Rekor Systems Inc

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Rekor Systems, Inc. (“Rekor”) was formed in* February 2017.*The consolidated financial statements include the accounts of Rekor, the parent company, and its wholly-owned subsidiaries Rekor Recognition Systems, Inc., Waycare Technologies Inc. and Waycare Technologies Ltd. (collectively, "Waycare"), Southern Traffic Services, Inc. ("STS") and All Traffic Data Services, LLC ("ATD") (collectively, the “Company”). The Company serves the roadway intelligence sector, developing product and services intended to revolutionize public safety, urban mobility, and transportation management on a global scale. The Company's vision is to improve the lives of citizens and the world around them by enabling safer, smarter, and greener roadways and communities. The Company works towards this vision by collecting, connecting, and organizing the world’s mobility data, and making it accessible and useful to its customers for real-time insights and decisioning for situational awareness, rapid response, risk mitigation, and predictive analytics for resource and infrastructure planning and reporting.

On* January*2,* 2024,* the Company completed the acquisition of ATD by acquiring 100% of the issued and outstanding capital stock of ATD, which is now a wholly-owned subsidiary of the Company.

These unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Accordingly, they donot 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, 2024*, the unaudited condensed consolidated results of operations, unaudited condensed consolidated statements of shareholders’ equity and unaudited condensed consolidated statements of cash flows for thethree months ended* March 31, 2024and2023*.

The financial data and other information disclosed in these notes are unaudited. The results for thethree months ended* March 31, 2024*, arenot necessarily indicative of the results to be expected for the year ending* December 31, 2024*.

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 Form10-K for the year ended* December 31, 2023*. The year-end condensed balance sheet data was derived from audited financial statements but doesnot 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.*

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Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the extensive use of management’s estimates. Management uses estimates and assumptions in preparing consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported revenues and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to the collectability of accounts receivable, the fair value of intangible assets, the fair value of debt and equity instruments, income taxes and determination of standalone selling prices in contracts with customers that contain multiple performance obligations. 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 arenot apparent from other sources. Actual results* may*differ from those estimates under different assumptions or conditions.

Liquidity and Going Concern

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

The Company has generated losses and negative operating cashflows since its inception and has relied on external sources of financing to support cash flow from operations. The Company attributes losses to non-capital expenditures related to the scaling of existing products and services, development of new products and services and marketing efforts associated with these products and services. As of and for thethree months ended* March 31, 2024*, the Company had working capital of $5,241,000 and a net loss of $18,614,000.

Our cash decreased by $3,446,000 for thethree months ended* March 31, 2024* primarily due to the cash paid to acquire ATD and redeem the2023 Promissory Notes and the net loss of $18,614,000, partially offset by external financing activity.

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Based on the Company's current business plan assumptions and the expected cash burn rate, the Company believes that the existing cash is insufficient to fund its current level of operations for the nexttwelve months following the issuance of these unaudited condensed consolidated financial statements. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements donot include any adjustments that might be necessary should the Company be unable to continue as a going concern.

The Company is actively monitoring its operations, the cash on hand and working capital. The Company is currently in the process of reviewing and exploring external financing options in order to sustain its operations. If additional financing isnot available, the Company also has contingency plans to continue to reduce or defer expenses and cash outlays in the look-forward period.

Significant Accounting Policies

Goodwill

The excess purchase consideration over the fair value of acquired assets and liabilities is recorded as goodwill. Goodwill is subject to impairment testing on an annual basis. The Company will assess goodwill for impairment annually on* October**1st* of each year, or more often if events or changes in circumstances indicate that it might be impaired, by comparing its carrying value to the reporting unit’s fair value. The Company will perform a qualitative assessment, to determine its fair value which includes an evaluation of relevant events and circumstances, including macroeconomic, industry and market conditions, the Company's overall financial performance, and trends in the value of the Company's common stock. As of* March 31, 2024*, the Company didnot identify any events that would cause it to assess goodwill for impairment.

