Rekor Systems, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 10, 2021. Unless stated otherwise, financial amounts below are in U.S. dollars. Financial statements are unaudited.
Business context and reporting period
Rekor develops AI-based vehicle-recognition software and intelligent roadway systems for government and commercial customers. Its products support public safety, transportation, parking, security, logistics and related uses; customers use its products or services in approximately 80 countries. Continuing operations focus on technology following the sale or planned disposition of legacy professional-services businesses. TeamGlobal, AOC Key Solutions and Firestorm are presented as discontinued operations.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $4.216 million | $1.595 million |
| Gross profit / gross margin | $2.254 million / 53% | $1.101 million / 69% |
| Operating expenses | $7.562 million | $3.705 million |
| Operating loss | $(5.308) million | $(2.604) million |
| Net loss | $(5.406) million | $(3.788) million |
| Basic and diluted loss per share | $(0.15) | $(0.19) |
| Operating cash flow | $(3.163) million | $(1.992) million |
- Revenue increased 164%. Licensing and subscription revenue was $3.301 million, versus $0.850 million; automated traffic safety solutions revenue was $0.915 million, versus $0.745 million.
- Commercial revenue was $3.105 million and government revenue was $1.111 million. The Oklahoma uninsured-vehicle program contributed $0.245 million in the quarter. eCommerce revenue was $0.442 million, up from $0.177 million.
- Gross margin declined 16 percentage points, which management attributed primarily to hardware sales, which typically carry lower margins than software.
- Operating expenses rose 104%, led by higher general and administrative expense, including headcount, equity awards and M&A-related professional fees; selling and marketing and R&D expenses also increased.
- Adjusted EBITDA, a non-GAAP measure, was a loss of $3.119 million, compared with a loss of $2.010 million. The filing cautions that this measure is not a substitute for GAAP results or cash flows.
- At March 31, cash and cash equivalents were $62.845 million, restricted cash was $1.005 million, and short-term Treasury investments were $23.996 million. Working capital was $84.369 million.
- Net cash provided by financing activities was $70.425 million, mainly reflecting $70.125 million of net proceeds from the February public offering. Investing cash use of $24.420 million primarily reflects purchases of short-term investments; these are Treasury bills with maturities over three months and under one year.
- Reported debt included $1.960 million of notes payable and $0.975 million of PPP loans. The 2019 promissory notes, which carried high interest costs, had been fully retired in 2020. PPP loan forgiveness applications remained under review.
- Remaining performance obligations were approximately $16.186 million; the company expected to recognize about 32% over the succeeding 12 months and the remainder over the following two to four years.
Material changes versus the prior comparable period
- Growth reflected additional products and programs, direct and partner-channel sales, eCommerce expansion and commencement of Oklahoma’s UVED services.
- Higher revenue and gross profit did not offset increased operating costs, so operating and net losses widened. Lower interest expense—$0.032 million versus $1.163 million—partly limited the increase in net loss after the 2019 notes were retired.
- Operating cash use increased by $0.715 million. The company attributed this primarily to a larger continuing-operations loss, partly offset by higher noncash share-based compensation.
- The public offering raised approximately $70.125 million net and materially strengthened liquidity. Series A and Series B preferred shares converted into common stock; the offering and conversions contributed to a substantial increase in common shares outstanding and potential dilution.
- Continuing-operations comparisons exclude discontinued businesses. Those businesses generated $9.697 million of revenue and $2.355 million of gross profit in Q1 2020, so consolidated historical comparisons that include them are not directly comparable.
Outlook, commentary, risks and unusual items
- Management said its forecasts supported going-concern operations for at least one year from filing, based on available cash and working capital. It noted that further funding might be needed if funds became unavailable and cited contingency plans to reduce or defer expenditures.
- No specific revenue, earnings or cash-flow guidance was provided. Management expected absolute spending on general and administrative, sales and marketing, and R&D to rise as it expands the business and develops products; the timing and adoption of offerings remain uncertain.
- Management highlighted Rekor One and the Oklahoma UVED implementation, while describing market opportunities in intelligent roadways, automated enforcement, smart cities and contactless commercial services. These are expectations, not assured outcomes.
- Key risks include customer and accounts-receivable concentration (one customer represented 40% of quarterly revenue and 53% of receivables at quarter-end), competition, long sales cycles, government budgets and regulation, product adoption, cybersecurity, supply-chain or system disruption, COVID-19 effects and access to future capital.
- Several lawsuits were ongoing, including disputes involving former Firestorm executives, a former customer and Fordham Financial Management. The company said it could not assess the likelihood of favorable outcomes in certain cases; no material litigation accrual value is clearly provided in the filing.
- Subsequent to quarter-end, Rekor entered a $1.0 million SAFE investment in Roker in April 2021. Management reported disclosure controls were effective as of March 31, 2021 and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth, remaining performance obligations and customer diversification translate into recurring revenue and sustainable gross margins.
- Cash consumption relative to the company’s stated one-year liquidity outlook, and how much cash is operationally available after restricted cash and investment maturities.
- The outcome and timing of PPP loan forgiveness, remaining debt payments and any litigation exposure.
- The impact of the public offering, preferred-stock conversions, warrants, options and restricted stock units on fully diluted share count.
- Whether major customer concentration, government procurement and regulatory conditions, and adoption of Rekor One and UVED materially affect future results.