Rekor Systems, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 15, 2023. Unaudited results. Rekor provides AI-based roadway data, traffic management and mobility intelligence products and services. The prior-year comparison reflects continuing operations, with its divested automated traffic safety and enforcement business reported as discontinued operations.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $6.185 million | $2.975 million |
| Recurring revenue | $4.204 million | $1.695 million |
| Adjusted gross profit / margin | $3.317 million / 53.6% | $1.438 million / 48.3% |
| Operating loss | $12.687 million | $12.678 million |
| Net loss | $12.682 million | $12.601 million |
| Adjusted EBITDA (non-GAAP) | $(9.381) million | $(9.400) million |
| Net cash used in continuing operating activities | $9.490 million | $12.260 million |
| Cash and cash equivalents, March 31 | $12.066 million | — |
Revenue grew 108% year over year; recurring revenue grew 148%. Adjusted gross margin excludes depreciation and amortization and is a non-GAAP measure. Loss per share was $0.23, versus $0.29. Total cash, cash equivalents and restricted cash, including discontinued operations, was $13.023 million at quarter-end. Continuing-operations working capital was $6.974 million. The filing reports $14.928 million of debt principal due before the unamortized debt discount; notes payable carried at $10.220 million. Lease liabilities were $14.941 million.
Material changes versus the prior period
- Revenue increased by $3.210 million, primarily reflecting STS, acquired in June 2022; urban mobility revenue was $2.754 million, compared with none in Q1 2022.
- Cost of revenue rose 87%, less than revenue growth; management attributed improved adjusted gross margin to operating efficiencies as offerings scale and standardize.
- Operating expenses rose 13% to $16.004 million, including higher selling and marketing, research and development, and depreciation and amortization. Operating loss was broadly unchanged.
- Interest expense increased to $761,000, mainly due to the 2023 promissory notes. The quarter included a $527,000 gain on extinguishment of debt tied to the Firestorm settlement.
- Financing provided $20.643 million of net cash, including proceeds from senior secured notes and a registered direct offering. Common shares outstanding increased during the quarter; the offerings also issued substantial warrants.
Outlook, risks and unusual items
- Going concern: Management states existing cash is insufficient to fund operations for the 12 months following issuance of the statements, raising substantial doubt about the company’s ability to continue as a going concern. Rekor is evaluating external financing and says it may further reduce or defer expenses if financing is unavailable.
- Management outlook: No formal numeric revenue or earnings guidance is provided. Management expects recurring revenue to grow as it markets the Rekor One platform and says adjusted gross margin may improve, but notes improvement is not assured.
- Commercial indicators: Rekor reported $12.083 million of contracts won in the quarter, primarily reflecting a Florida DOT statewide contract. Remaining performance obligations were approximately $24.330 million; the company expects to recognize about 67% over the next 12 months. Contract values and recognition timing depend on assumptions and contract terms.
- Financing terms and dilution: The 2023 notes carry 12% annual interest, mature July 18, 2025, are senior secured and include covenants and early-redemption provisions. Financing-related warrants and the registered offering create potential dilution; the filing reported 14.422 million outstanding warrants at quarter-end.
- Other risks: The company cites dependence on additional capital, operating cash burn, competition, product adoption and development, government budgets and procurement, acquisition integration, supply-chain and equipment risks, and cybersecurity. Customer concentration is also present: one customer represented 13% of quarterly revenue and another exceeded 14% of accounts receivable at quarter-end.
- Firestorm settlement: The March settlement resolved the disclosed litigation through mutual releases, transfer of certain assets and a $175,000 payment. Former principals relinquished claims on acquisition notes and rights to exercise related warrants; 631,254 warrants were cancelled.
Investor facts to verify
- Cash runway, actual subsequent cash burn, and whether additional financing was obtained on terms that preserve liquidity and limit dilution.
- Progress, implementation and revenue contribution from the Florida DOT contract, as well as conversion of remaining performance obligations into recognized revenue and cash collections.
- Ability to sustain recurring-revenue growth and gross-margin improvement while controlling operating costs.
- Debt service and covenant capacity under the 12% secured notes, including any future redemption or financing requirements.
- Potential dilution from outstanding warrants, pre-funded warrants, restricted stock units and other equity awards.