Business Combination

Management conducts a valuation analysis on the tangible and intangible assets acquired and liabilities assumed at the acquisition date thereof. During the measurement period, which* maybe up toone* year from the acquisition date, the Company* may*record adjustments to the fair value of these tangible and intangible assets acquired and liabilities assumed, with the corresponding offset to goodwill. In addition, uncertain tax positions and tax-related valuation allowances are initially established in connection with a business combination as of the acquisition date. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations.

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company allocates a portion of the purchase price to the fair value of identifiable intangible assets. The fair value of identifiable intangible assets is based on a detailed valuation that uses information and assumptions provided by management. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for accounts receivable, notes receivable and accounts payable approximate fair value as of* March 31, 2024* and* December 31, 2023*, because of the relatively short-term maturity of these financial instruments. The carrying amount reported for long-term debt and long-term receivables approximates fair value as of* March 31, 2024* and* December 31, 2023*, given management’s evaluation of the instrument’s current rate compared to market rates of interest and other factors.

The determination of fair value is based upon the fair value framework established by ASC Topic820, Fair Value Measurements and Disclosures (“ASC820”). 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. ASC820 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 establishesthree levels of inputs that* may*be used to measure fair value:

Level1 – Quoted prices in active markets for identical assets or liabilities.

Level2 – Inputs other than Level1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that arenot 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.

Level3 – Unobservable inputs that are supported by little orno market activity and that are significant to the fair value of the assets or liabilities.

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

The Company’s goodwill and other intangible assets are measured at fair value at the time of acquisition and analyzed on a recurring and non-recurring basis for impairment, respectively, using Level3 inputs.

The Company considers its contingent consideration to be Level3 investments and that the fair value approximates the carrying value.

There wereno changes in levels during the year ended* March 31, 2024*.

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Revenue Recognition

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

To determine revenue recognition for arrangements that the Company determines are within the scope of ASC606, the Company performs the followingfive steps:

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

Revenues

Recurring revenue

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

Recurring revenues are generated through the Company’s Software-as-a-Service ("SaaS") model, where the Company provides customers with the right to access the Company’s software solutions for a fee. These services are made available to the customer continuously throughout the contractual period. However, the extent to which the customer uses the services* mayvary at the customer’s discretion. The contracts with customers are generally for a term ofone* tofive years. The 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 donot 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 donot 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 eCommerce customers are generally for a term ofone 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 isnot critical to the customers' ability to derive benefit from their right to use the Company’s software, customer support is considered a distinct performance obligation when sold together with a long-term license for software. Customer support for perpetual and term licenses is renewable, generally on an annual basis, at the option of the customer. 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.

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Product and service revenue

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

Implementation revenue is recognized when the Company provides implementation or construction services to its customers. These services involve a fee for the implementation services and are typically associated with the sale of the Company’s data collection services, software and hardware. The Company’s implementation revenue is recognized over time as the implementation is completed.

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

The Company also generates revenue through the sale of hardware through its partner program and internal sales force distribution channels. The Company satisfies its performance obligation upon the transfer of control of hardware to its customers. The Company invoices end-user customers upon transfer of control of the hardware to its customers. The Company provides hardware installation services to customers which range fromone tosix 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 the request of its customers and the revenue related to these services is recognized over time as the service is completed.

Revenue by Customer Type

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

Urban Mobility

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

Transportation Management

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

Public Safety

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

Performance obligations

The Company contracts with customers in a variety of ways, including contracts that obligate the Company to provide services over time. Some contracts include performance obligations for several distinct services. For those contracts that have multiple distinct performance obligations, the Company allocates the total transaction price to each performance obligation based on its relative standalone selling price, which is determined based on the Company’s overall pricing objectives, taking into consideration market conditions and other factors. This* may*result in a deferral or acceleration of revenue recognized relative to cash received for each distinct performance obligation.

Where performance obligations for the remaining term of a contract with a customer arenot 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, 2024*, the unsatisfied portion of the remaining performance obligation was approximately $22,912,000. The Company expects to recognize approximately $17,494,000 of this amount as revenue over the succeeding twelve months, and the remainder is expected to be recognized within the next five years thereafter.

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Unbilled accounts receivable

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 within60 to120 days, but typicallyno longer than over the nexttwelve months. Unbilled accounts receivables of $1,367,000 and $946,000 were included in accounts receivable, net, in the unaudited condensed consolidated balance sheets as of* March 31, 2024* and* December 31, 2023*, respectively.

