Co., LLC to serve as exclusive placement agent, on a reasonable best-efforts basis, in connection with the offering. The Company paid the placement agent an aggregate cash fee equal to 7.5% of the gross proceeds of the offering. The Company also paid the placement agent $75,000 for non-accountable expenses and $16,000 for clearing fees. Additionally, the Company issued designees of the placement agent, as compensation, warrants to purchase up to 481,100 shares of ~~authorized~~ common stock, ~~will~~equal to ~~not~~7.0% ~~alter current stockholders’ relative rights~~of the aggregate number of shares of common stock and ~~limitations.~~pre-funded warrants placed in the offering. The warrants issued to the placement agent have a term of five years and an exercise price of $1.8188 per share of common stock.

In connection with the initial closing of the 2023 Promissory Notes on January 18, 2023, the Company issued warrants to purchase 6,250,000 shares of common stock. The warrants issued in connection with the initial closing have an exercise price of $2.00 per share, subject to adjustment for stock splits, reverse stock splits, stock dividends and similar transactions, are immediately exercisable, have a term of five years from the date of issuance and are exercisable on a cash or cashless basis at the election of the holder. The 2023 Warrants were valued at $5,125,000, at the time of issuance.

The warrants issued with the 2023 Promissory Notes qualified for equity accounting as the warrants did not fall within the scope of ASC Topic 480,Distinguishing Liabilities from Equity.

The Company estimated the fair value of the warrants using the Black-Scholes pricing model. The use of the Black-Scholes pricing model requires the use of subjective assumptions, including the fair value and projected volatility of the underlying common stock and the expected term of the award. The fair value of each warrant granted has been estimated as of the date of the grant using the Black-Scholes pricing model with the following assumptions:

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

On February 24, 2022, the Company entered into an At-the-Market Issuance Sales Agreement (the “2022 Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to create an at the market equity program under which the Company from time to time mayoffer and sell shares of its common stock, par value $0.0001 per share, having an aggregate offering price of up to $50,000,000 (the “Shares”) through or to the Agent. The Agent iswas entitled to a commission equal to 3.0% of the gross proceeds from each sale. The Company incurred issuance costs of ~~approximate~~lyapproximately $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 sold 728,452 shares of c~~ommon~~common stock at a weighted-average selling price of $4.67 per s~~hare~~share in accordance with the 2022 Sales Agreement. Net cash provided from the 2022 Sales Agreement was ~~$3,134,000~~was $3,134,000 after ~~payin~~g ~~$169,000~~paying $169,000 related to the issuance cost, as well as, 3.0% or $102,000 related to cash commissions provided to the Agent.

~~Waycare Acquisition~~In December of 2022 the Company terminated the 2022 Sales Agreement.

In connection with the acquisition as described in NOTE 2 – ACQUISITIONS, the Company ~~issued2,784,474~~issued798,666 shares of the Company’s common stock as part of the consideration.

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~~ ~~“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 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.

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.

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

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

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.~~

~~A summary of the warrant activity for the Company for the period ended~~ ~~March 31, 2022~~ ~~is as follows:~~

A summary of the warrant activity for the Company for the period ended March 31, 2023 is as follows:

In August 2017, the Company approved and adopted the 2017 Equity Award Plan (the “2017 Plan”). The 2017 Plan permits the granting of stock options, stock appreciation rights, restricted and unrestricted stock awards, phantom stock, performance awards and other stock-based awards for the purpose of attracting and retaining quality employees, directors and consultants. 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 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 March 31, ~~2022~~2023 and ~~2021~~2022 was was $0 and $28,000, ~~and $30,000, respectively,~~respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the ~~accompanying~~ unaudited condensed consolidated statements of operations.

A summary of stock option activity under the Company’s 2017 Plan for the period ended March 31, ~~2022~~2023 is as follows:

As of March 31, ~~2022~~2023, there was ~~$19,000~~ $0 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 0.23 years.~~Plan.

Stock compensation expense related to RSU’s for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 was was $1,112,000 and $1,872,000, ~~and $751,000, respectively,~~respectively, and is presented, based on the awardees operating department, as general administrative, selling and 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 three months ended March 31, ~~2022~~2023 is as follows:

~~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 March 31, ~~2022~~2023, ~~ther~~ethere was ~~$15,030,000~~$6,678,000 of ~~unrecognized~~unrecognized stock compensation expense related to unvested RSUs granted under the 2017 Plan that will be recognized over an average remaining p~~eriod~~period of ~~2.20~~2.09 years.

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

~~As the Company had a net loss for the~~ ~~three~~ ~~months ended~~ ~~March 31, 2022~~~~, the following 3,858,220 potentially dilutive securities were excluded from diluted loss per share:~~ ~~692,311~~ ~~for outstanding warrants,~~ ~~996,865~~ ~~related to outstanding options and~~ ~~2,169,044~~ ~~related to outstanding RSUs.~~

~~As the Company had a net loss for the~~ ~~three~~ ~~months ended~~ ~~March 31, 2021~~, the following 2,436,750 potentially dilutive securities were excluded from diluted loss per share: 714,293 for outstanding warrants, 1,167,852 related to outstanding options and 554,605 related to outstanding RSUs.

~~The Company issued an additional 1,521,755 shares of its common stock in exchange for net cash of $4,928,000 under the~~ ~~2022~~ ~~Sales Agreement.~~

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

The exercise of the pre-funded warrants was determined to be virtually assured because the underlying common shares will be issued for little or no cash consideration. As a result, the Company determined that all necessary conditions for issuance of the underlying common shares were met when the pre-funded warrants were issued and therefore, the 772,853 pre-funded warrants are included in the denominator of both the basic and diluted loss per share.

As the Company had a net loss for the three months ended March 31, 2023, the following 16,375,816 potentially dilutive securities were excluded from diluted loss per share: 14,422,307 for outstanding warrants, less the 772,853 pre-funded warrants, 828,134 related to outstanding options and 1,898,228 related to outstanding RSUs.

As the Company had a net loss for the three months ended March 31, 2022, the following 3,858,220 potentially dilutive securities were excluded from diluted loss per share: 692,311 for outstanding warrants, 996,865 related to outstanding options and 2,169,044 related to outstanding RSUs.

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

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”~~“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, ~~2021,~~2022, 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:

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, ~~2021~~2022 (the ~~“2021~~“2022 Annual Report”) and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.

