Rekor Systems, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Unaudited results; dollar amounts below are in millions unless noted. Rekor provides AI-enabled roadway intelligence, data, software, hardware, and related services. The quarter includes All Traffic Data Services (ATD), acquired January 2, 2024.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $9.778 | $6.185 |
| Cost of revenue, excluding depreciation and amortization | $5.285 | $2.868 |
| Adjusted gross profit / margin (non-GAAP) | $4.493 / 46.0% | $3.317 / 53.6% |
| Operating loss | $(12.916) | $(12.687) |
| Net loss | $(18.614) | $(12.682) |
| Basic and diluted loss per share | $(0.23) | $(0.23) |
| Adjusted EBITDA (non-GAAP) | $(9.368) | $(9.381) |
| Cash used in operating activities | $(7.886) | $(9.490) |
- Revenue rose 58%; recurring revenue increased 18% to $4.963 million. ATD contributed $2.364 million of Q1 revenue.
- Adjusted gross margin fell 7.6 percentage points; management attributed the decline primarily to a lower mix of higher-margin software sales.
- Cash and cash equivalents were $11.881 million at March 31; including restricted cash, the total was $12.267 million. Working capital was $5.241 million, down from $8.100 million at December 31, 2023.
- Cash used in investing was $9.130 million, including $8.969 million net cash paid for ATD. Financing provided $13.570 million, including $26.362 million of net proceeds from the February public offering, partly offset by redemption of the 2023 notes.
- Notes payable had $17.329 million of principal outstanding, or $16.715 million net of unamortized discount. This includes $15 million principal of Series A Prime Revenue Sharing Notes bearing 13.25% annual interest, due December 2026. Operating and finance lease liabilities are additional obligations.
Material changes and unusual items
- ATD acquisition consideration was approximately $20.774 million: $9.795 million cash and $10.979 million in stock. Preliminary allocation included $12.1 million of identifiable intangibles and $3.568 million of goodwill.
- Rekor redeemed its $12.5 million 2023 Promissory Notes in March at a 115% redemption price plus accrued interest. It paid part of the redemption premium in shares and recognized a $4.693 million loss on extinguishment, including $2.818 million of accelerated issuance costs. This materially contributed to the higher net loss.
- Common shares outstanding increased from 69.2 million at December 31 to 85.3 million at March 31, reflecting the public offering, ATD acquisition stock consideration, and other share activity. The filing also reports 9.581 million outstanding warrants.
- Total contract value was $7.846 million, down 35% year over year; management said large statewide contracts closed in Q1 2023 drove the comparison, and those contracts remained in effect.
Outlook, risks, and contingencies
- Going concern: Management states existing cash is insufficient to fund the current level of operations for the 12 months following issuance of the financial statements, raising substantial doubt about the company’s ability to continue as a going concern. Rekor is exploring external financing and may reduce or defer expenses if financing is unavailable.
- Remaining performance obligations were approximately $22.912 million at March 31; about $17.494 million is expected to be recognized over the succeeding 12 months. These amounts are not a revenue forecast.
- No formal financial guidance is provided in the supplied filing text. Management expects recurring revenue growth over time, while noting customer procurement timing can shift the mix toward one-time sales. It also expects continued investment in sales and marketing and anticipates general and administrative expenses will remain high in the foreseeable future.
- Series A notes require an interest reserve; the filing reports $0.5 million held for this purpose. A sinking-fund requirement could apply if eligible contract value falls below a specified threshold; it had not been triggered, and Rekor reported no default as of March 31.
- HCW litigation remains pending. HCW seeks at least $825,000 plus warrants and an additional $2.156 million plus warrants relating to the February offering. Rekor denies the claims and filed counterclaims; the company’s stated position is that HCW’s claims are without merit. Two former employees’ OSHA matter is set for a hearing beginning December 2, 2024; the company says it will defend the claims.
- Disclosure controls were deemed ineffective due to a material weakness in controls over tax accounting for significant and unusual transactions, identified in connection with ATD-related intangible assets. Management reported additional analysis of the statements and plans remediation, expected to be at least partially implemented by year-end 2024.
- Other stated risks include access to capital, sustained losses, acquisition integration, competition, customer collections, cybersecurity, technology adoption, and litigation. The filing does not provide a clear quantified estimate of potential losses from the pending legal matters.
Important facts for investors to verify
- Whether Rekor obtains sufficient financing to address the disclosed 12-month funding shortfall, and how any financing affects liquidity and dilution.
- Cash burn, customer collections, and progress toward improving operating losses and gross margin.
- ATD integration, contribution to revenue and margins, and any final purchase-price allocation adjustments.
- Terms, covenants, and potential cash demands under the Series A notes, including whether the sinking-fund threshold is met in future periods.
- Developments and potential exposure in the HCW and OSHA matters, and progress in remediating the internal-control material weakness.
- Potential dilution from outstanding warrants, equity awards, and the additional shares registered for the equity incentive plan.