Contract liabilities

When the Company advance bills clients prior to providing services, generally such amounts will be earned and recognized in revenue within the nextsix months tofive years, depending on the length of the period during which services are to be provided. This revenue and the corresponding decrease in liabilities is recognized on a contract-by-contract basis at the end of each reporting period and reflected on the unaudited condensed consolidated balance sheet for such period. Changes in the contract balances during thethree months ended* March 31, 2024* werenot materially impacted by any other factors. During thethree months ended* March 31, 2024*, $1,449,000 of the contract liabilities balance as of* December 31, 2023* was recognized as revenue.

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

Cash and Cash Equivalents, and Restricted Cash and Cash Equivalents

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

Cash subject to contractual restrictions andnot readily available for use is classified as restricted cash and cash equivalents. The Company’s restricted cash balances are primarily made up of cash collected on behalf of certain client jurisdictions. Restricted cash and cash equivalents for these client jurisdictions as of* March 31, 2024* and* December 31, 2023* were $386,000 and $328,000, respectively, and correspond to equal amounts of related liabilities.

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Concentrations of Credit Risk

The Company deposits its temporary cash investments with highly rated quality financial institutions that are located in the United States and Israel. The United States deposits are federally insured up to*$250,000* per account. As of* March 31, 2024* and* December 31, 2023*, the Company had deposits from operations totaling $12,267,000 and $15,713,000, respectively, in multiple U.S. financial institutions andone Israeli financial institution.

Customer A accounted for 13% of the unaudited condensed consolidated revenue for thethree months ended* March 31, 2023.No other single customer accounted for more than10% of the Company’s unaudited condensed consolidated revenues for thethree months ended March 31, 2024and2023*, respectively.

As of* March 31, 2024*,no single customer accounted for more than10% of the Company's unaudited condensed consolidated accounts receivable balance. As of* December 31, 2023*, Customer A and Customer B accounted for 22% and 13% of the unaudited condensed consolidated accounts receivable balance,no other single customer accounted for more than10% of the Company’s unaudited condensed consolidated accounts receivable balance as of* December 31, 2023*.

Accounts Payable, Accrued and Other Current Liabilities

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

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

New Accounting Pronouncements Effective in Future Periods

In* November 2023,FASB issued ASU2023*-07 - Segment Reporting (Topic280): Improvements to Reportable Segment Disclosures, which requires public entities with a single reportable segment to provide all the disclosures required by this standard and all existing segment disclosures in Topic280 on an interim and annual basis, including new requirements to disclose significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within the reported measure(s) of a segment's profit or loss, the amount and composition of any other segment items, the title and position of the CODM, and how the CODM uses the reported measure(s) of a segment's profit or loss to assess performance and decide how to allocate resources. The guidance is effective for our annual period beginning* January 1, 2025,*and interim periods thereafter, applied retrospectively with early adoption permitted. The Company is currently evaluating the impact of adoption of this standard on its financial statements and disclosures.

In* December 2023,the FASB issued ASU2023*-09 - Income Taxes (Topic740): Improvements to Income Tax Disclosures, which requires public entities to provide greater disaggregation within their annual rate reconciliation, including new requirements to present reconciling items on a gross basis in specified categories, disclose both percentages and dollar amounts, and disaggregate individual reconciling items by jurisdiction and nature when the effect of the items meet a quantitative threshold. The guidance also requires disaggregating the annual disclosure of income taxes paid, net of refunds received, by federal (national), state, and foreign taxes, with separate presentation of individual jurisdictions that meet a quantitative threshold. The guidance is effective for the Company's annual periods beginning* January 1, 2025*on a prospective basis, with a retrospective option, and early adoption is permitted. The Company is currently evaluating the impact of adoption of this standard on its financial statements and disclosures.

The Company doesnot believe that any recently issued, butnot yet effective, accounting standards, other than the standards discussed above, could have a material effect on the accompanying unaudited condensed consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.

Additional significant accounting policies of the Company are also described in Note1 of the Company’s Annual Report on Form10-K for the year ended* December 31, 2023*.