~~We are~~Rekor’s mission is to become the premier provider of roadway intelligence and data-driven mobility insights on a global scale. As a technology company, we are dedicated to transforming the public safety, urban mobility, and transportation management market segments worldwide with our cutting-edge, AI-driven solutions tailored specifically to the unique needs of each sector. Our commitment to delivering mission-critical solutions for roadway intelligence is driven by our vision of creating smarter, safer, and more sustainable streets for all communities. To achieve this vision, we strive to collect, connect, and organize the world's mobility data, harnessing its full potential to provide the most essential, real-time, and predictive actionable mobility insights. Our innovative approach is designed to make roadway mobility data readily accessible and useful, empowering our customers to make informed decisions and drive meaningful progress towards a better future.

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

Rekor has been dedicated to being a leader in ~~the development~~roadway intelligence by collecting, connecting, and ~~implementation~~organizing global mobility data since its inception. Today, our comprehensive portfolio offers multiple cutting-edge, AI-driven, edge-based Internet of ~~intelligent~~Things ("IoT") devices for roadside data collection, a vast array of curated and integrated data sets from a network of transportation ecosystem data providers, tailored platforms, applications, and data streams that provide accurate, real-time, and predictive actionable insights for any moving objects on roadways.

We specialize in collecting and aggregating mobility-related data from multiple sources into our Rekor One™ roadway intelligence engine, transforming this data into knowledge and actionable insights, and securely distributing those insights to multiple users across our software platforms and applications. Our proprietary technologies use recent advances in artificial intelligence, machine learning, data analysis, edge processing, and communications. They are designed to be integrated into existing roadway and roadway sensor infrastructure ~~focused on addressing~~to deliver real-time and predictive analytics that address critical challenges ~~across~~in transportation management, public safety, urban mobility, and other key commercial markets. ~~With~~

By applying a ~~real-time~~multi-layer architectural approach and protocols inspired by the Open System Interconnection ("OSI") model, which was instrumental in creating computer operating systems in the 1970s and the internet in the 1980s, we are collaborating with members of the Rekor Partner Network to integrate various transportation infrastructure systems into a cohesive network of roadway intelligence ~~platform driven by deep access~~assets and insights. This involves consolidating fragmented and disparate systems, as well as adding new layers of connectivity, to ~~data, AI-powered software,~~create a unified infrastructure. To achieve this goal, we are working closely with a wide range of stakeholders, including local and smart optical devices at-the-edge, we combine our industry expertise and advanced proprietary technologies to deliver unrivaled insights that increase roadway safety, efficiency, and sustainability while enabling safer, smarter, and more connected cities and communities. We provide products and services across 80 countries as we deliver transformative mission-critical intelligent infrastructure solutions and services forfederal government agencies, law enforcement, transit providers, infrastructure owners/operators, automotive OEMs, and ~~commercial clients in the United States~~technology, communications and ~~around the world.~~ data providers.

~~Society~~At Rekor, we are building a future for our customers where the mobility internet is ~~increasingly digital, automated,~~interactive, generating 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 ofdistributing real-time transportation ~~mobility, and public safety. The cost, complexity and interdependency of these systems have made many organizations slow~~intelligence to ~~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,~~improve traffic management, public safety, maintenance, and ~~environmental challenges to cities, states,~~emergency services, and ~~metropolitan areas. Today’s challenges cannot be solved~~planning agencies, as well as 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.

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 can account for connected and autonomous vehicles. ~~With these~~Our primary objective has been and remains to develop unique and differentiated AI-based and edge-based IoT that will play a central role in facilitating this process, while aligning with key partners in the transportation ecosystem to provide the most comprehensive view of roadways. We will continue to optimize our investments ~~we estimate an addressable global intelligent~~to uniquely combine physical and digital infrastructure ~~market~~that is foundational to a new operating system for the roadways. As agencies plan for and build the transportation network of ~~$148 billion by 2026.~~the future, Rekor expects to play a critical and disproportionately valuable role in meeting the essential need for real-time and predictive roadway intelligence.

Rekor's cutting-edge technology and domain expertise gives us a position of strength in the emerging field of roadway intelligence. Rekor One™ roadway intelligence engine is purpose-built to be a single source of truth, fueled by rich data and powered by AI. With access to multiple sources of data and our ~~award winning~~award-winning AI-driven innovations, we ~~believe we have established~~provide a ~~leadership position in intelligent infrastructure solutions that puts us at the center~~range of ~~this emerging opportunity. With our advanced technology and domain expertise, we have developed~~ solutions that address diverse use cases across ~~a number of~~various public and private sector segments. Our platform facilitates the efficient collection, analysis, and distribution of vast amounts of data, unlocking real-time and predictive operational insights like never before. Using our ~~proprietary~~advanced technology and centralized platform, ~~to maximize the value of our technology to customers,~~ we are ~~well positioned~~well-positioned to provide a single-source of truth for roadway intelligence, and help governments and businesses ~~collect, analyze and~~ turn infrastructure data into actionable insights ~~with new products and services~~ that increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.

~~As described below, we have concentrated on developing~~ our ~~intelligent infrastructure~~roadway intelligence solutions ~~to work~~is the Rekor One roadway intelligence engine. It is through ~~a single integrated platform, which creates a unique, market-advantaged position for us. The volume, variety, velocity, and veracity of data~~this engine that we ~~capture~~deliver a range of solutions that cater to public safety, urban mobility, transportation management, and ~~apply to~~commercial markets. Within Rekor One, 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 usingalgorithms curate data ~~to build and improve our models.~~

Today, we can look at the roadway and 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 inferences, predictive analytics, and insights. We are rapidly growing the geographic area connected by smart opticalfrom multiple sources, including edge-based IoT devices, ~~at-the-edge to the open architecture 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~~sensors, and process it through our models. This reduces our clients’ need to invest in legacy system upgrades and gives them the ability to gain additional value from existing infrastructure. Beyond this, we are augmenting our data through a growing network of transportation data ~~partners. This provides~~partners, unlocking multiple trillions of additional data ~~points that unlock further~~points. We use this data to generate multi-dimensional insights in real-time, and predictive operational insights about what is happening in a given transportation environment at every moment. Example data sources from our partner network include mobility, navigation, and traffic applications, in-vehicle data, connected, autonomous vehicles (“CAV”) datasets, weather, supply chain, event management, and a rapidly growing list of customer-provided and crowd-sourced data. The more data we capture and 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 AI-driven predictive analytics tothat leverage patterns of what happened in the past so that we can forecast what will happen in the ~~next five minutes, in 12 or 24 hours, and even days and months into the~~ future. ~~From these~~These insights enable our customers ~~can~~to make ~~better informed~~better-informed proactive decisions and achieve improved operational efficiency through ~~a more~~ strategic ~~allocation of resources. All of this is facilitated by our proprietary Rekor One™ intelligence platform.~~resource allocation.

