Rekor Systems, Inc.: Form 10-Q for the period ended Sep 30, 2025

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, 2024, 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, wars and local conflicts and other events that could affect our operations and 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 ATD Acquisition;
• our continued ability to successfully access the public markets for debt or equity capital;
• political, legal, regulatory, administrative, military and economic conditions and developments in the United States (“U.S.”) and other countries in which we operate and, in particular, the impact of ongoing hostilities in the Middle East and 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, and their impact U.S. and international markets and 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, 2024 (the “2024 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 serves governmental and commercial customers by providing advanced roadway intelligence products and services. Our customers include federal, state and local governments and large commercial customers in the North America, as well as commercial customers in many other countries. Rekor generates and distributes roadway data used in the management, maintenance and planning of transportation infrastructure. We have been working for many years to develop and deploy proprietary systems that modernize and improve the collection and use of roadway data. Our systems employ advanced models developed using machine learning and other recent advances in artificial intelligence (“AI”) to enhance public safety, urban mobility, and transportation management. By collaborating closely with our public and private sector customers, we deliver mission-critical services and solutions that enable them to achieve their objectives effectively, while simultaneously working toward creating a connected, data-driven infrastructure ecosystem.

Our vision is to create safer, smarter, and more sustainable roadways and communities, improving the lives of citizens and the world around them. Our approach leverages its AI capabilities to collect, organize and analyze mobility data and distribute it securely and efficiently, making it useful, accessible, and actionable for real-time insights and decision-making. This provides our customers with significantly enhanced situational awareness, rapid response capabilities, risk mitigation strategies, and predictive analytics. To assist our customers in realizing this vision, we’ve developed purpose-built software platforms and a complimentary suite of interconnected AI-enabled hardware offerings. We’ve designed these solutions to exploit a set of diverse multi-modal datasets using our proprietary AI technologies, with the objective of delivering unparalleled roadway intelligence. They enable clients to more effectively monitor, manage, and optimize the movement of vehicles and activities in and around roadways and communities with precision. Through real-time insights and predictive analytics, our platforms enable rapid decision-making, proactive risk mitigation, and streamlined operations across public safety, urban mobility, and transportation systems and agencies, ensuring smarter and safer outcomes for all.

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

A New Operating System for Roadways

We believe the United States of America is undergoing significant transition in the evolution of its transportation and roadway infrastructure. For over 70 years, the nation has relied on legacy technologies that depend on analog and manual methodologies, resulting in inefficiencies, rising costs, and preventable safety hazards. While innovations like sensor technology, Internet of Things (“IoT”), AI, cloud computing, and autonomous vehicles are advancing rapidly, fundamental challenges such as poor roadway quality, traffic congestion, and driver safety continue. A concentrated recent effort by federal, state and local governments to repair and upgrade the nation’s roadways has provided an exciting opportunity to modernize the nation’s transportation infrastructure and address these challenges.

Since 2018, Rekor has positioned itself to participate in this modernization effort by actively designing, building, testing and deploying its AI solutions through public-private collaborations with departments of transportation (“DOTs”), public safety agencies, and private sector partners. Rekor is committed to keep a leadership role in laying the foundation of a new digital infrastructure operating system for roadways—and has already delivered proven value across multiple domains:

• Enhanced Roadway Safety: Real-time AI monitoring systems detect roadway hazards and reduce incident response times, helping to prevent injuries and fatalities.
• Optimized Traffic Flow: Intelligent analytics alleviate congestion, improve commute times, and boost productivity.
• Cost Savings & Efficiency: AI automation streamlines operations, maximizing resource allocation for agencies.
• Improved Data Accuracy & Insights: Precise, real-time traffic data drives smarter decision-making and better resource planning.
• Border & Freight Management: AI-driven vehicle identification enhances security while minimizing bottlenecks.
• Uninsured Driver Reduction: Automated enforcement ensures insurance compliance, improving public safety.

With these forward-thinking infrastructure strategies, Rekor is playing a leading role in reshaping how transportation systems operate. Its solutions empower agencies to prevent accidents, reduce inefficiencies, and optimize resources, driving smarter, safer, and more efficient roadways across the nation.

