# Rekor Systems, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Rekor Systems, Inc.](/companies/rekr.md) (CIK 1697851)
- Form: 10-Q
- Filed: 2023-11-14
- Accepted by EDGAR: Nov 14, 2023, 16:20 ET
- Period: 2023-09-30
- Accession: 0001437749-23-031990
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1697851/000143774923031990/rekr20230930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1697851/000143774923031990/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $9.1m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $23.9m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $4.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $14.0m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$9.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$32.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $906.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $2.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$10.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$34.4m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.16 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.56 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$27.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $944.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $105.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $7.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $19.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $88.2m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $16.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $44.6m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $11.2m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-30 | $43.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 53,493 characters.

### Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve substantial risks and uncertainties including particularly statements regarding our future results of operations and financial position, business strategy, prospective products and services, timing and likelihood of success, plans and objectives of management for future operations, and future results of current and anticipated products and services. These statements involve uncertainties, such as known and unknown risks, and are dependent on other important factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements we express or imply. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar expressions. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties, and assumptions described under the sections in our Annual Report on Form 10-K for the year ended December 31, 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:

- significant risks, uncertainties and other considerations discussed in this report;
- operating risks, including supply chain, equipment or system failures, cyber and other malicious attacks and other events that could affect the amounts and timing of revenues and expenses;
- reputational risks affecting customer confidence or willingness to do business with us;
- financial market conditions, including the continuation of significant national and global uncertainties that may affect these conditions, and the results of financing efforts;
- our ability to successfully identify, integrate and complete acquisitions and dispositions, including the integration of the STS Acquisition;
- our continued ability to successfully access the public markets for debt or equity capital;
- political, legal, regulatory, governmental, administrative and economic conditions and developments in the United States (“U.S.”) and other countries in which we operate and, in particular, the impact of recent and future federal, state and local regulatory proceedings and changes, including legislative and regulatory initiatives associated with our products;
- current and future litigation;
- competition from other companies with an established position in the markets we have recently entered or are seeking to enter or from other companies who are seeking to enter markets we already serve;
- our failure to successfully develop products using our technology that are accepted by the markets we serve or intend to serve or the development of new technologies that change the nature of our business or provide our customers with products or services superior to or less expensive than ours;
- the inability of our strategic plans and goals to expand our geographic markets, customer base and product and service offerings;
- risks associated with pandemics and other global health emergencies, such as the spread of a novel strain of coronavirus (“COVID-19”) around the world since the first quarter of 2020 which has caused significant volatility in U.S. and international markets and has created significant uncertainty around the breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies; and
- risks associated with cyberattacks on international, national, local and Company information infrastructure by rogue businesses or criminal elements or by agents of governments engaged in asymmetric disruptions for competitive, economic, or military reasons.

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

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report”) and any updates contained herein as well as those set forth in our reports and other filings made with the SEC.

### General

### Overview

Rekor is a technology company dedicated to transforming public safety, urban mobility, and transportation management worldwide. Our AI-driven solutions have been tailored specifically to the unique needs of our customer base in each of these areas. We are working to collect, connect, and organize the world's mobility data, harnessing its full potential to provide in real-time the most essential, actionable and predictive 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”).

#### Roadway Intelligence

Rekor has become a leader in roadway intelligence by collecting, connecting, and organizing global mobility data since its inception. Today, our comprehensive portfolio of products and services offers multiple cutting-edge Internet of Things ("IoT") devices for roadside data collection, an array of curated and integrated data sets from a network of transportation ecosystem data providers, as well as platforms, applications, and data streams that have been tailored for use by a demanding customer base consisting of federal state and local government agencies and large corporate clients.

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 various 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 to deliver real-time and predictive analytics that address critical challenges in transportation management, public safety, urban mobility, and other key commercial markets.