~~Fueled by Data~~Rekor's solutions can support diverse use cases, including real-time incident detection and ~~Artificial Intelligence~~

~~At the core of all our intelligent infrastructure solutions is the Rekor One intelligence platform. Fueled by rich~~response, data driven traffic operations and powered by AI, Rekor One is purpose-built to be a single source of truth and insights serving multiple customer segments and multiple missions. From Rekor One, we can simultaneously deliver vertical-specific solutions for traffic management, proactive traffic calming around events, Federal Highway Administration ("FHWA") mandated vehicle classification, counts, and speed collection and reporting, analytics for bicycle, pedestrians, and other micromobility modes, patterns and hot spots for greenhouse gas emissions, high-definition ("HD") video management and traffic surveillance, law enforcement and intelligence-based policing, citation management, contactless compliance and enforcement, among others. With our advanced technology and domain expertise, we are well-equipped to serve multiple public ~~safety,~~agencies and ~~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~~private sector segments with 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.~~intelligence.

~~Built on the foundation of Rekor One, we deliver vertical-specific solutions for traffic management, public safety, and commercial markets.~~

We ~~believe the world is~~find ourselves at ~~an inflection point. In the next five years,~~a pivotal moment in history, where governments ~~will make significant investments to improve aging infrastructure, roadway conditions,~~are investing heavily in upgrading and ~~public safety via modern, efficient, and connected~~digitizing outdated infrastructure. Recent technological ~~developments~~advances, such as edge- and cloud-based computing, artificial intelligence, and the internet of things, ~~edge- and cloud-based computing, and advances in rich data management~~ have ~~put~~given us ~~in a unique position~~an unprecedented opportunity to ~~help~~ revolutionize mobility ~~through intelligent infrastructure~~ and ~~close~~bridge the ~~gap~~divide between rapidly evolving technology and aging ~~legacy~~ infrastructure. These endeavors are not ~~just our aspirational goals,~~simply aspirations, but things we’re working on now. By aggregating data from optical sensors, connected vehicles, and third-party providers, processing it using artificial intelligence, and packaging it to provide real-time insights and long-term solutions for intelligent infrastructure,active pursuits we ~~sustainably help governments and businesses address both issues of aging infrastructure and the unprecedented mobility, public safety, economic, and environmental challenges they face.~~are currently engaged in as described in detail below.

~~We believe our leadership in intelligent infrastructure~~Rekor is a technology company that provides state-of-the-art AI-driven roadway intelligence solutions ~~advanced technology,~~to enhance public safety, urban mobility, and ~~breadth of use cases across multiple industries puts us in an advantaged market position at~~transportation management. By collecting, connecting, and organizing the ~~forefront of developing a new economy~~world’s mobility data, Rekor delivers precise, real-time, and ~~poised~~predictive actionable insights for any moving objects on roadways. Our unwavering dedication to unlock massive gains as we provide governments and businesses with new products and services that use trillions of intelligent infrastructure interactions to increase safety and sustainability, drive revenue, and power innovation for the benefit of billions of people.

~~Our operations are conducted~~delivering mission-critical solutions is propelled by our ~~wholly-owned subsidiaries,~~vision of helping to creating intelligent, secure, and sustainable streets for all communities. The ultimate objective is for Rekor ~~Recognition Systems, Inc. (“~~to be the foundation of a digital-enabled internet and operating system for roadways that will enable smarter, safer, and more eco-friendly mobility for all. Rekor ~~Recognition”)~~is making mobility data widely accessible and ~~Waycare Technologies, Ltd. (“Waycare”).~~

useful for all, empowering customers to make informed decisions and drive meaningful progress towards a brighter future.

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:

~~We derive~~The Company derives its revenues ~~substantially~~primarily from the sale of ~~software, hardware~~its roadway data aggregation, traffic management and ~~related services.~~

~~Software sales~~licensing offerings. These offerings include ~~subscriptions for the use~~a mixture 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 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~~data collection, implementation, engineering, customer support and ~~implementation~~maintenance services as well as ~~management~~software, hardware. Revenue is recognized upon transfer of control of promised products and services ~~such as violation notices, billing~~to the Company’s customers, in an amount that reflects the consideration the Company expects to receive in exchange for those products and collections, website portals and call centers related to programs that employ our software solutions. 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 the pilot program.services.

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 activities. Direct costs of revenues also include production expenses, data subscriptions, sub-consultant services and other expenses that are incurred in connection with our revenue-generating activities. Direct costs of revenues exclude 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.~~they incur.

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

We expect our general and administrative expenses to continue to remain high for the foreseeable future due to the costs associated with our growth and the costs of accounting, compliance, insurance, and investor relations as a public company. Our general and administrative expenses may fluctuate as a percentage of our revenue from period to period due to the timing and extent of these expenses. However, our general and administrative expenses have decreased as a percentage of our revenue and, to the extent we continue to be successful in generating increased revenue, we expect our general and administrative expenses to decrease as a percentage of our revenue over the long term.

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~~will require significant investments in our sales and marketing expenses to ~~grow revenue,~~continue the rate of growth in our revenues, further penetrate ~~the market~~existing markets and expand our customer ~~base.~~base into new markets.

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

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

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

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.

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, ~~2021.~~2022.

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.

Our historical operating results in dollars are presented below. ~~The~~This analysis of operation is solely related to continuing operations and does not consider the results of discontinued operations.