Roadway Intelligence

Rekor is a leader in roadway intelligence, committed to supporting the process of revolutionizing transportation systems by collecting, connecting, and organizing the world’s mobility data. Improving and making effective use of roadway intelligence requires the ability to harness vast amounts and varieties of data from roadways, vehicles, transportation systems, and hundreds of external elements like weather, special events, and work zones, and do the analysis and distribution that transforms them into actionable insights that operators and planners can use productively. These unique insights permit our customers to enhance public safety, visualize and optimize traffic flows more quickly, and improve other operational efficiencies. Through our Rekor One® roadway intelligence engine, we aggregate these datasets from diverse sources and securely deliver these insights to government agencies and private-sector clients, driving smarter, more effective decision-making across transportation management, urban mobility, and public safety ecosystems, as well as multiple commercial market segments.

Inspired by the Open System Interconnection (“OSI”) model, Rekor works to integrate fragmented transportation systems into a cohesive, unified network. Collaborating with government agencies, infrastructure operators, transit providers, and technology partners, we can consolidate hardware, software, and data into a connected platform that delivers smarter, safer, and more efficient roadways.

Our mission extends beyond connectivity—we are building dynamic, AI-enabled networks to modernize traffic management, public safety, and emergency services. By supporting the establishment of a digital overlay on existing physical infrastructure, Rekor is helping to create a new generation digital operating system for roadways, delivering real-time intelligence that powers economic growth, operational excellence, and improved quality of life for communities.

Roadway Intelligence Powered by Rekor

The Rekor One® roadway intelligence engine serves as a central data and analytics platform that integrates multimodal mobility and roadway data into actionable insights. Powered by advanced AI and fueled by diverse data sources, Rekor delivers real-time and predictive solutions that enhance mobility, safety, and operational efficiency across public and private sectors. Our platforms aggregate and analyze trillions of data points from IoT devices, roadway sensors, cameras, and an expansive partner network, enabling customers to make proactive, informed decisions and optimize resources, and enabling us to deliver tailored solutions for government and commercial customers in public safety, urban mobility, and transportation management.

Within this suite, Rekor has developed specialized AI-powered platforms that serve as core revenue streams:

• Rekor Command®: A cutting-edge, AI-enabled platform that provides Transportation Management Centers with a rapid and holistic view of roadway activity. By collecting and analyzing multiple real-time and historical data sources efficiently, Rekor Command delivers our customers with actionable alerts for more incidents, at greater speed, transforming roadway management by enabling faster detection, situational awareness, and proactive response.
• Rekor Discover®: Leveraging artificial intelligence models developed through years of supervised machine learning analysis of high-resolution video streams, Rekor Discover fully automates the capture of comprehensive traffic and vehicle analytics across a wide variety of use cases. Strategically deployed, non-intrusive, video-based camera systems with AI-powered edge processing deliver powerful roadway intelligence and operational efficiencies.
• Rekor Scout®: A versatile platform that enables accurate license plate and vehicle recognition on nearly any IP, traffic, or security camera. With quick deployment and a web-based interface hosted in the cloud or on-premise, Rekor Scout provides scalable security enhancements for government agencies, law enforcement, businesses, and even residential customers.

Rekor’s solutions support a variety of use cases, including:

• Traffic Analysis
• Comprehensive traffic reports, including Federal Highway Administration (“FHWA”)-mandated vehicle classification, count and speed analytics.
• Analytics on bicycles, pedestrians, and other micro-mobility modes.
• Identification of patterns and hot spots for emissions and traffic impacts.
• Traffic Operations & Management
• Data-driven traffic operations for improved efficiency.
• Real-time incident detection and response for proactive problem-solving.
• Proactive traffic calming around events to minimize congestion and enhance safety.
• Intelligent analytics to alleviate congestion, shorten commute times, and boost productivity.
• High-Definition Video Monitoring
• Traffic monitoring to assist law enforcement.
• Support for intelligence-based policing to improve crime prevention.
• Contactless compliance and enforcement solutions for safety and legal adherence.
• Enhanced Roadway Safety
• Real-time AI enabled monitoring systems to detect hazards and help reduce roadway fatalities.
• Predictive analytics to anticipate and address potential safety risks.
• Optimized Resource Allocation
• AI assistance to allow managers to streamline operations and maximize resource allocation.
• Improved data accuracy to support better decision-making and strategic planning.
• Border & Freight Management
• AI-assisted vehicle identification to enhance national security and minimize bottlenecks at borders and ports.
• Weigh-in-Motion (“WIM”) systems for real-time commercial trucking analytics
• Insurance Compliance & Public Safety
• Automated enforcement systems to reduce uninsured drivers and improve overall public safety.