By applying a 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 assets and insights. This involves consolidating fragmented and disparate systems, as well as adding new layers of connectivity, to create a unified environment. To achieve this goal, we are working closely with a wide range of stakeholders, including local and federal government agencies, law enforcement, transit providers, infrastructure owners/operators, automotive OEMs, and technology, communications and data providers.

At Rekor, we are building a future for our customers where the mobility internet is interactive, generating and distributing real-time transportation intelligence to improve traffic management, public safety, maintenance, and emergency services, and planning agencies, as well as by connected and autonomous vehicles. 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 to uniquely combine physical and digital infrastructure that is foundational to a new operating system for the roadways. As agencies plan for and build the transportation network of the future, Rekor expects to play a critical and valuable role in meeting the essential need for real-time and predictive roadway intelligence.

#### Roadway Intelligence Powered by Rekor

Our Rekor One™ roadway intelligence engine is purpose-built to be a single source of truth, powered by AI and fueled by rich data. With access to multiple sources of data and our award-winning AI-driven innovations, we provide a range of solutions that address diverse use cases across various public and private sector segments. Our platforms facilitate the efficient collection, analysis, and distribution of vast amounts of data, unlocking real-time and predictive operational insights that have previously been unavailable. Using our advanced technology and centralized platform, we are well-positioned to provide a single-source of truth for roadway intelligence, and help governments and businesses turn infrastructure data into actionable insights that increase mobility and safety, drive revenue, and power innovation for billions of people and trillions of interactions.

Our Rekor One roadway intelligence engine allows us to deliver a range of solutions that serve government and commercial customers in the public safety, urban mobility and transportation management areas. Within the Rekor One environment, our proprietary algorithms curate data from multiple sources, including edge-based IoT devices, existing roadway sensors, and a growing network of transportation data partners, unlocking multiple trillions of additional data points. We use this data to generate multi-dimensional insights in real-time, and AI-driven predictive analytics that leverage patterns of what happened in the past so that we can forecast what will happen in the future. These insights enable our customers to make better-informed proactive decisions and achieve improved operational efficiency through strategic resource allocation.

Rekor's solutions support diverse use cases, including: 1) traffic reports, including counts showing Federal Highway Administration ("FHWA") mandated vehicle classifications and speed, analytics for bicycle, pedestrians, and other micromobility modes, as well as patterns and hot spots for greenhouse gas emissions, 2) data driven traffic operations and traffic management, real-time incident detection and response, including proactive traffic calming around events, and 3) high-definition ("HD") video traffic surveillance, to assist law enforcement and support intelligence-based policing, including contactless compliance and enforcement, among others. With our advanced technology and domain expertise, we are well-equipped to serve multiple public agencies and private sector segments with comprehensive roadway intelligence.

#### The Road Ahead

The United States government is investing heavily in upgrading and digitizing the nation’s outdated infrastructure. Recent technological advances, such as edge- and cloud-based computing, artificial intelligence, and the internet of things, have given us an unprecedented opportunity to revolutionize mobility and bridge the divide between rapidly evolving technology and aging infrastructure. We are actively engaged in providing state-of-the-art AI-driven roadway intelligence solutions to enhance public safety, urban mobility, and transportation management. By collecting, connecting, and organizing the world’s mobility data, Rekor delivers precise, real-time, and predictive actionable insights for any moving objects on roadways. We are dedicated to delivering mission-critical solutions that help to create intelligent, secure, and sustainable streets for all communities. The ultimate objective is for Rekor to be a foundational partner in building a digitally-enabled internet and operating system for roadways that will enable smarter, safer, and more eco-friendly mobility for all. Rekor is making mobility data widely accessible and useful for all, empowering customers to make informed decisions and drive meaningful progress towards a brighter future.

