Rekor Systems, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The unaudited results are compared with Q1 2021. Rekor develops AI-enabled software, hardware and services for transportation management, public safety and commercial markets; its operations include Rekor Recognition and Waycare.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $3.608 million | $4.216 million; down 14% |
| Recurring revenue | $1.695 million | $0.864 million; up 96% |
| Product and service revenue | $1.913 million | $3.352 million |
| Operating loss | $12.606 million | $5.308 million |
| Net loss | $12.601 million; $0.29 per share | $5.406 million; $0.15 per share |
| Adjusted gross profit and margin | $1.625 million; 45.0% | $2.294 million; 54.4% |
| Adjusted EBITDA | $(9.293) million | $(3.897) million |
| Cash used in operating activities | $12.156 million | $3.159 million |
All amounts are U.S. dollars. Adjusted gross profit, adjusted gross margin and adjusted EBITDA are non-GAAP measures as defined by the company.
- Operating expenses rose 87% to $14.231 million, including increases in general and administrative, sales and marketing, research and development, and depreciation and amortization. Management attributed growth chiefly to staffing and stock-based compensation, product development, marketing, and Waycare-related intangible amortization.
- Cash and cash equivalents were $14.606 million at March 31, 2022; restricted cash was an additional $0.987 million. Combined cash, cash equivalents and restricted cash were $15.594 million, down $11.007 million during the quarter. Cash-flow investing outlays were $1.964 million, including $1.814 million of capital expenditures; financing provided $3.113 million, principally net ATM proceeds.
- Working capital was $9.297 million, versus $16.989 million at December 31, 2021. Current assets were $20.611 million and current liabilities $11.442 million.
- Notes payable were $1.000 million and loan payable totaled $0.065 million. Operating lease liabilities were $14.935 million; these are separate from notes and loans. Total liabilities were $26.645 million.
- Remaining performance obligations were approximately $21.288 million, with about 41% expected to be recognized over the next 12 months. Contract wins were $1.525 million, down 40% from $2.531 million in Q1 2021.
Material changes versus Q1 2021
- Revenue declined as product and service sales fell, including the absence of a prior-year customer’s $1.673 million one-time hardware and software sale. The $0.831 million increase in recurring revenue partly offset the decline; management cited Waycare and its land-and-expand strategy.
- Adjusted gross margin fell from 54.4% to 45.0%. Management cited sales mix and lower-margin short-term pilot programs with upfront setup costs.
- Net loss more than doubled, while operating cash use increased by $8.997 million. Share-based compensation was $1.900 million, compared with $0.781 million.
- Q1 2021 financing included $70.125 million of net proceeds from a public offering; Q1 2022 financing included $3.134 million net proceeds from the ATM program. Q1 2021 investing cash use included $23.994 million of short-term investment activity.
Outlook, risks and unusual items
- No formal numeric revenue or earnings guidance is provided. Management expects recurring revenue to continue growing as it emphasizes longer-term contracts and Rekor One, and expects research and development and sales and marketing spending to remain elevated or increase in the near term. It says general and administrative costs are also expected to remain high for the foreseeable future.
- Management stated that forecasts indicate the company can continue as a going concern for at least one year from issuance of the financial statements. It is monitoring cash and working capital; if additional funding is unavailable, it may reduce or defer expenses. The company has a history of losses and says further funding may be needed if access to funds is insufficient.
- The company entered a $50 million at-the-market equity program in February 2022. It sold 728,452 shares in Q1 for $3.134 million net. After quarter-end, it sold another 1,521,755 shares for $4.928 million net, creating additional dilution.
- The company did not pay the $1.000 million principal due in January 2022 on Firestorm acquisition notes, citing its rescission request and ongoing litigation with the sellers. The litigation includes claims and counterclaims; the court dismissed certain company claims but denied summary judgment on several other claims. Management could not assess the likelihood of a favorable outcome.
- Other disclosed risks include competition, product and market adoption, regulatory changes affecting automated enforcement, supply-chain and system risks, cybersecurity, financing access, acquisition integration, and ongoing litigation. Management reported no material change to the risk factors in its 2021 Form 10-K.
- Management reported disclosure controls and procedures were effective as of March 31, 2022, with no material quarterly change in internal control over financial reporting.
Investor verification points
- Track whether recurring revenue growth converts into higher total revenue, contract wins and longer-term performance obligations, particularly as pilots mature.
- Assess cash burn, working-capital decline, financing needs and dilution from ATM share sales against the company’s stated one-year going-concern assessment.
- Review the causes and persistence of lower gross margin and higher operating expenses, including staffing, stock compensation and Waycare-related amortization.
- Verify the status and potential financial consequences of the Firestorm notes and related litigation, as well as the separate Fordham dispute.
- Compare reported cash balances carefully: unrestricted cash and cash equivalents were $14.606 million; the higher combined amount includes restricted cash.