Comparison of the Three Months Ended March 31, 2023 and the Three Months Ended March 31, 2022

The increase in revenue for the three months ended March 31, ~~2022 and~~2023, compared to the ~~Three months ended March 31, 2021~~

~~The decrease in revenue for the~~ three months ended March 31, 2022 ~~compared~~, was primarily attributable to our recent acquisition. During the three months ended March 31, ~~2021,~~2023, revenue attributable to our acquisition of STS was ~~a result of a decrease in product and service revenue in the current period.~~ $2,754,000. As part of the ongoing development of our ~~change in~~ selling strategy, we have ~~focused~~been focusing on a sales ~~model~~ that ~~employs~~employ contracts with recurring revenue. We expect these contracts to provide a more predictable stream of revenues, compared to one-time sales of hardware and software licenses which are generally more difficult to predict. During the three months ended March 31, 2021, there was one customer who accounted for $1,673,000 of revenue as a result of a one-time sale of hardware and 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 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 services and solutions we provide to existing customers, and also facilitating cooperation between our existing customers and new customers as part of a broader information network.

For the three months ended March 31, ~~2022,~~ 2023, cost of revenue, excluding depreciation and amortization increased ~~by $61,000~~ compared to the corresponding prior periods primarily due to an increase in personnel and other direct costs such as hardware that were incurred to support our ~~new go-to-market strategy.~~increase in revenue

The ~~increase~~decrease in general and administrative expenses during the three months ended March 31, 2023, compared to the three months ended March 31, 2022 ~~compared~~, was primarily due to a $1,282,000 decrease in personnel costs which was primarily related to a decrease in bonus and share-based compensation expense. This decrease in expense was partially offset by an increase in our professional services expenses of $454,000 for the three months ended March 31, ~~2021, were primarily due~~2023, compared to ~~a $2,319,000 increase~~the three months ended March 31, 2022. The decrease in ~~personnel costs~~expenses was also offset by additional expenses related to ~~an increase in headcount, including a $473,000 increase in stock-based compensation.~~ our acquisition of STS.

The increase in selling and marketing expenses during the three months ended March 31, 2023, compared to the 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~~targeted sales ~~efforts.~~efforts related to the acquisition of STS. In connection with these efforts, for the three months ended March 31, 2023, there was an increase in staffing to support our growth plan which led to a ~~$513,000~~$540,000 increase in personnel costs ~~including a $125,000 increase in stock-based compensation.~~which includes increased expenses due to our sales incentives and higher revenue.

The increase in research and development expenses during the three months ended March 31, 2023, compared to the three months ended March 31, 2022 ~~compared~~, was primarily attributable to development expenses as we completed and began production deployment of our count, class and speed application. For 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 an increase in headcount and hours associated with research and development activities. In the current period, 2023, there was an increase in staffing to ~~support the Company’s~~develop new transportation management products which led to a ~~$1,811,000~~$848,000 increase in personnel ~~costs, including a $476,000 increase in stock-based compensation.~~costs.

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

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

Gain on extinguishment of debt and the increase to other income is a result of the settlement agreement in the Firestorm litigation. As part of the settlement, we recorded a reduction to notes payable, the related accrued interest and other ~~income remained consistent period over period.~~ assets and liabilities which we part of the Firestorm entities.

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):

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 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.

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

Adjusted Gross Margin for the three months ended March 31, ~~2022~~2023 and ~~2021 decreased~~2022 increased to ~~45.0%~~53.6% from ~~54.4%~~48.3%~~, respe~~. ~~ctively. Fluctuations~~As Company continues to scale and standardize it product offerings it has begun to realize operational efficiencies that have resulted in an improved Adjusted Gross Margin are primarily the result of the mix of software and hardware sales experienced in the quarter. Software sales carry a higher margin than hardware sales as there are fewer costs associated with software 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 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 establish the program, which will not be incurred again if the pilot program is converted into a long-term program.Margin.

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.

Our recurring revenue model and revenue retention rates provide significant visibility into our future operating results and cash flow from operations. This visibility enables us to better manage and invest in our business.The following table sets forth our recurring revenue for the periods included:

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.

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 three months ended March 31, ~~2022~~2023 we won contracts ~~value~~dvalued at $~~1,525,000~~12,083,000, compared to $~~2,531,000~~1,525,000 of contracts won for the three months ended March 31, ~~2021~~2022. This ~~decline~~ represents a $~~1,006,000~~10,558,000 or ~~40%~~692% ~~decline,~~increase, period over period. The increase in total contract value is primarily related to a large statewide contract that closed with the Florida DOT in which we will provide our class, count and speed application.

As of March 31, ~~2022,~~2023, we had ~~approxim~~approximately $24,330,000~~ately $21,288,000~~ of contracts that were closed prior to March 31, ~~2022~~2023 but have a contractual period beyond March 31, ~~2022~~2023. This represents ~~a decline~~an increase of ~~$1,299,000~~$2,918,000 or 6%14% compared to ~~$22,587,000~~$21,412,000 of performance obligations as of December 31, ~~2021.~~ 2022. These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately ~~41%~~67% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.

The ~~decrease~~increase in total ~~contract value and~~ performance obligations is ~~partially~~primarily 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.acquisition of STS.

As of March 31, ~~2022,~~2023, we had material leased building space at the following locations in the U.S. and Israel:

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

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

Net cash used in operating activities for the three months ended March 31, ~~2022~~2023 had a net decrease of ~~$8,997,000,~~$2,770,000, which was attributable to the increase in ~~the loss from continuing operations~~non-cash related expenses such as depreciation of ~~$12,601,000. This amount was~~property and equipment and amortization of debt financing costs. These amounts were partially offset by an increase in ~~share-based compensation expense, a non-cash adjustment, which increased $1,119,000 to $1,900,000 for~~the loss from continuing operations. During the three months ended March 31, ~~2022~~2023 compared to ~~$781,000 for~~ the three months ended March ~~31, 2021. This increase is~~2022, we had large, non-recurring, cash outlays related to professional services and payments to vendors carried from 2022 due to cash constrains, however, even with these factors we were able to improve the ~~number of equity incentive shares that were issued~~overall cash used in operating activities and believe we will be able to ~~employees and directors.~~ continue to show improvements in our operating cash flow.

The net decrease in net cash used in investing activities of ~~$22,530,000~~$1,236,000 was primarily due to aan decrease in ~~short-term investments that were previously made in during~~ the ~~three months ended March 31, 2021,~~outflow of ~~$23,994,000 which were previously invested in U.S. Treasury Bills that have maturity dates over three months, but less than a year.~~funds used for capital expenditures.