### Opportunities, Trends and Uncertainties

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

- *New Efficiencies and Expanded Uses for Roadway Intelligence –* The suite of products and services that we have developed makes use of recent technological developments that significantly lower the cost of existing roadway deployments. These technological developments include the development of improved graphic processing units (“GPU’s”) that feature greater bandwidth and are structured to facilitate parallel processing of larger blocks of data, improvements in cellular technologies that we can take advantage of through more efficient edge processing techniques. Our systems have also been designed to address developments in cellular communications networks 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. The reduced cost and additional capabilities realized as a result of these technological developments have also enabled us to deliver products and services that were previously either unavailable or available only at prohibitive cost. Although our customer base is currently anchored by large government institutions and commercial enterprises, we currently also serve many users who could not afford the cost, or adapt to the restrictions of, conventional systems. These include smaller municipalities, homeowners’ associations, and smaller businesses finding new applications for our software and hardware.
- *AI for Infrastructure –* We have been able to develop applications of AI that improve the analysis of conditions on roadways and significantly affect the safety and efficiency of travel. As vehicles move towards further automation, we expect there to be a growing 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. Businesses 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. Connected vehicle sensors can provide important information related to hazardous conditions, speed variations, intersection performance, and more. This data is a resource that we are using to help transportation and other agencies gain more visibility about conditions on their roads, supplementing data from existing infrastructure and allowing transportation information from rural areas that are not served by ITS infrastructure to be integrated into the overall analysis.
- *Growing Smart City Market –* We 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. According to a United Nations report, about two-thirds of the world population will live in urban areas by 2050. The world’s cities are getting larger, with longer commutes 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.
- *Adaptability of the Market –* We have made a considerable investment in our advanced vehicle recognition systems because we believe their increased accuracy, affordability and ability to capture additional vehicle data will allow them to compete effectively with existing providers. 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 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.

33

- *Expansion of Contactless Compliance Programs –* 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, the market for these products and services should broaden in the public safety market.
- *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. We have previously made significant investments in our business development, marketing and eCommerce activities to increase awareness and market adoption of our products and services within key markets. We anticipate that a sustained presence in the market, the continued development of strategic partnerships and other economies of scale will 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.
- *Pressure on Government Budgets –*With increasing needs for resources, government agencies need increasingly affordable, effective, and scalable solutions. With subscription pricing and an intelligent infrastructure approach that accomplishes multiple agency missions, we are uniquely positioned to provide agencies with force-multiplying tools when money and human resources are limited. Agencies are looking to improve public safety, manage resources more effectively, and make an impact on their citizen's quality of life with limited capital expenditure. In addition, states adopting contactless compliance programs may be able to garner significant net cash contributions to their annual budgets while reducing the number of non-compliant vehicles on their roadways.
- *Infrastructure Investment and Jobs Act (“IIJA”) and the Bipartisan Infrastructure Law (“BIL”)* - The IIJA, signed into law on November 15, 2021, provides for significant national investments in the transportation systems in the United States, including over $150 billion in new spending on roadway infrastructure, including intelligent transportation systems. We believe that our comprehensive offering of solutions positions the Company well to emerge as a technology leader in the expanded market for roadway intelligence that will benefit from this legislation. We have identified opportunities to access federal funding streams, and we are working to implement a program that capitalizes on this unprecedented U.S. federal investment in public safety, homeland security, and transportation infrastructure and ensures that our customers are positioned to capture as much of this extraordinary government spending as possible. Beyond the many recurring federal grant programs that could support customer purchases, and the $350 billion in American Rescue Plan Act allocations that public agencies are receiving now, we are particularly excited about the prospect of benefitting from the following new grant sources that are contained in the IIJA: $200 million annually for a “Safe Streets and Roads for All” program that would make competitive grants for state projects that significantly reduce or eliminate transportation-related fatalities. $150 million for the current administration to establish a grant program to modernize state data collection systems $500 million for the Strengthening Mobility and Revolutionizing Transportation (“SMART”) Grant Program that would support demonstration projects on smart technologies that improve transportation efficiency and safety.

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### Components of Operating Results

#### Revenues

The Company derives its revenues primarily from the sale of its roadway data aggregation, traffic management and licensing 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.

#### Costs of revenues, excluding depreciation and amortization

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

#### Operating Expenses

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

#### General and Administrative

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, legal, 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

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

#### Research and Development

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.