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NOTE2 – ACQUISITION

On* January 2, 2024 (*the “Closing Date”), the Company acquired All Traffic Data Services, LLC, a Colorado limited liability company (“ATD”), pursuant to that certain Interest Purchase Agreement (the “ATD Purchase Agreement”), dated as of the Closing Date, by and among the Company, ATD and All Traffic Holdings, LLC (the “Seller”). The Seller is a portfolio company of Seaport Capital, a private equity firm. ATD is engaged in the business of advanced traffic data collection. Under the terms of the ATD Purchase Agreement, the Company acquired all of the issued and outstanding limited liability company interests of ATD (the “ATD Acquisition”).

The acquisition meets the criteria to be accounted for as a business in accordance with ASC805, Business Combinations (“ASC805”). This method requires, among other things, that assets acquired, and liabilities assumed be recognized at their fair values as of the acquisition date and that the difference between the fair value of the consideration paid for the acquired entity and the fair value of the net assets acquired be recorded as goodwill, which isnot amortized but is tested at least annually for impairment. The aggregate purchase price for the interests of ATD was approximately $20,774,000, subject to a customary working capital adjustments. The purchase price comprised approximately $9,795,000 in cash, which included closing adjustments and 3,496,464 unregistered shares of the Company’s common stock (the “Stock Consideration”), based on a volume weighted average trading price of the Company’s common stock over athirty consecutive trading day period prior to the date of the ATD Purchase Agreement, which was $2.86.662,329 of the 3,496,464 shares of the Stock Consideration will be issued and delivered to the Seller on thetwelve-month anniversary of the Closing Date, subject to cutback for working capital adjustments and/or indemnification claims favoring the Company, if any. As a result of the transaction, ATD became a wholly-owned subsidiary of the Company and ATD’s key employees have agreed to continue employment with the Company orone of its affiliates.

In accordance with the acquisition method of accounting for a business combination, the purchase price has been allocated to the assets acquired and liabilities assumed based on their fair values as of the Closing Date. Since the acquisition of ATD occurred on* January 2,2024, the results of operations for ATD from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for thethree months ended March 31, 2024.*The table below shows the breakdown related to the preliminary purchase price allocation for the acquisition (dollars in thousands):

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Operations of Combined Entities

The following unaudited pro forma combined financial information gives effect to the acquisition of ATD and the Series A Prime Revenue Sharing Notes as if they were consummated as of* January 1, 2023.A portion of the proceeds from the Series A Prime Revenue Sharing Notes was used to fund the acquisition of ATD and therefore the Company has included the impact of the issuance of the debt in its pro forma financial information. This unaudited pro forma financial information is presented for information purposes only and isnot* intended to present actual results that would have been attained had the acquisition and the issuance of the Series A Prime Revenue Sharing Notes been completed as of* January 1, 2023 (*the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.

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NOTE3 – SUPPLEMENTAL NON CASH DISCLOSURES OF CASH FLOW INFORMATION

Supplemental disclosures of cash flow information for thethree months ended* March 31, 2024and2023* were as follows (dollars in thousands):

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NOTE4 – INTANGIBLE ASSETS AND GOODWILL

The purchase price has been allocated to the assets acquired and liabilities assumed based on fair values as of the acquisition date. Since the acquisition of ATD occurred on* January 2, 2024,the results of operations for ATD from the date of acquisition have been included in the Company’s unaudited condensed consolidated statement of operations for thethree* months ended* March 31, 2024.*As part of the Company's preliminary purchase price allocation for the acquisition, the Company recognized $3,568,000 in goodwill, $11,900,000 in customer relationships, assigned a 15-year useful life, and $200,000 of marketing related intangible assets related to the ATD tradename, assigned anfive-year useful life.

Intangible Assets Subject to Amortization

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

These intangible assets are amortized on a straight-line basis over their estimated useful life. Amortization expense for thethree months ended* March 31, 2024and2023* was $1,172,000 and $1,041,000, respectively and is presented as part of depreciation and amortization in the unaudited condensed consolidated statements of operations. During the current period there have beenno events that would cause the Company to evaluate its intangible assets for impairment.