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Opportunities, Trends and Uncertainties

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

• Growing Smart City Market – According to a United 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.
• AI for Infrastructure – We believe that the application of AI to the analysis of conditions on roadways and other transportation infrastructure can significantly affect the safety and efficiency of travel in the future. As vehicles move towards full automation, there is a need for real-time data and actionable insights around traffic flow, identification of anomalous and unsafe movements – e.g. wrong way vehicles, stopped vehicles, or/and pedestrians on the roadway. Marketers and drive-thru retailers with loyalty programs can also benefit from rapid, lower cost identification of existing and potential customers in streamlining and accelerating local vehicular flow as well as data about the vehicles on the roadway.
• Connected Vehicle Data – Today’s new vehicles are equipped with dozens of sensors, collecting information about internal systems, external hazards, and driving behaviors. This data is a resource that transportation and other agencies are beginning to find valuable uses for. Notably, the data from these vehicles represent a virtual network that is independent of the infrastructure which is maintained and operated by the public agencies. Connected vehicle sensors can provide important information related to hazardous conditions, speed variations, intersection performance, and more. This data can help agencies and municipalities 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.
• New and Expanded Uses for Vehicle Recognition Systems – We believe that reductions in the cost of vehicle recognition products and services will significantly broaden the market for these systems. We also expect the availability of faster, higher-accuracy, lower-cost systems to dramatically increase the ability of crowded urban areas to manage traffic congestion and implement smart city programs. We currently serve many users who could not afford the cost, or adapt to the restrictions of, conventional vehicle recognition systems. These include smaller municipalities, homeowners’ associations, and organizations finding new applications such as innovative customer loyalty programs. As larger agencies implement and grow more familiar with the new systems, we have seen and responded to increased awareness among smaller agencies.
• 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. Based on published benchmarks, our software currently outperforms competitors. However, large users of existing technology, such as toll road operators, have long-term contracts with service providers that have made considerable investments in their existing technologies and may not consider the improvements in accuracy or reductions in cost sufficient to justify abandoning their current systems in the near future. In addition, existing providers may be able to reduce the cost of their current offerings or elect to reduce prices and accept reduced profitability while working to develop their own systems or secure advanced systems from others who are also working to develop them. As a result, our success in establishing a major position in these markets will depend on being able to effectively communicate our presence, develop strong customer relationships, and maintain leadership in providing the capabilities that customers want. As with any large market, this will require considerable effort and resources.
• Expansion of Automated Enforcement of Motor Vehicle Laws – We expect contactless compliance programs to be expanded as the types of vehicle related violations authorized for automated enforcement increase and experience provides localities with a better understanding of the circumstances where it is and is not beneficial. We believe that future legislation will increasingly allow for automated enforcement of weight requirements and 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 or incursions into restricted lanes. For example, due to high rates of fatalities and injuries to law enforcement and other emergency response crews on roadsides, several states have considered 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.