#### Depreciation and Amortization

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

#### Other Income (Expense)

Other income (expense) consists primarily of legal settlements, 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, interest income earned on cash and cash equivalents, short-term investments and note receivables.

#### Income Tax Provision

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

### Critical Accounting Estimates and Assumptions

A comprehensive discussion of our critical accounting estimates and assumptions is included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Annual Report on Form 10-K for the year ended December 31, 2022.

### New Accounting Pronouncements

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

### Results of Operations

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

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $9,119 | $6,778 | $23,867 | $13,455 |
| Cost of revenue, excluding depreciation and amortization | 4,320 | 3,655 | 11,319 | 7,445 |
| Operating expenses: |  |  |  |  |
| General and administrative expenses | 6,871 | 6,775 | 19,941 | 22,232 |
| Selling and marketing expenses | 1,498 | 2,432 | 5,441 | 6,390 |
| Research and development expenses | 4,270 | 4,911 | 14,011 | 13,772 |
| Depreciation and amortization | 1,963 | 1,852 | 5,925 | 4,477 |
| Goodwill impairment | - | 34,835 | - | 34,835 |
| Total operating expenses | 14,602 | 50,805 | 45,318 | 81,706 |
| Loss from operations | (9,803) | (47,682) | (32,770) | (75,696) |
| Other income (expense): |  |  |  |  |
| Gain on extinguishment of debt | - | - | 527 | - |
| Interest expense, net | (906) | (21) | (2,576) | (46) |
| Other income (expense) | 143 | (1,379) | 458 | (1,403) |
| Total other income (expense) | (763) | (1,400) | (1,591) | (1,449) |
| Loss before income taxes | $(10,566) | $(49,082) | $(34,361) | $(77,145) |

37

### Comparison of the Three and Nine Months Ended September 30, 2023 and the Three and Nine Months Ended September 30, 2022

### Total Revenue

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Revenue | $9,119 | $6,778 | $2,341 | 35% | $23,867 | $13,455 | $10,412 | 77% |

The increase in revenue for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily attributable to our acquisition of STS in June 2022. During the nine months ended September 30, 2023, revenue attributable to STS was $10,740,000, compared to $3,990,000 for the nine months ended September 30, 2022.

The other main driver of revenue growth during three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022 was attributable to sales of the Company's software and its contactless compliance program which both increased in revenue.

### Cost of Revenue, Excluding Depreciation and Amortization

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue, excluding depreciation and amortization | $4,320 | $3,655 | $665 | 18% | $11,319 | $7,445 | $3,874 | 52% |

For the three and nine months ended September 30, 2023, cost of revenue, excluding depreciation and amortization increased 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 increase in revenue.

### Operating Expenses

*(Dollars in thousands)*

| Operating expenses: | Three Months Ended September 30, 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| General and administrative expenses | $6,871 | $6,775 | $96 | 1% | $19,941 | $22,232 | $(2,291) | -10% |
| Selling and marketing expenses | 1,498 | 2,432 | (934) | -38% | 5,441 | 6,390 | (949) | -15% |
| Research and development expenses | 4,270 | 4,911 | (641) | -13% | 14,011 | 13,772 | 239 | 2% |
| Depreciation and amortization | 1,963 | 1,852 | 111 | 6% | 5,925 | 4,477 | 1,448 | 32% |
| Goodwill impairment | - | 34,835 | (34,835) | -100% | - | 34,835 | (34,835) | -100% |
| Total operating expenses | $14,602 | $50,805 | $(36,203) | -71% | $45,318 | $81,706 | $(36,388) | -45% |

#### General and Administrative Expenses

General and administrative expenses during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, remained consistent period over period.

The decrease in general and administrative expenses during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to a $3,458,000 decrease in personnel costs which was primarily related to a decrease in payroll and payroll related expenses, as well as share-based compensation expense. This decrease was partially offset by a $429,000 increase in our insurance expenses.