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

NOTE5 – DEBT

STS Notes

On* June 17, 2022,pursuant to the terms of the Company’s acquisition of STS, the Company issued an aggregate of $2,000,000 of notes payable in the form oftwo* unsecured, subordinated promissory notes, each in the principal amount of $1,000,000 and bearing an interest rate of 3.0% per annum, payable quarterly. The notes mature on* June 14, 2024and June 17,2025, respectively. As of March 31, 2024and December 31, 2023,the aggregate balance of these notes payable was $2,000,000 of which $1,000,000 was included in notes payable current portion and $1,000,000 was included in notes payable long-term, respectively, in the unaudited condensed consolidated balance sheets. Interest expense related to these notes was $14,000 and $14,000 for thethree* months ended* March 31, 2024and2023,* respectively.

2023 Promissory Notes

On* January 18, 2023,the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company agreed to issue and sell to the investors in a private placement transaction (i) up to $15,000,000 in aggregate principal amount of senior secured promissory notes (the“2023* Promissory Notes”), and (ii) warrants to purchase, for an exercise price of $2.00 per share, up to an aggregate of 7,500,000 shares of common stock of the Company, par value $0.0001 per share. In connection with the initial closing on* January 18, 2023,the Company issued $12,500,000 in aggregate principal amount of2023* Promissory Notes and warrants to purchase 6,250,000 shares of Common Stock.

On* March 4, 2024,the Company elected to prepay the outstanding2023* Promissory Notes. The2023 Promissory Notes were redeemed at the redemption price of 115% of the $12,500,000 aggregate principal amount of the2023 Promissory Notes, or approximately $14,375,000, plus accrued and unpaid interest to the redemption date of approximately $263,000 (the “Redemption Payment”). The noteholders elected to accept $1,875,000 of the Redemption Payment in the form of 750,000 unregistered shares of the Company’s common stock, par value $0.0001 per share, having a value of $2.50 per share, with the remainder of the Redemption Payment to be paid in cash. As a result of the Redemption Payment, the Company recognized a loss on extinguishment of debt of $4,693,000, which included 1,875,000 related to the early termination payment and $2,818,000 related to unamortized issuance costs.

The2023 Promissory Notes were a senior secured obligation of the Company and ranked senior to all indebtedness of the Company, subject to certain exceptions, had a maturity date of* July 18, 2025 (*the “Maturity Date”), and bore an interest rate of 12% per annum.

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Series A Prime Revenue Sharing Notes

On* December 15, 2023,the Company issued $15,000,000 in Series A Prime Revenue Sharing Notes. Interest accrues on the Series A Prime Revenue Sharing Notes at a fixed annual rate of 13.25% and is paid monthly. The entire outstanding principal balance, together with all interest accrued and unpaid is due and payable on the maturity date of December 15, 2026.*Debt issuance costs paid in connection with the Series A Prime Revenue Sharing Notes were $670,000 and are being amortized as interest expense using a straight-line method over the term of the Series A Prime Revenue Sharing Notes. The Company has a material relationship with Arctis, which invested $5,000,000 in connection with the $15,000,000 initial closing of the Series A Prime Revenue Sharing Notes.

Interest will be paid based on revenue received from an initial pool of “prime” accounts which are related to contracts from customers infive states, each of which has been rated at or above AAA/AA+/Aal for their respective unsecured general obligation debt by nationally recognized credit rating agencies. The Company entered into a base Indenture for the Series A Prime Revenue Sharing Notes as of* December 15, 2023with Argent Institutional Trust Company, as trustee. The Indenture creates afirst* priority security interest for the benefit of the holders of all subsequent notes issued under the Indenture. The Series A Prime Revenue Sharing Notes rank senior to the Company’s existing and future secured and unsecured debt with respect to the pool of revenue securing the Series A Prime Revenue Sharing Notes.

