Rekor Systems, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing was signed August 14, 2023. Rekor develops roadway data, AI software, and related hardware and services for transportation management, public safety, and urban mobility. Prior-year results are presented on a continuing-operations basis, with the divested ATSE business classified as discontinued operations.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $8.563 million | $3.698 million | $14.748 million | $6.673 million |
| Net loss | $11.113 million | $15.267 million | $23.795 million | $27.868 million |
| Loss from operations | $10.280 million | $15.674 million | $22.966 million | $28.350 million |
| Adjusted gross profit and margin | $4.432 million; 51.8% | $1.457 million; 39.4% | $7.749 million; 52.5% | $2.896 million; 43.4% |
| Adjusted EBITDA | $(7.158) million | $(12.005) million | $(16.544) million | $(21.627) million |
Revenue rose 132% in Q2 and 121% in the first half. Recurring revenue was $5.772 million in Q2, up 178%, and $9.976 million for the first half, up 164%. Management attributed growth mainly to the STS acquisition and increased software sales. STS contributed $3.574 million of Q2 revenue and $6.327 million in the first half. The company reported improved adjusted gross margins, citing operating efficiencies and a higher mix of software sales. Adjusted gross profit, adjusted gross margin, and Adjusted EBITDA are non-GAAP measures.
Interest expense, net, was $0.908 million in Q2 and $1.668 million in the first half, up from $0.017 million and $0.026 million, respectively, primarily because of the 2023 promissory notes. First-half operating cash use was $19.200 million from continuing operations ($19.649 million including discontinued operations); investing cash use was $0.476 million and financing provided $20.441 million. Cash, cash equivalents, and restricted cash totaled $2.784 million at June 30, including $2.438 million in cash and equivalents and $0.346 million restricted.
Total assets were $83.914 million and total liabilities $41.989 million at June 30. Current assets were $12.899 million versus current liabilities of $14.591 million, a $1.692 million working-capital deficit. Notes payable were reported at $10.709 million net of unamortized debt discount; the 2023 notes carry 12% annual interest and mature July 18, 2025. The notes are senior secured, include financial and other covenants, and may be subject to early redemption provisions. The balance sheet also included $14.588 million of operating lease liabilities and $0.922 million of finance lease liabilities.
Material changes and notable items
- Operating loss narrowed year over year, while higher interest expense partly offset the improvement in net loss.
- Operating expenses declined 14% in Q2 and 2% in the first half. General and administrative expense fell, while first-half research and development and depreciation and amortization increased.
- First-half financing included $12.5 million in principal of 2023 senior secured notes and approximately $10.0 million gross proceeds from a March registered direct offering. The offering included shares and warrants, resulting in material potential dilution.
- Common shares outstanding were 61,952,211 at June 30, compared with 54,405,080 at December 31, 2022. The filing reported 13,649,454 warrants outstanding at June 30.
- On July 25, 2023, after quarter-end, a warrant holder exercised 6,872,853 warrants for $10.997 million gross cash proceeds. Rekor also issued new warrants for up to 2,850,000 shares, exercisable at $3.25. The company also expected to recover substantially its Roker SAFE investment following the sale of substantially all Roker assets; the filing does not state a clear expected recovery amount.
- The Firestorm litigation was settled in March 2023 through mutual releases, a $175,000 payment and transfer of certain assets; related warrants were cancelled. The settlement generated a $0.527 million first-half gain on extinguishment of debt.
Outlook, liquidity, and risks
Rekor provided no specific numerical revenue or earnings guidance. Management expects recurring revenue to continue increasing as it markets its integrated products and services, and expects adjusted gross margin to improve over time, while cautioning that improvement is not assured. Remaining performance obligations were approximately $31.774 million at June 30; the company expects to recognize about 69% over the following 12 months and the remainder over the next two to four years.
Management stated that, based on its business plan and expected cash burn, existing cash was insufficient to fund operations for the next 12 months after issuance of the financial statements. The filing says this raises substantial doubt about Rekor’s ability to continue as a going concern. Rekor was reviewing external financing options and said it could further reduce or defer expenses if financing were unavailable. The July warrant exercise provided additional proceeds after quarter-end but does not remove the filing’s stated liquidity risk.
Risks highlighted include access to debt and equity markets, cash burn, competition, product development and adoption, supply-chain or system disruptions, cybersecurity, regulatory and government-budget changes, litigation, and the integration of STS. Management reported disclosure controls and procedures were effective as of June 30 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subsequent financing or operating cash generation is sufficient to address the stated 12-month funding shortfall and going-concern uncertainty.
- The terms, covenant compliance, repayment schedule, and effective financing cost of the 12% senior secured notes, including the impact of debt discounts and redemption provisions.
- How much of reported revenue growth reflects organic growth versus STS, and whether recurring revenue and the reported performance obligations convert to recognized revenue and cash collection as expected.
- The dilution impact of outstanding and newly issued warrants, including the July 2023 exercise and replacement warrants; confirm post-exercise shares outstanding in subsequent filings.
- The amount and timing of proceeds from the Roker SAFE following the asset sale, which the filing does not quantify clearly.