Net cash provided by financing activities for the three months ended March 31, ~~2022 decreased~~2023 increased by ~~$67,386,000~~$17,530,000 from the prior three month period ended March 31, ~~2022.~~2022. During the three months ended March 31, ~~2022,~~2023, as part of our 2023 Promissory Notes and the 2023 Registered Direct Offering, we received net proceeds of $11,100,000 and $9,159,000, respectively. In the prior comparable quarterly period, through our 2022 Sales Agreement, we received net proceeds, after deducting the underwriting discounts and commissions and offering expenses payable by us, of $3,134,000. In the 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 months ended March 31, ~~2022~~2023 and ~~2021,~~2022, we funded our operations primarily through cash from operating activities, the issuance of debt and the sale of equity. As of March 31, ~~2022,~~2023, we had cash and cash equivalents from continuing operations of ~~$15,593,000~~$12,444,000 and working capital of ~~$9,297,000,~~$6,974,000, as compared to cash and cash equivalents of ~~$26,600,000~~$2,178,000 and a working capital deficit of ~~$16,989,000~~$6,010,000 as of December 31, ~~2021.~~2022.

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

We have generated losses since our inception and have relied on cash on hand and external sources of financing to support cash flow from operations. We attribute losses to non-capital expenditures related to the scaling of existing products, development of new products and service offerings and marketing efforts associated with these products and services. As of and for the three months ended March 31, 2023, we had working capital from continuing operations of $6,974,000 and a loss from continuing operations of $12,682,000.

Our cash increased by $10,555,000 for the three months ended March 31, 2023 primarily due external financing which was offset by the loss from continuing operations of $12,682,000.

Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient to fund operations for the next twelve months following the issuance of these unaudited condensed financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern.

The Company is actively monitoring its operations, the cash on hand and working capital. The Company is currently in the process of reviewing external financing options in order to sustain its operations. During the third quarter of 2022 and the first quarter of 2023, the Company implemented strategic expense reductions in certain areas to better align its operations with near term revenue generating opportunities. If additional financing is not available, the Company has contingency plans to further reduce or defer expenses and cash outlays in the look-forward period.

On June 17, 2022, the Company completed its acquisition of Southern Traffic Services ("STS") by acquiring 100% of the issued and outstanding capital stock of STS. The acquisition included total consideration of $12,799,000 including; cash consideration of $6,500,000, 798,666 shares of the Company’s common stock, valued at $2,000,000, $1,001,000 related to an earnout based on the achievement of certain performance metrics, $1,298,000 contingent on the closing of a future contract and a $2,000,000 note. As a result of the transaction, STS has become a wholly-owned subsidiary of the Company.

On January 18, 2023, the Company entered into a securities purchase agreement with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $15,000,000 in aggregate principal amount of senior secured promissory notes, and (ii) warrants to purchase up to an aggregate of 7,500,000 shares of common stock of the Company. In connection with the initial closing on January 18, 2023, the Company issued $12,500,000 in aggregate principal amount of notes and warrants to purchase 6,250,000 shares of Common Stock, resulting in proceeds to the Company of $12,500,000 before reimbursement of expenses.

On March 23, 2023, the Company entered into a securities purchase agreement with a single institutional investor that provided for the sale and issuance by the Company in a registered direct offering of an aggregate of: (i) 6,100,000 shares of the Company’s common stock, (ii) pre-funded warrants exercisable for up to an aggregate of 772,853 shares of common stock, and (iii) warrants to purchase up to 6,872,853 shares of common stock. The offering price per share of common stock and associated warrant was $1.455 and the offering price per pre-funded warrant and associated warrant was $1.454. Each pre-funded warrant is exercisable for one share of common stock at an exercise price of $0.001 per share and will expire when exercised in full. The warrants to purchase common stock became exercisable immediately upon issuance, will expire five years following the issuance date and have an exercise price of $1.60 per share. The Company received gross proceeds from the Registered Direct Offering of approximately $10,000,000. The Offering closed on March 27, 2023.

The Company entered into an engagement letter with H.C. Wainwright & Co., LLC to serve as exclusive placement agent, on a reasonable best-efforts basis, in connection with the offering. The Company paid the placement agent an aggregate cash fee equal to 7.5% of the gross proceeds of the offering. The Company also paid the placement agent $75,000 for non-accountable expenses and $16,000 for clearing fees. Additionally, the Company issued designees of the placement agent, as compensation, warrants to purchase up to 481,100 shares of common stock, equal to 7.0% of the aggregate number of shares of common stock and pre-funded warrants placed in the offering. The warrants issued to the placement agent have a term of five (5) years and an exercise price of $1.8188 per share of common stock.

As of March 31, 2023, we did not have any material commitments for capital expenditures.

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 “2021 Public Offering”). The net proceeds to us, after deducting the underwriting discounts and commissions and offering expenses payable by us, were approximately $70,125,000.

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.

~~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 our common stock, par value $0.0001 per share, having an aggregate offering price of up to $50,000,000 (the “Shares”) through or to the Agent. The Agent is entitled to a commission equal to 3.0% of the gross proceeds from each sale. We incurred issuance costs of approximately ~~$169,000 rel~~ated 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, 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~~ ~~aft~~er ~~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.~~

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

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 March 31, ~~2022.~~2023.

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.

On August 19, 2019, we filed suit in the United States District Court for the Southern District of New York against three former executives of the Company who were founders of two related former subsidiaries (the “Firestorm Principals”)—Rekor Systems, Inc. v. Suzanne Loughlin, et al., Case no. 1:19-cv-07767-VEC. 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 the acquisition transaction and monetary damages.

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, resulting in the Firestorm Principals voluntarily dismissing the counterclaims against those parties. Thereafter the Company 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 we opposed. In addition, on December 9, 2019, the Firestorm Principals filed a motion for an interim award of expenses and attorney’s fees. With respect to the Firestorm Principals’ motion for judgment on the pleadings, the Court’s November 23, 2020 order denied that motion in its entirety. In that same order, the Court granted in part and denied in part the Firestorm Principals’ fee advance motion.

On April 27, 2021, the Firestorm Principals filed a notice of motion for partial summary judgment, seeking summary judgment on several of the Company’s claims and the Firestorm Principals’ counterclaims, which the Company, along with counterclaim-defendants Firestorm Franchising, LLC and Firestorm Solutions, LLC, opposed. 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. 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 the case.