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• Graphic Processing Unit (“GPU”) Improvements – We expect our business to benefit from more powerful and affordable GPU hardware that has recently been developed. These GPUs are more efficient for image processing because their highly parallel structure makes them more efficient than general-purpose central processing units (“CPUs”) for algorithms that process large blocks of data, such as those produced by video streams. GPUs also provide superior memory bandwidth and efficiencies as compared to their CPU counterparts. The most recent versions of our software have been designed to use the increased GPU speeds to accelerate image recognition. The GPU market is predicted to grow as a result of a surge in the adoption of the Internet of Things (“IoT”) by the industrial and automotive sectors. If GPU manufacturers are able to increase production volume, we hope to benefit from the reduced cost to manufacture the hardware included in our products or available to others using our services.
• Edge Processing – Demand for actionable roadway information continues to grow in parallel with sensor improvements, such as increasingly sophisticated internal software and optical and other hardware adapted to the use of this software. Over the last several decades, sensors have evolved and unlocked new capabilities with each advancement. Further, cellular networks have been optimized for downloading data rather than uploading data. As a result, while download speeds have improved significantly due to large investments in cellular infrastructure, this has resulted in relatively small improvements to cellular upload speeds. With roadside deployments experiencing explosive growth in count and density, scalability, latency and bandwidth have become aspects of competition in the market. Our systems have been designed to address these issues through the use of more effective edge processing, enabled both by incorporating the increasingly effective new GPUs into our systems and continual improvements in the efficiency of our AI algorithms. Our edge processing systems ingest local HD video streams at the source and convert the raw video data to text data, dramatically reducing the volume of data that needs to be uploaded and transferred through the network. Edge processing allows us to scale a network dramatically without the bandwidth, cost, latency and dependability limitations that are experienced by other networks where raw video needs to be streamed to the cloud for processing.
• Accelerated Business Development and Marketing – Our ability to compete in a large, competitive and rapidly evolving industry will require us to achieve and maintain a visible leadership position. As a result, we will need to make significant investments in our business development, marketing and eCommerce activities to increase awareness and market adoption of our products and services within key markets. If we are able to maintain 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.
• 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 there will continue to be bi-partisan support for these programs and 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.
• Challenges to Executing on the Corporate Strategy – As an acquirer and integrator of established technology companies in the ITS industry, there is an inherent risk associated with the successful implementation and execution of the strategy. If Rekor is unable to successfully implement and execute its plans, there could be a material and adverse effect on the Company’s business, results of operations, and financial condition.
• Inability to Achieve Profitability - Rekor continues to grow its business, its operating expenses and capital expenditures have increased, and it has not yet achieved the level of sustaining profitability. As a result, if the Company is unable to generate additional revenue or achieve planned efficiencies in operations, or if its revenue declines significantly, Rekor may not be able to achieve profitability in the future, which would materially and adversely affect the Company’s business.
• Inability to Retain Qualified Personnel – Rekor’s success depends on the continued efforts and abilities of the senior management team and key engineering and marketing specialists. Although Rekor has employment agreements with these employees, they may not choose to remain employed by Rekor. Should one or more key personnel leave the Company or join a competitor, the Company’s business, operating results, and financial condition can be adversely affected.
• Inability to Compete Effectively - Competition and technological advancements by others may erode the Company’s business and result in inability to capture new business and revenue. Each business line faces significant competitive pressures within the markets in which they operate. While Rekor continues to work to develop and strengthen its competitive advantages, many factors such as market and technology changes may erode or prevent this. If the Company is unable to successfully maintain its competitive advantage, the Company’s business, operating results, and financial condition can be adversely affected.
• Cyber Security Risks - Rekor relies on information technology in all aspects of its business. A significant disruption or failure in the information technology systems could result in services interruptions, safety failures, security violations, regulatory compliance failures, an inability to protect information and assets against intruders, and other operational difficulties. This could result in the loss of assets and critical information and expose the Company to remediation costs and reputational damage. Although Rekor takes reasonable steps intended to mitigate these risks, a significant disruption or cyber intrusion could lead to misappropriation of assets or data corruption and could adversely affect the Company’s results of operations, financial condition, and liquidity.
• Intellectual Property Claims - Third parties that have been issued patents or have filed for patent applications similar to those used by the Company’s operating subsidiaries may result in intellectual property claims against the Company. Rekor cannot determine with certainty whether existing third-party patents or the issuance of any future third party patents would require any of its operating subsidiaries to alter their respective technologies, obtain licenses or cease certain activities. Should the Company be unable to defend against such claims, the Company’s business, operating results, and financial condition can be adversely affected.

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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.

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 income and 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, gain or losses on the change in fair value of our liabilities, and interest income earned on cash and cash equivalents 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, 2024.

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.

(Dollars in thousands)

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Comparison of the Three and Nine Months Ended September 30, 2025 and the Three and Nine Months Ended September 30, 2024

Total Revenue

(Dollars in thousands)

Revenue increased for the three and nine months ended September 30, 2025, compared to the corresponding periods in 2024, primarily due to higher perpetual license sales in Q3 2025.

Cost of Revenue, Excluding Depreciation and Amortization

(Dollars in thousands)

Cost of revenue, excluding depreciation and amortization, decreased for the three and nine month periods ended September 30, 2025, compared to the corresponding prior-year periods, primarily due to a favorable revenue mix of software versus hardware, which resulted in higher margins from increased software license sales.