#### Selling and Marketing Expenses

The decrease in selling and marketing expenses during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to a $645,000 decrease in personnel costs which was primarily related to a decrease in payroll and payroll related expenses.

The decrease in selling and marketing expenses during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to a $551,000 decrease in personnel costs which was primarily related to a decrease in payroll and payroll related expenses. Additionally, there was a $267,000 decrease in advertising expenses.

#### Research and Development Expense

The decrease in research and development expenses during the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was primarily due to a $427,000 decrease in personnel costs which was primarily related to a decrease in payroll and payroll related expenses.

Research and development expenses during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, remained consistent period over period.

#### Goodwill Impairment

During the third quarter of 2022, we experienced a significant decline in our market capitalization, which management deemed a triggering event related to goodwill. As a result, we performed an interim impairment assessment as of September 30, 2022 and determined that as of the reporting date we had an impairment related to goodwill in the amount of $34,835,000.

#### Depreciation and Amortization

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

### Other Income (Expense)

*(Dollars in thousands)*

| Other income (expense): | Three Months Ended September 30, 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Gain on extinguishment of debt | $- | $- | $- | - | $527 | $- | $527 | 100% |
| Interest expense, net | (906) | (21) | (885) | 4214% | (2,576) | (46) | (2,530) | 5500% |
| Other income (expense) | 143 | (1,379) | 1,522 | 110% | 458 | (1,403) | 1,861 | 133% |
| Total other income (expense) | $(763) | $(1,400) | $637 | 46% | $(1,591) | $(1,449) | $(142) | -10% |

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

Gain on extinguishment of debt 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 assets and liabilities which were part of the Firestorm entities.

Other income (expense) increased in the current period compared to the prior period as a result of a legal settlement.

### Non-GAAP Measures

#### EBITDA and Adjusted EBITDA

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

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

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net loss from continuing operations | $(10,566) | $(48,128) | $(34,361) | $(76,191) |
| Income taxes | - | (954) | - | (954) |
| Interest | 906 | 21 | 2,576 | 46 |
| Depreciation and amortization | 1,963 | 1,852 | 5,925 | 4,477 |
| EBITDA | $(7,697) | $(47,209) | $(25,860) | $(72,622) |
| Share-based compensation | $1,081 | $1,628 | $3,237 | $5,413 |
| Goodwill impairment | - | 34,835 | - | 34,835 |
| Gain on extinguishment of debt | - | - | (527) | - |
| Adjusted EBITDA | $(6,616) | $(10,746) | $(23,150) | $(32,374) |

#### Adjusted Gross Profit and Adjusted Gross Margin

Adjusted Gross Profit is a non-GAAP financial measure that we define as revenue less cost of revenue, excluding depreciation and amortization. We define Adjusted Gross Margin as our Adjusted Gross Profit divided by our revenue. We expect Adjusted Gross Margin to continue to improve over time to the extent that we can gain efficiencies through the adoption of our technology and successfully cross-sell and upsell our current and future offerings. However, our ability to improve Adjusted Gross Margin over time is not guaranteed and could be impacted by the factors affecting our performance. We believe 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:

*(Dollars in thousands, except percentages)*

*(Dollars in thousands, except percentages)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $9,119 | $6,778 | $23,867 | $13,455 |
| Cost of revenue, excluding depreciation and amortization | 4,320 | 3,655 | 11,319 | 7,445 |
| Adjusted Gross Profit | $4,799 | $3,123 | $12,548 | $6,010 |
| Adjusted Gross Margin | 52.6% | 46.1% | 52.6% | 44.7% |

Adjusted Gross Margin for the three and nine months ended September 30, 2023 increased compared to the three and nine months ended September 30, 2022. As the 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. Additionally, during the three and nine months ended September 30, 2023, the Company had a higher mix of software sales which typically carry a higher Adjusted Gross Margin.