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

On March 22, 2023, the ~~suits moved~~Company entered into a settlement agreement with the Firestorm Principals. Pursuant to ~~dismiss these complaints. At this stage of these litigations, suits against two~~the terms of the ~~directors~~settlement agreement, the parties have ~~been dismissed. On September 28, 2021, the Court issued an order denying the motion to dismiss one~~mutually released and discharged all existing and potential actions, causes of action, suits, proceedings, debts, dues, contracts, damages or claims against each other, including certain claims for officer indemnification of the ~~actions in Delaware. On October 21, 2021,~~Firestorm Principals. In exchange for the ~~Delaware Action defendants filed~~mutual releases, the Company will transfer certain Firestorm assets to CrisisRisk Strategies, LLC, make a ~~motion~~payment of $175,000, and the Firestorm Principals have agreed to the extinguishment of all rights to enforce their claims for reconsideration of the Court’s dismissal order; that reconsideration motion was denied on February 28, 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 motionpayment with respect to principal and interest on the ~~defamation claim on jurisdictional grounds. The defamation claim will now be challenged on substantive grounds.~~promissory notes issued in connection with the Company’s acquisition of Firestorm, and are giving up their rights to exercise the warrants issued in connection with the same.

~~At this stage~~As a result of ~~these litigations, we are unable~~the settlement agreement, the Company recorded a reduction to ~~render an opinion regarding~~notes payable, the ~~likelihood~~related accrued interest and other assets and liabilities already presented as discontinued operations. The Company also cancelled warrants to purchase 631,254 shares of ~~a favorable outcome. We intend to continue vigorously litigating its claims~~common stock, which were issued in connection with the acquisition of Firestorm. The settlement also results in there being no litigation pending against the ~~Firestorm Principals and believe that the Firestorm Principals’ remaining counterclaims and suits against Rekor directors and officers are without merit.~~Company at this time.

On January 31, 2020, our wholly-owned subsidiary, OpenALPR, filed a complaint in the US District Court for the Western District of Pennsylvania against a former customer, Plate Capture Solutions, Inc. (“PCS”) for breach of software license agreements pursuant to which software was licensed to PCS. On June 14, 2020, PCS filed its operative answer to the Complaint. On June 21, 2020, PCS filed a motion to join us and another entity, OpenALPR Technology, Inc., as parties to the litigation and made claims against them and 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. The Court granted Fordham’s motion to dismiss our counterclaims on October 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.

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 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 sought damages on behalf of shareowners who acquired our stock between April 12, 2019 and May 25, 2021. The court appointed a lead plaintiff. In November 2021, the plaintiff filed an order of dismissal, seeking to voluntarily dismiss without prejudice. This matter was voluntarily dismissed without prejudice.

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

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 31, 2022. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.

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

As ~~a result~~previously disclosed under Item 3.02 in the Company’s Current Report on Form 8-K filed with the SEC on June 17, 2022, as part 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.

~~On August 18, 2021,~~purchase price the Company ~~completed its acquisition~~issued to the sellers of Waycare by acquiring 100% of the issued and outstanding shares of Waycare. As a result of the acquisition, Waycare is a wholly-owned subsidiary of the Company. The aggregate purchase price for the shares of Waycare was $61,100,000, less the amount of Waycare’s debt and certain transaction expenses and subject to a customary working capital adjustment. The purchase price was comprised of $40,813,000 of cash and 2,784,474STS 798,666 unregistered shares of the Company’s common stock, valued at ~~$20,287,000. As a result~~$2,000,000. The stock consideration paid to the sellers was issued pursuant to an exemption under Section 4(a)(2) of the Securities Act of 1933, as amended, and/or Regulation D, as promulgated thereunder.

As previously disclosed under Item 3.02 in the Company’s Current Report on Form 8-K filed with the SEC on January 18, 2023, the Company entered into a securities purchase agreement with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction ~~Waycare became a wholly-owned subsidiary~~(i) up to $15,000,000 in aggregate principal amount of senior secured promissory notes, and (ii) warrants to purchase up to an aggregate of 7,500,000 shares of common stock of the Company. ~~Additionally, pursuant~~In connection with the initial closing on January 18, 2023, the Company issued $12,500,000 in aggregate principal amount of notes and warrants to purchase 6,250,000 shares of Common Stock, resulting in proceeds to the ~~terms~~Company of ~~the Waycare purchase agreement, the Company reserved for issuance to Waycare’s continuing employees an aggregate~~$12,500,000 before reimbursement 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.expenses.

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, legal, financing costs, acquisition costs and sales and marketing expenses related to new product development and our strategic shift to develop and promote the capabilities of our technology offerings.

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.

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	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	2930
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	4143
ITEM 4.	CONTROLS AND PROCEDURES	4143

PART II - OTHER INFORMATION		4244
ITEM 1.	LEGAL PROCEEDINGS	4244
ITEM 1A.	RISK FACTORS	4345
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	4345
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	4445
ITEM 4.	MINE SAFETY DISCLOSURES	4445
ITEM 5.	OTHER INFORMATION	4445
ITEM 6.	EXHIBITS	4546

SIGNATURES		4647

	*Three Months Ended March 31,*						*Three Months Ended March 31,*
	*2022*			*2021*			*2023*			*2022*
Revenue	$	3,608		$	4,216		$	6,185		$	2,975
Cost of revenue, excluding depreciation and amortization		1,983			1,922			2,868			1,537

Operating expenses:
General and administrative expenses		7,388			4,829			7,201			7,308
Selling and marketing expenses		1,352			937			1,890			1,352
Research and development expenses		4,092			1,222			4,958			4,092
Depreciation and amortization		1,399			614			1,955			1,364
Total operating expenses		14,231			7,602			16,004			14,116

Loss from operations		(12,606	)		(5,308	)		(12,687	)		(12,678	)
Other income (expense):
Interest expense		(9	)		(32	)
Gain on extinguishment of debt								527			-
Interest expense, net								(761	)		(9	)
Other income		14			16			239			14
Total other income (expense)		5			(16	)		5			5
Loss before income taxes and equity method investments		(12,601	)		(5,324	)
Income tax provision		0			(3	)
Equity in loss of investee		0			(76	)
Loss before income taxes								(12,682	)		(12,673	)
Income tax benefit (provision)								-			-
Net loss from continuing operations		(12,601	)		(5,403	)		(12,682	)		(12,673	)
Net loss from discontinued operations		0			(3	)
Net income from discontinued operations								-			72
Net loss	$	(12,601	)	$	(5,406	)	$	(12,682	)	$	(12,601	)
Comprehensive loss:
Net loss from continuing operations		(12,601	)		(5,403	)
Change in unrealized gain on short-term investments		0			2
Total comprehensive loss from continuing operations		(12,601	)		(5,401	)
Total comprehensive loss	$	(12,601	)	$	(5,404	)
Loss per common share from continuing operations - basic and diluted		(0.29	)		(0.15	)		(0.23	)		(0.29	)
Loss per common share discontinued operations - basic and diluted		0			(0.00	)
Earning per common share discontinued operations - basic and diluted								-			0.00
Loss per common share - basic and diluted	$	(0.29	)	$	(0.15	)	$	(0.23	)	$	(0.29	)