As part of the terms of the Series A Prime Revenue Sharing Notes the Company is required to maintain an interest reserve related tonot less thanthree times the next monthly interest payment. Additionally, there is a sinking fund requirement which states if thethree year value of eligible contracts is less than 170% of the aggregate outstanding principal amount of Series A Prime Revenue Sharing Notes. In the event that the sinking fund requirement is triggered, to meet the sinking fund requirement the Company would be required to maintain a cash balance sufficient to amortize the principal amount due on the Series A Prime Revenue Sharing Notes in equal monthly installments by the respective due dates of such series. The amount related to the interest reserve was $500,000 as of* March 31, 2024* and is held by athird party and is presented as part of deposits on the consolidated balance sheets. The Company isnot in default of any requirements as they relate to the Series A Prime Revenue Sharing Notes and the sinking fund hasnot been triggered as of* March 31, 2024.*

The Company* mayprepay the Series A Prime Revenue Sharing Notes at any time up until December 15, 2026by paying a premium ranging from 103% to 106%. Thereafter, the Series A Prime Revenue Sharing Notes maybe prepaid by the Company at par value; provided, however, that the Series A Prime Revenue Sharing Notes maynot* be redeemed prior to* December 15, 2024.Repayment of the Series A Prime Revenue Sharing Notes consisting of all principal, plus any unpaid accrued interest, mayalso be accelerated by the noteholder upon a change in control or event of default. For thethree* months ended* March31,* 2024, the Company recognized $496,000 in interest expense related to the Series A Prime Revenue Sharing Notes.

Interest Expense

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

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Schedule of Principal Amounts Due of Debt

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

NOTE6 – INCOME TAXES

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

The Company files income tax returns in Israel, the United States and in various states.No U.S. Federal, state or foreign income tax audits were in process as of* March 31, 2024*.

The Company evaluated the recoverability of the net deferred income tax assets and the level of the valuation allowance required with respect to such net deferred income tax assets. After considering all available facts, the Company fully reserved for its net deferred tax assets, outside of the deferred tax liability related to the indefinite lived intangibles, because the Company doesnot believe that it is more likely thannot 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 thethree months ended* March 31, 2024* and2023, the Company didnot 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. The2019 through2023 tax years remain subject to examination by the Internal Revenue Service. As of* March 31, 2024* and* December 31, 2023*, our evaluation revealedno uncertain tax positions that would have a material impact on the unaudited condensed consolidated financial statements.

For thethree months ended* March 31, 2024and2023,* the Company didnot record any expense or benefit related to income tax.

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NOTE7 – COMMITMENTS AND CONTINGENCIES

From time to time, the Company* may*be named as a party to various other lawsuits, claims and other legal and regulatory proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract, property damage, infringement of proprietary rights, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to such lawsuits, claims and proceedings the Company accrues reserves when a loss is probable, and the amount of such loss can be reasonably estimated.

H.C Wainwright & Co., LLC

In* March 2023,the Company entered into an engagement letter with H.C. Wainwright & Co., LLC, ("HCW"), related to a capital raise (see Note8* –2023 Registered Direct Offering). That letter agreement contained provisions for both a “tail” fee due to HCW for any subsequent transactions the Company* mayenter into during the specified tail period with investors introduced to the Company by HCW during the term of the letter, as well as a right offirst* refusal ("ROFR"), to act as the Company's exclusive underwriter or placement agent on any subsequent financing transactions utilizing an underwriter or placement agent occurring withintwelve months from the consummation of a transaction pursuant to the engagement letter.

In* July 2023,the Company entered into an agreement withone* of its stockholders in connection with the exercise of warrants held by the stockholder, which the Company refers to as the* JulyWarrant Exercise Transaction. Subsequent to the JulyWarrant Exercise Transaction, the Company received a letter from HCW claiming entitlement to certain “tail” fees and warrant consideration stemming from the agreement with the Company's stockholder. The Company believed then, and believes now, that this claim is without merit. As a result of this claim and for other reasons articulated to HCW, the Company terminated its engagement letter with HCW, including for cause, which, the Company believes, eliminated both the “tail” provision and the ROFR provision with respect to the2023* Registered Direct Offering.

On or about* October 23, 2023,HCW filed a complaint in New York State Supreme Court asserting a claim for breach of contract against the Company relating to the JulyWarrant Exercise Transaction. HCW sought to recover compensatory and consequential damages and certain warrants under its letter agreement with Rekor and other fees,not less than a cash fee of $825,000 and the value of warrants to purchase an aggregate of up to 481,100 shares of common stock of the company at an exercise price of $2.00 per share as well as attorneys’ fees. On February**29,* 2024, HCW filed a notice of discontinuance without prejudice and advised the court that it intended to commence a new proceeding by filing a new complaint that would address the claim in this lawsuit and subsequent events. On* March 4, 2024,*the court discontinued this lawsuit without prejudice.