Operating Expenses

(Dollars in thousands)

General and Administrative Expenses

General and administrative expenses decreased for the three and nine months ended September 30, 2025, compared to the prior-year periods. The decrease was primarily driven by reductions in payroll and related expenses of $1,085,000 and $1,766,000, respectively, as a result of cost-containment initiatives implemented to better align with operations. In addition, bad debt expense decreased by $591,000 and $798,000, respectively, and professional fees decreased by $571,000 and $390,000, respectively.

Selling and Marketing Expenses

For the three and nine months ended September 30, 2025, the decrease in selling and marketing expenses was primarily due to a $388,000 and $1,091,000 decrease related to payroll and payroll related costs as a result of cost-containment initiatives implemented to better align with operations.

Research and Development Expense

For the three and nine months ended September 30, 2025, the decrease in research and development expenses was primarily due to a $1,000,000 and $3,138,000 decrease related to payroll and payroll related costs as a result of cost-containment initiatives implemented to better align with operations.

Depreciation and Amortization

The decrease in depreciation and amortization during the period is attributable to an impairment we recognized as of December 31, 2024, following the identification of a triggering event.

Other Income (Expense)

(Dollars in thousands)

For the three months ended September 30, 2025, interest expense increased by 15%, however, for the nine months ended September 30, 2025 interest expense decreased compared to the corresponding period in 2024 due to the early redemption of the 2023 Promissory Notes.

Loss on extinguishment of debt is a result of early redemption of the 2023 Promissory Notes in 2024. As part of the redemption, we recorded accelerated debt issuance costs of $2,818,000 and a redemption payment of $1,875,000 which we settled through the issuance of common stock.

Additionally, in 2024 we recorded non-operating items, including a loss on offering costs related to our Prepaid Advance and a gain on the sale of Global Public Safety. These items were one-time in nature and did not recur in 2025.

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):

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)

Adjusted Gross Margin for the three and nine months ended September 30, 2025 increased compared to the three and nine months ended September 30, 2024. The fluctuation in Adjusted Gross Margin is typically correlated to the mix of software sales versus service type work. Typically our software sales 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 (dollars in thousands):

We expect to continue to focus on long-term contracts with recurring revenue as part of our business model, which is intended to cause recurring revenue growth in future periods to continue to increase. However, procurement requirements for some of our largest customers may result in periods when there is an increase one-time sales as compared to recurring revenues, which may cause the proportion of recurring revenues generated in those periods to fluctuate. In addition, there may be an increase in one time sales as a result of initial installations related to the development of recurring revenue.

Performance Obligations

As of September 30, 2025, we had approximately $13,157,000 of contracts that were closed prior to September 30, 2025 but have a contractual period beyond September 30, 2025. These contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. Performance obligations for large contracts gradually decrease as they approach the renewal stage and increase if and when renewed. We currently expect to recognize approximately 86% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion, our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the contract related to the performance obligation for a service period that is not yet met are recorded as part of our contract liabilities balance.

Lease Obligations

As of September 30, 2025, 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 or decrease facilities as considered appropriate to meet the needs of our planned operations.

Liquidity and Capital Resources

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

Net cash used in operating activities for the nine months ended September 30, 2025 had a decrease of $6,970,000, which was primarily attributable to a reduction in our net loss.

The decrease in net cash used in investing activities of $6,580,000 was primarily due to the net cash outflow of $9,222,000 related to the acquisition of ATD. The decrease in net cash used in investing activities was partially offset by an increase in capital expenditures, which are directly tied to revenue generating contracts.

Net cash provided by financing activities for the nine months ended September 30, 2025 decreased by $10,722,000 from the prior nine month period ended September 30, 2024. During the nine months ended September 30, 2025, as part of our Sales Agreement, we received net proceeds of $22,350,000. During the nine months ended September 30, 2024, as part of our 2024 Public Offering and Prepaid Advance, we received net proceeds of $26,362,000 and $14,100,000, respectively, these proceeds were partially offset by the repayment of our 2023 Promissory Notes.

For the three and nine months ended September 30, 2025 and 2024, we funded our operations primarily through cash from operating activities, the issuance of debt and the sale of equity. As of September 30, 2025, we had cash and cash equivalents and restricted cash of $3,411,000 and a working capital of $6,959,000, as compared to cash and cash equivalents and restricted cash of $5,329,000 and working capital of $1,707,000 as of December 31, 2024.

Liquidity

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 least one year from the date these 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.