Weighted average shares outstanding
Basic and diluted		44,087,911			35,944,355			54,680,048			44,087,911

	●	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

	*Three Months Ended March 31,*				*Three Months Ended March 31,*
	*2022*		*2021*		*2023*		*2022*
Recurring revenue	$	1,695	$	864	$	4,204	$	1,695
Product and service revenue		1,913		3,352		1,981		1,280
Total revenue	$	3,608	$	4,216	$	6,185	$	2,975

	*Three Months Ended March 31,*
	*2022*		*2021*
Government customers	$	2,003	$	3,105
Commercial customers		1,605		1,111
Total revenue	$	3,608	$	4,216

2022, remaining	$	1,927
2023		651
2024		303
2025		124
2026		56
Thereafter		6
Total	$	3,067

2023, remaining	$	3,802
2024		1,048
2025		480
2026		186
2027		70
Thereafter		5
Total	$	5,591

	*March 31, 2023*		*December 31, 2022*
Payroll and payroll related	$	1,828	$	2,483
Right of offset to restricted cash		373		243
Other		1		46
Total	$	2,202	$	2,772

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

Operating lease right-of-use lease assets	$	9,548		$	9,509

Current portion of lease liability	$	676		$	1,074
Long-term portion of lease liability		14,259			13,867
Total lease liability	$	14,935		$	14,941

Weighted average remaining lease term - operating leases (years)		9.88			9.22

Weighted average discount rate - operating leases		9.0	%		9.0	%

2022, remaining	$	837
2023		2,293
2023, remaining				$	1,776
2024		2,254			2,320
2025		2,271			2,295
2026		2,306			2,258
2027					2,302
Thereafter		13,628			11,159
Total lease payments	$	23,589		$	22,110
Less imputed interest		8,654			7,169
Maturities of lease liabilities	$	14,935		$	14,941

	*December 31, 2021*		*Additions*		*Amortization*			*March 31, 2022*		*Useful Life (in Years)*		*December 31, 2022*		*Amortization*			*March 31, 2023*
Intangible assets subject to amortization
Customer relationships	$	328	$	0	$	(8	)	$	320		10 - 15	$	3,581	$	(65	)	$	3,516
Marketing related		97		0		(10	)		87		5		684		(43	)		641
Technology based		20,304		0		(860	)		19,444		3 - 10		16,849		(863	)		15,986
Internally capitalized software		677		0		(123	)		554		3		185		(70	)		115
Intangible assets subject to amortization	$	21,406	$	0	$	(1,001	)	$	20,405			$	21,299	$	(1,041	)	$	20,258

	*Customer Relationships*			*Marketing Related*			*Technology Based*			*Internally Capitalized Software*			*Total*
Identifiable intangible assets	$	461		$	327		$	24,107		$	1,452		$	26,347
Accumulated amortization		(141	)		(240	)		(4,663	)		(898	)		(5,942	)
Identifiable intangible assets, net	$	320		$	87		$	19,444		$	554		$	20,405

	March 31, 2023			December 31, 2022
Customer relationships	$	3,861		$	3,861
Marketing related		1,027			1,027
Technology based		24,107			24,107
Internally capitalized software		1,236			1,236
Total		30,231			30,231
Less: accumulated amortization		(9,973	)		(8,932	)
Identifiable intangible assets from continuing operations, net	$	20,258		$	21,299

2022, remaining	$	2,953
2023		3,777
2023, remaining			$	3,024
2024		3,474		3,841
2025		3,465		3,832
2026		2,653		3,019
2027				2,744
Thereafter		4,083		3,798
Total	$	20,405	$	20,258

2022, remaining	$	1,028
2023		37
Total notes payable	$	1,065

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

Risk-free interest rate	3.42	%
Expected term (in years)	5
Volatility	113	%
Dividend yield	0	%
Estimated annual forfeiture rate at the time of grant	0	%

	*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 Subject to Option*			*Weighted Average Exercise Price*		*Weighted Average Remaining Contractual Term (Years)*		*Aggregate Intrinsic Value*
Outstanding Balance as of January 1, 2023		862,380		$	1.27		5.29	$	172,000
Exercised		(18,333	)		0.80
Forfeited		-			-
Expired		(15,913	)		3.51
Outstanding balance as of March 31, 2023		828,134		$	1.24		5.01	$	185,000
Exercisable as of March 31, 2023		828,134		$	1.24		5.01	$	185,000

	*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 as of December 31, 2021		1,347,879		$	10.94		2.20
Outstanding balance as of January 1, 2023									1,940,260		$	5.58		1.81
Granted		1,085,680			4.62		2.48		599,990			1.39		2.62
Vested		(201,259	)		9.21				(557,193	)		5.14		0.86
Forfeited		(63,256	)		11.29				(84,829	)		4.57		1.81
Outstanding balance as of March 31, 2022		2,169,044		$	8.07		2.33
Outstanding balance as of March 31, 2023									1,898,228		$	4.43		2.09

2023, remaining	$	80
2024		1,073
2025		13,578
2026		83
2027		86
Thereafter		28
Total		14,928
Less unamortized debt discount		(4,708	)
Total notes payable	$	10,220

	*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

	●	~~Traffic management and analytics~~
	●	~~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~~