On* February**29,* 2024, HCW initiated the new action with the filing of complaint in New York State Supreme Court. In this lawsuit, HCW advances the same breach of contract theory and seeks to recover the same damages as sought in the prior now-dismissed lawsuit. In addition, HCW seeks to recover an additional $2,156,000 in damages plus the value of warrants to purchase an aggregate of up to 805,000 shares of common stock at an exercise price of $3.125 per share in connection with Rekor’s* February 2024offering. HCW alleges that Rekor breached its engagement letter with HCW by failing to give HCW notice of this offering and failing to provide HCW with the opportunity to exercise the ROFR with respect to this transaction. On May 3, 2024,Rekor answered HCW’s complaint and filed counterclaims against HCW and Armistice Capital LLC ("Armistice") relating to Rekor’s March 2023Registered Direct Offering, Armistice’s trading activity in Rekor common stock, and Rekor’s2024* Public Offering. Rekor’s counterclaims include causes of action for fraud, breach of fiduciary duty, and tortious interference. Rekor seeks to recover damages from HCW and Armistice.

Occupational Safety and Health Administration (“OSHA”) Claim

In2023 two previous employees of the Company (the “Claimants”) filed a complaint with OSHA (the “OSHA Complaints”) against the Company. Shortly after the OSHA Complaints were filed against the Company, the Company filed a position statement to address the OSHA Complaints. On* November 30, 2023,*OSHA issued its determination that, based on the information gathered thus far in its investigation, OSHA was unable to conclude that there was reasonable cause to believe that a violation of the statute occurred. OSHA thereby dismissed the complaint.

Thereafter, Claimants appealed the determination by filing objections and requesting a hearing before an Administrative Law Judge. The Company likewise filed a request for an award of attorneys’ fees. On* January 4, 2024,the Office of Administrative Law Judges (“OALJ”) processed the appeals and issued its Notice of Docketing and Order of Consolidation. On February 28, 2024,the OALJ issued an Order setting forth a revised schedule governing the case with the start of the hearing scheduled for December 2, 2024.*

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NOTE8 – STOCKHOLDERS’** EQUITY**

In connection with the acquisition as described inNOTE 2 –ACQUISITION, the Company issued 3,496,464 shares of the Company’s common stock as part of the consideration.

2024 Public Offering

On* February 9, 2024,the Company issued and sold 10,000,000 shares of its common stock, at an offering price of $2.50 per share of common stock (the“2024* Public Offering Price”) in a registered public offering by the Company (the “2024 Public Offering”), pursuant to an underwriting agreement with William Blair & Company, L.L.C., as representative of the several underwriters named therein (collectively, the “Underwriters”).

On* February9,* 2024, the Underwriters exercised in-full their option to purchase up to 1,500,000 additional shares of common stock at the2024 Public Offering Price (the “Underwriters’ Option”). The exercise closed on* February13,* 2024. The net proceeds to the Company for the exercise of the Underwriters’ Option, after deducting the underwriting discounts and commissions and offering expenses payable by the Company, was $2,388,000, or approximately $26,362,000 in aggregate for the2024 Public Offering including the exercise of the Underwriters’ Option.

2023 Registered Direct Offering

On* March23,* 2023, the Company entered into a securities purchase agreement with a single institutional investor that provided for the sale and issuance by the Company in a registered direct offering of an aggregate of: (i)6,100,000 shares of the Company’s common stock, (ii) pre-funded warrants exercisable for up to an aggregate of 772,853 shares of common stock, and (iii) warrants to purchase up to 6,872,853 shares of common stock (the "Registered Direct Warrants"). The offering price per share of common stock and associated warrant was $1.455 and the offering price per pre-funded warrant and associated warrant was $1.454. Each pre-funded warrant was exercisable forone share of common stock at an exercise price of $0.001 per share and expired when exercised in full. The Registered Direct Warrants were exercisable immediately upon issuance, had an expiration date five years following the issuance date and had an exercise price of $1.60 per share. The Company received gross proceeds from the2023 Registered Direct Offering of approximately $10,000,000. The Offering closed on* March27,* 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 to7.5% 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 to7.0% 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 offive years and an exercise price of $1.8188 per share of common stock.