### Key Performance Indicators

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

#### Recurring Revenue Growth

As part of the ongoing development of our selling strategy, we have been focusing on sales that 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. 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:

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Recurring revenue | $4,827 | $4,839 | $(12) | 0% | $14,803 | $8,616 | $6,187 | 72% |

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 the integrated suite of products and services powered by our Rekor One™ engine.

#### Total Contract Value

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.

The following table presents a summary of total contract value (dollars in thousands):

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total Contract Value | $8,400 | $4,839 | $3,561 | 74% | $38,126 | $8,616 | $29,510 | 343% |

The increase in total contract value is primarily related to large statewide contracts that closed across all three customer markets.

#### Performance Obligations

As of September 30, 2023, we had approximately $30,203,000 of contracts that were closed prior to September 30, 2023 but have a contractual period beyond September 30, 2023. This represents an increase of $8,791,000 or 41% compared to $21,412,000 of performance obligations as of December 31, 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 73% 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 increase in total performance obligations is primarily related to our acquisition of STS.

### Lease Obligations

As of September 30, 2023, we had material leased building space at the following locations in the U.S. and Israel:

- Columbia, Maryland – The corporate headquarters
- Tel Aviv, Israel

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

### Liquidity and Capital Resources

The following table sets forth the components of our cash flows from continuing operations for the periods included (dollars in thousands):

|  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Net cash used in operating activities | $(26,666) | $(30,374) | $3,708 | 12% |
| Net cash provided by (used in) investing activities | 646 | (10,447) | 11,093 | 106% |
| Net cash provided by financing activities | 31,360 | 22,817 | 8,543 | 37% |
| Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents | $5,340 | $(18,004) | $23,344 | 130% |

Net cash used in operating activities for the nine months ended September 30, 2023 had a decrease of $3,708,000, which was primarily attributable to the reductions in expenses from continuing operations.

The net decrease in net cash used in investing activities of $11,093,000 was primarily due to a decrease in the outflow of funds used for capital expenditures. Additionally, during the nine months ended September 30, 2022, the Company had net cash outflows of $6,389,000 related to the acquisition of STS.

Net cash provided by financing activities for the nine months ended September 30, 2023 increased by $8,543,000 from the prior nine month period ended September 30, 2022. During the nine months ended September 30, 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. Additionally, in the third quarter of 2023, we received gross proceeds of $10,996,000 related to the exercise of warrants associated to the 2023 Registered Direct Offering. 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 $22,758,000.

For the three and nine months ended September 30, 2023 and 2022, we funded our operations primarily through cash from operating activities, the issuance of debt and the sale of equity. As of September 30, 2023, we had cash and cash equivalents from continuing operations of $7,359,000 and working capital of $3,579,000, as compared to cash and cash equivalents of $2,178,000 and a working capital deficit of $6,010,000 as of December 31, 2022.

### Liquidity

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 nine months ended September 30, 2023, we had working capital from continuing operations of $3,579,000 and a loss from continuing operations of $34,361,000.

Our cash increased by $4,891,000 for the nine months ended September 30, 2023 primarily due to external financing which was offset by the loss from continuing operations of $34,361,000.

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.

#### 2023 Promissory Notes with Warrants

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.

#### 2023 Registered Public Offering

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.

During the third quarter of 2023, the institutional investor connected to the 2023 Registered Direct Offering exercised 6,872,853 of the Registered Direct Warrants into an equal number of shares of the Company's common stock. The Company received gross proceeds from the exercise of the Registered Direct Warrants of approximately $10,996,000.

As of September 30, 2023, we did not have any material commitments for capital expenditures.

## Market risk

As filed, 142 characters.

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.

## Controls and procedures

As filed, 1,554 characters.

### Evaluation of Disclosure Controls and Procedures

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

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

Based on management’s review, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2023.

### Changes to Internal Control over Financial Reporting

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

## Risk factors

As filed, 420 characters.

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.

Filed Nov 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-031990. Last ingested by Listed: Oct 27, 2026, 12:16 ET. No prices; not investment advice.