	●	Growing Smart City Market – According to a United Nations report, about two-thirds of the world population will live in urban areas by 2050. ~~Our~~The world’s cities are getting larger, with longer commutes ~~bigger roads~~ and the resulting impact on the environment and the quality of life. This trend requires forward-thinking officials to manage assets and resources more efficiently. We believe that advancements in “big data” connected devices and artificial intelligence can provide Intelligent Transportation System (“ITS”) solutions that can be used to reduce congestion, keep travelers safe, improve transportation, protect the environment, respond to climate change, and enhance the quality of life. We believe our data-driven, artificial intelligence-aided solutions provide useful tools that can effectively tackle the challenges cities and communities are facing today and will face over the coming decades.
	●	AI for Infrastructure– We believe that the application of AI to the analysis of conditions on roadways and other transportation infrastructure can significantly affect the safety and efficiency of ~~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 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~~a resource ~~for cities~~that transportation and ~~transportation~~other agencies ~~alike.~~are beginning to find valuable uses for. Notably, the data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public agencies. Connected vehicle sensors can provide important information related to hazardous conditions, speed variations, intersection performance, and more. This data can help agencies and ~~cities~~municipalities gain more visibility about conditions on their roads, supplementing data from existing infrastructure and ~~providing untapped~~allowing transportation information from rural areas that are not served by ITS ~~infrastructure.~~infrastructure to be integrated into the overall analysis.
	●	New and Expanded Uses for Vehicle Recognition Systems – We believe that reductions in the cost of vehicle recognition products and services will significantly broaden the market for these systems. We currently serve many users who could not afford the cost, or adapt to the restrictions of, conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs. We have seen and responded to an increase in the number of smaller jurisdictions ~~and municipalities~~ that are testing vehicle recognition systems or that issued requests for proposals to install a network of vehicle recognition sensors. We also expect the availability of faster, higher-accuracy, lower-cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion and implement smart city programs.
	●	Adaptability of theMarket – We have made a considerable investment in our advanced vehicle recognition systems because we believe their increased accuracy, affordability and ability to capture additional vehicle data will allow them to compete effectively with existing providers. Based on published benchmarks, our software currently outperforms competitors. However, large users of existing technology, such as toll road operators, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. 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 systems or secure advanced ~~vehicle recognition~~ 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 expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial. We believe that future legislation will increasingly allow for automated enforcement of regulations such as motor vehicle insurance and registration requirements. 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. To the extent that legislative implementation is required, a deliberative and necessarily time-consuming process is involved. However, as states expand ~~auto enforcement,~~auto-enforcement, the market for ~~our~~these products and services should broaden in the public safety market.
	●	Graphic Processing Unit (“GPU”) Improvements – We expect our business to benefit from more powerful and affordable GPU hardware that has recently been developed. These GPUs are more efficient for image processing because their highly parallel structure makes them more efficient than general-purpose central processing units (“CPUs”) for algorithms that process large blocks of data, such as those produced by video streams. GPUs also provide superior memory bandwidth and efficiencies as compared to their CPU counterparts. The most recent versions of our software have been designed to use the increased GPU speeds to accelerate image recognition. The GPU market is predicted to grow as a result of a surge in the adoption of the Internet of Things (“IoT”) by the industrial and automotive sectors. As GPU manufacturers increase production volume, we hope to benefit from the reduced cost to manufacture the hardware included in our products or available to others using our services.
	●	Edge Processing – Demand for actionable roadway information continues to grow in parallel with ~~camera resolutions.~~sensor improvements, such as increasingly sophisticated internal software and optical and other hardware adapted to the use of this software. Over the last several decades, ~~cameras~~sensors have evolved and unlocked new capabilities with each advancement. Further, cellular networks have been optimized for downloading data rather than uploading data. As a result, while download speeds have improved significantly due to large investments in cellular infrastructure, this has resulted in relatively small improvements to cellular upload speeds. With roadside deployments experiencing explosive growth in count and density, scalability, latency and bandwidth have become aspects of competition in the market. Our systems have been designed to address these issues through the use of more effective edge processing, enabled both by incorporating the increasingly effective new GPUs into our systems and continual improvements in the efficiency of our AI algorithms. Our edge processing systems ingest local HD video streams at the source and convert the raw video data to text data, dramatically reducing the volume of data that needs to be transferred through the network. Edge processing allows us to scale a network dramatically without the bandwidth, cost, latency and dependability limitations that are experienced by other networks where raw video needs to be streamed to the cloud for processing.
	●	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~~made significant investments in our business development marketing and eCommerce activities to increase awareness and market adoption of our ~~new technology~~products and ~~products~~services within ~~the market.~~key markets. We anticipate that ~~an increased~~a sustained 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.
	●	Resurgent 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. As such, we are unable to determine the full impact on our ~~operations. However, we have also seen a positive impact of COVID-19 on~~operations should the ~~technology sector,~~global pandemic resurface in ~~which we are competing.~~2023. The pandemic has accelerated the adoption of new technologies by businesses. According to a McKinsey Global Survey of executives, their companies have accelerated the digitization of their customer and supply-chain interactions and their internal operations by three to four years. Funding for digital initiatives has increased, creating opportunities for innovative solution providers such as Rekor.

	Three Months Ended March 31,						Three Months Ended March 31,
(Dollars in thousands)	2022			2021			2023			2022
Revenue	$	3,608		$	4,216		$	6,185		$	2,975
Cost of revenue, excluding depreciation and amortization		1,983			1,922			2,868			1,537

Operating expenses:
General and administrative expenses		7,388			4,907			7,201			7,308
Selling and marketing expenses		1,352			937			1,890			1,352
Research and development expenses		4,092			1,222			4,958			4,092
Depreciation and amortization		1,399			536			1,955			1,364
Total operating expenses		14,231			7,602			16,004			14,116

Loss from operations		(12,606	)		(5,308	)		(12,687	)		(12,678	)
Other income (expense):
Interest expense		(9	)		(32	)
Gain on extinguishment of debt								527			-
Interest expense, net								(761	)		(9	)
Other income		14			16			239			14
Total other income (expense)		5			(16	)		5			5
Loss before income taxes and equity method investments		(12,601	)		(5,324	)
Income tax provision		-			(3	)
Equity in loss of investee		-			(76	)
Net loss from continuing operations	$	(12,601	)	$	(5,403	)	$	(12,682	)	$	(12,673	)

	Three Months Ended March 31,				Change
(Dollars in thousands)	2023		2022		$		%
Revenue	$	6,185	$	2,975	$	3,210		108	%

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

	Rekor Systems, Inc.

	By:	/s/ Robert A. Berman
	Name:	Robert A. Berman
	Title:	Chief Executive Officer Principal Executive Officer
	Date:	May ~~16, 2022~~15, 2023

	By:	/s/ Eyal Hen
	Name:	Eyal Hen
	Title:	Chief Financial Officer Principal Financial and Accounting Officer
	Date:	May ~~16, 2022~~ 15, 2023