During the year ended* December 31,*2023, 772,853 of the pre-funded warrants were exercised for 772,853 shares of the Company's common stock.

2023 Letter Agreement

On* July25,* 2023, the Company entered into a letter agreement (the*“2023* Letter Agreement”) with the purchaser of the2023 Registered Direct Offering, pursuant to which the investor and the Company agreed that the investor would exercise all its Register Direct Warrants for shares of common stock underlying the Registered Direct Warrants at $1.60 per share of common stock. In consideration for the imposition of volume and trading restrictions on the 6,872,853 shares of common stock issued to the institutional investor in connection with exercise of the Registered Direct Warrants, the2023 Letter Agreement provided for the issuance of unregistered warrants to purchase up to an aggregate of 2,850,000 shares of common stock (the*“2023* Private Warrants”). The shares of common stock underlying the2023 Private Warrants have been registered for resale on a registration statement declared effective by the SEC on* September 29, 2023.The2023* Private Warrants will expire on* January25,* 2029 and have an exercise price of $3.25.

The2023 Private Warrants were valued using the Black-Scholes pricing model at a total of $6,757,000 based on afive year term, volatility of 115%, a risk-free of 4.15%, and stock price of $2.85. The fair value of the2023 Private Warrants were treated as an equity financing cost and recorded as part of the Company’s additional paid-in capital. This resulted in a netzero impact within the Company’s additional paid-in capital.

2023 Warrants

In connection with the initial closing of the2023 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 offive years from the date of issuance and are exercisable on a cash or cashless basis at the election of the holder. The2023* Warrants were valued at $5,125,000, based on the relative fair value basis, compared to the total proceeds received.

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Warrants

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

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NOTE9 – EQUITY INCENTIVE PLAN

In* August 2017,the Company approved and adopted the2017* Equity Award Plan (the*“2017* Plan”). The2017 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 the2017 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 the2017* Plan.

On* April 29, 2024,the Company filed a registration statement on Form S-8 solely to register an additional 7,912,216 shares of its common stock available for issuance under the2017* Plan. This increase was approved by the Company’s Board of Directors on* March22,* 2024, and by the Company’s stockholders on* April18,* 2024 at the Company’s annual meeting.

Stock Options

Stock options granted under the2017 Plan* maybe either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”). ISOs maybe 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 often years.

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A summary of stock option activity under the Company’s2017 Plan for the period ended* March 31, 2024* is as follows:

As of* March 31, 2024*, there was $0 of unrecognized stock compensation expense related to unvested stock options granted under the2017 Plan.

Restricted Stock Units

Stock compensation expense related to RSU’s for thethree months ended* March 31, 2024and2023* was $1,167,000 and $1,112,000, respectively, and is presented, based on the awardees operating department, as general administrative, selling and marketing and research and development expenses in the unaudited condensed consolidated statements of operations.

A summary of RSU activity under the Company’s2017 Plan for thethree months ended* March 31, 2024* is as follows:

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

As of* March 31, 2024*, there was $4,124,000 of unrecognized stock compensation expense related to unvested RSUs granted under the2017 Plan that will be recognized over an average remaining period of 1.65 years.

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NOTE10 – LOSS PER SHARE

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

As the Company had a net loss for thethree months ended* March 31, 2024*, the following 11,946,345 potentially dilutive securities were excluded from diluted loss per share:9,581,100 for outstanding warrants,688,841 related to outstanding options and 1,676,404 related to outstanding RSUs.

As the Company had a net loss for thethree 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.

**NOTE11 **–SUBSEQUENT EVENTS

Authorized Common Stock

On* April 22, 2024,the Company increased the number of authorized shares of common stock from 100,000,000 to 300,000,000. The number of authorized shares of the Company’s preferred stock wasnot* affected by this amendment and remained unchanged at 2,000,000 shares.

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