Rekor Systems, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 13, 2020. Financial amounts below are in U.S. dollars, in thousands unless noted. The unaudited results cover continuing operations unless otherwise stated.
Business context and reporting period
Rekor develops AI-based vehicle identification and management technology, including software licensing and subscriptions, traffic safety systems, and related hardware and services. Management is concentrating resources on technology and has classified its Professional Services businesses—Global, AOC Key Solutions, and Firestorm—as held for sale or discontinued operations. AOC Key Solutions was sold after quarter-end.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Continuing-operations revenue | $1,595 | $1,010 |
| Gross profit / gross margin | $1,101 / 69% | $520 / 51% |
| Operating loss | $(2,604) | $(1,186) |
| Net loss from continuing operations | $(3,774) | $(2,518) |
| Net loss from discontinued operations | $(14) | $(357) |
| Consolidated net loss / loss per share | $(3,788) / $(0.19) | $(2,875) / $(0.17) |
| Continuing-operations operating cash flow | $(2,444) | $(1,530) |
| Consolidated operating cash flow | $(1,992) | $(1,970) |
- Licensing and subscription revenue increased to $850 from $193, while automated traffic safety enforcement revenue was $745 versus $817.
- Adjusted EBITDA was a loss of $2,010, compared with a loss of $923 in Q1 2019. The filing presents this as a non-GAAP measure.
- At March 31, cash and cash equivalents were $1,087, with restricted cash of $415. Management separately reported $1,502 of unrestricted cash from continuing operations and a working-capital deficit of $1,179.
- Notes payable were $21,922 on the balance sheet; total liabilities were $33,462 and shareholders’ deficit was $10,350. The 2019 Promissory Notes carry a 16% stated rate and 24.87% effective rate. Their maturity was extended to June 12, 2021; $1,283 of unpaid paid-in-kind interest was added to principal.
- Continuing-operations financing cash flow was $2,523, including $2,169 net proceeds from the at-the-market (ATM) share program. Capital expenditures were $178. Consolidated cash, cash equivalents and restricted cash ended the quarter at $1,663, down $203 from year-end.
- Remaining performance obligations were approximately $13,831; the company expected to recognize about 34% over the next 12 months and the balance over the following two to four years.
Material changes versus the prior comparable period
- Revenue rose 58%, primarily because Q1 2020 included a full quarter of OpenALPR, acquired in March 2019, versus only part of a month in Q1 2019. The filing’s pro forma comparison, as if the acquisition had occurred at the start of 2019, shows revenue of $1,595 in 2020 versus $1,979 in 2019.
- Gross margin expanded 18 percentage points, which management attributed in part to higher-margin software and licensing revenue with lower labor costs.
- Operating expenses increased 117% to $3,705: general and administrative expense rose to $2,791, selling and marketing to $371, and research and development to $543. Management cited increased staffing, marketing, and technology development.
- Interest expense rose to $1,163 from $209, largely reflecting the 2019 Promissory Notes. The prior-year comparison included a $1,113 loss on extinguishment of debt, which did not recur.
- Cash used in continuing operations increased by $914, to $2,444, principally alongside the larger continuing-operations net loss. Continuing-operations financing inflows were lower than in 2019, when new note proceeds provided $3,839.
Outlook, commentary, risks and unusual items
- No formal revenue or earnings guidance is provided. Management said near-term operating losses may continue as it funds product development, commercialization, public-company costs, and sales and marketing. It expects continued investment in research and development and marketing.
- Management stated that its forecasts supported going-concern status for one year from issuance, while noting the company’s history of losses, working-capital deficit, dependence on external financing, and need to raise capital. It cited up to $9,490 of ATM capacity as of April 30 and said it would pursue additional funding if needed; contingency plans included reducing or deferring expenses.
- The 2019 Notes’ fixed-charge coverage covenant had a waiver through May 31, 2020. The notes are secured by substantially all Rekor assets and include financial covenants and an exit fee. Investors should assess covenant compliance and refinancing needs.
- COVID-19 had caused remote work, travel and event restrictions, and customer disruptions; management said the ultimate business and financial impact was uncertain and could be material. The filing also cites possible effects on demand, sales activity, service traffic, supply availability, and access to capital.
- After quarter-end, Rekor sold AOC Key Solutions for $4,000: $3,400 cash and a $600 subordinated note. It also paid $2,200 toward the 2019 Notes, comprising $2,000 principal and a $200 prepayment premium.
- On May 5, 2020, Global, a business classified as held for sale, entered into a $5,005 Paycheck Protection Program loan at 1% interest, with payments deferred for six months and potential forgiveness subject to program requirements. The filing noted uncertainty about public-company eligibility guidance.
- Disclosed litigation includes Rekor’s claims and related counterclaims involving former Firestorm executives, a patent-infringement complaint by Vigilant Solutions, and counterclaims by former customer Plate Capture Solutions. The company said it intended to defend the matters; the filing does not provide a clear quantified exposure.
- Customer concentration is notable: one customer accounted for 17% of Q1 2020 revenue, another 13%; one customer represented 19% of receivables at quarter-end. The company also increased authorized common shares from 30 million to 100 million and issued shares through the ATM and warrant exercises, creating dilution potential.
Important facts for investors to verify
- Whether the ATM program and other financing can fund operations, and the cash runway after the quarter-end debt payment and AOC sale.
- Compliance with the 2019 Notes’ covenants after the disclosed waiver expiration, the effects of the high effective interest rate, and the ability to repay or refinance the notes.
- Actual cash proceeds, collection of the AOC subordinated note, and the status and eligibility or forgiveness of Global’s PPP loan.
- Whether subscription growth and the $13,831 performance-obligation balance convert into recognized revenue and cash collections as anticipated.
- COVID-19 effects, customer concentration and receivable collections, the outcome of the disclosed litigation, and potential dilution from authorized shares, ATM sales, warrants, options, and preferred stock.
- The filing contains inconsistent common-share figures: the balance sheet reports 22,786,757 shares at March 31, while the shareholders’ deficit statement reports 22,768,757. Verify the correct figure in company filings.