Rekor Systems, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. Rekor provides roadway intelligence, vehicle recognition, analytics and related software, hardware and services to government and commercial customers.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $2.615m | $2.126m | $11.105m | $6.399m |
| Operating loss | $(9.655)m | $(3.367)m | $(19.648)m | $(8.749)m |
| Net loss | $(9.613)m | $(6.669)m | $(19.781)m | $(11.075)m |
| Basic and diluted loss per share | $(0.23) | $(0.26) | $(0.52) | $(0.53) |
| Adjusted EBITDA, non-GAAP | $(6.713)m | $(2.662)m | $(12.745)m | $(6.797)m |
Revenue grew 23% in Q3 and 74% for the nine-month period. Recurring revenue was $1.233m in Q3, up 28%, and $3.142m for nine months, up 9%. For nine months, product and service revenue rose to $7.963m from $3.523m. The Oklahoma uninsured-vehicle program contributed $345,000 in Q3 and $975,000 year to date; Waycare contributed $260,000 after its acquisition.
Cost of revenue excluding depreciation and amortization was $1.402m in Q3 and $4.705m year to date. The company’s non-GAAP adjusted gross margin was 46.4% in Q3 versus 54.0%, and 57.6% for nine months versus 57.1%. Management attributed margin variation primarily to the mix of software and hardware sales and lower-margin pilot programs.
At September 30, 2021, cash and cash equivalents were $35.102m, with an additional $1.063m of restricted cash. Working capital was $28.203m. Total liabilities were $25.895m. Balance-sheet notes and loan payables totaled approximately $1.951m; operating lease liabilities were $10.095m. The company reported $12.325m of cash used in operating activities for the nine months, including $12.321m from continuing operations.
Material changes and notable transactions
- On August 18, Rekor acquired Waycare for stated consideration of $61.1m: $40.813m in cash and 2,784,474 common shares valued at $20.287m. The preliminary allocation included $43.524m of goodwill and $17.255m of acquired technology. Waycare was included in reported results only from the acquisition date.
- February’s public offering generated $70.125m of net proceeds from 6,126,939 common shares. Outstanding Series A and Series B preferred stock converted into common shares during 2021.
- Operating expenses rose substantially: nine-month general and administrative expense increased 114%, selling and marketing 124%, and research and development 121%. The filing cites increased staffing, equity compensation, acquisition-related professional fees, marketing and product development.
- Cash used in continuing operations increased to $12.321m from $7.860m. Investing cash use was $43.392m, principally reflecting the Waycare acquisition and a $1m SAFE investment; financing provided $70.874m, principally from the public offering.
Outlook, risks and contingencies
- Management reported approximately $23.845m in remaining performance obligations, expecting about 36% to be recognized over the next 12 months and the balance over the following two to four years. Contracts won in the first nine months totaled $7.663m, compared with $3.682m a year earlier.
- No specific numerical earnings or revenue guidance is provided. Management expects continued investment in sales and marketing, research and development, and public-company costs; it expects recurring revenue to grow, while acknowledging uncertainty around adoption and near-term margin pressure.
- Management said its forecasts indicate the company can continue as a going concern for at least one year from issuance of the financial statements. It also said additional funding may be needed if access to funds becomes unavailable and described plans to reduce or defer spending if necessary.
- Risks highlighted include Waycare integration, dependence on third-party data and camera networks, acceptance of a new market and platform, competition, customer and government spending, supply-chain and operating disruptions, cybersecurity, regulation, and litigation. Management stated that it could not assess the likelihood of a favorable outcome in the Firestorm-related and Fordham cases. A shareholder class action was subject to a November 2021 request for voluntary dismissal without prejudice. A separate PCS case was dismissed with prejudice.
- The company’s $994,000 Firestorm-related notes were current liabilities; Rekor said it had requested rescission of the Firestorm acquisition and did not expect to pay the notes when due while litigation continued. In October 2021, the SBA fully forgave the company’s PPP loans.
- Management concluded disclosure controls were effective as of September 30, 2021 and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether Waycare integration, customer wins and the reported contract pipeline translate into recurring revenue and cash generation.
- Cash-burn trends and funding needs, particularly after the acquisition outlay and continued operating losses.
- Whether gross margin can recover from Q3’s 46.4%, given hardware, pilot-program and product-mix effects.
- The final Waycare purchase-price allocation, acquisition-related costs, dilution from issued shares and subsequent employee RSUs, and potential future securities issuance under the shelf registration.
- Developments and potential financial exposure in the Firestorm and Fordham litigation, and confirmation of the shareholder case’s final status.