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, 2025, we had working capital of $6,959,000 and a net loss of $23,681,000.

Our cash decreased by $1,918,000 for the nine months ended September 30, 2025 primarily due to the net loss of $23,681,000, this amount was partially offset by external financing activity.

On February 10, 2025, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with Northland Securities, Inc. (the “Agent”), pursuant to which the Company may, from time to time, offer and sell shares of the Company’s common stock, par value $0.0001 per share (“Common Stock”), having an aggregate offering price of up to $25,000,000. The Agent is entitled to receive from the Company a commission in an amount equal to (i) 3.0% of the gross sales price per share sold through it as agent in agency transactions and (ii) 6.0% of the purchase price per share sold to the Agent, as principal in principal transactions. The Company incurred issuance costs of approximately $245,000 related to legal, accounting, and other fees in connection with the Sales Agreement. These costs were charged against the gross proceeds of the Sales Agreement and presented as a reduction to additional paid-in capital on the accompanying consolidated balance sheets.

On August 12, 2025, the Company elected to voluntarily terminate its Sales Agreement.

As of September 30, 2025 the Company issued 18,888,832 shares of its common stock at a weighted average selling price of $1.23 per share in accordance with the Sales Agreement. Net cash provided from the Sales Agreement was $22,350,000 after paying $245,000 related to the issuance cost, as well as 3.0% or $699,000 related to cash commissions provided to the Agent. See Note 9 – Stockholders’ Equity for details on shares issued under the Sales Agreement.

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. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for the next twelve months following the issuance of these unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

The Company's ability to generate positive operating results and execute its business strategy will depend on (i) its ability to continue the growth of its customer base, (ii) its ability to continue to improve its quarterly financial metrics such as net loss and cash used from operating activities (iii) the continued performance of its contractors, subcontractors and vendors, (iv) its ability to maintain and build good relationships with investors, lenders and other financial intermediaries, (v) its ability to maintain timely collections from existing customers, and (vi) the ability to scale its business processes. To the extent that events outside of the Company's control have a significant negative impact on economic and/or market conditions, they could affect payments from customers, services and supplies from vendors, its ability to continue to secure and implement new business, raise capital, and otherwise, depending on the severity of such impact, materially adversely affect its operating results.

As of September 30, 2025, we did not have any material commitments for capital expenditures.

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

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 Interim Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2025.

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.

Tariffs and Trade Policy Changes Could Adversely Affect Our Supply Chain and Financial Performance

We depend on international suppliers for certain hardware components, such as cameras and sensors, used in our AI-driven roadway intelligence solutions. Recent U.S. tariffs on imports, from trading partners, could significantly increase our component costs. If we are unable to pass these increased costs to customers due to competitive pressures, our gross margins could decline, further straining our financial condition. Moreover, ongoing trade policy uncertainty could hinder our ability to plan effectively, adversely affecting our business, operating results, and financial condition.

An extended U.S. Government Shutdown Could Adversely Affect Our Ability to Execute Contracts, Receive Payments, and Secure New Awards.

A portion of our revenue is derived, directly or indirectly, from contracts with U.S. federal, state, and local government agencies. As a result, our business is subject to risks associated with changes in government funding priorities, budgetary constraints, and administrative disruptions.

During a shutdown or delay in the passage of appropriations bills, government agencies may experience interruptions in procurement, contracting, and payment activities. Consequently, agencies may be unable to issue new awards, exercise contract options, or obligate additional funding under existing contracts. Ongoing projects could be delayed or suspended, and payments to us may be deferred due to the unavailability of appropriated funds or furloughs of government personnel responsible for contract administration and approvals. These disruptions could negatively impact our cash flows, the timing of revenue recognition, and our overall financial results.

Even short-term shutdowns or funding delays can create uncertainty for our customers and partners, lengthen sales and contracting cycles, and affect our ability to forecast and close new business. There can be no assurance as to when a U.S. government shutdown would end or how quickly our customers and partners could resume normal operations and payment activities. Prolonged or repeated shutdowns, or material delays in government appropriations, could have a material adverse effect on our business, results of operations, liquidity, and financial condition.

Other than the risk factor discussed above, 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 September 30, 2025. We encourage investors to review the risk factors and uncertainties relating to our business disclosed in that Form 10-K, as supplement by this Form 10-Q, as well as those contained in Part 1, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above.