Rekor Systems, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 14, 2023. Rekor provides roadway data, traffic management, software, hardware and related services. The 2022 Automated Traffic Safety and Enforcement business was divested and is presented as discontinued operations.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $9.1 million | $6.8 million | $23.9 million | $13.5 million |
| Net loss | $10.6 million | $48.0 million | $34.4 million | $75.9 million |
| Loss per share, diluted | $0.16 | $0.90 | $0.56 | $1.57 |
| Adjusted gross margin (non-GAAP) | 52.6% | 46.1% | 52.6% | 44.7% |
| Adjusted EBITDA (non-GAAP) | $(6.6) million | $(10.7) million | $(23.2) million | $(32.4) million |
Q3 revenue grew 35% year over year; nine-month revenue grew 77%. Management attributed growth in part to the STS acquisition and increased software and contactless-compliance sales. Q3 recurring revenue was essentially flat at $4.8 million; nine-month recurring revenue rose 72% to $14.8 million. Product and service revenue was $4.3 million in Q3, up from $1.9 million.
Cost of revenue excluding depreciation and amortization was $4.3 million in Q3 and $11.3 million year to date. Management cited improved adjusted gross margin from operating efficiencies and a higher mix of software sales. Q3 operating loss was $9.8 million, versus $47.7 million a year earlier; the prior-year quarter included a $34.8 million goodwill impairment. Nine-month operating loss was $32.8 million, versus $75.7 million.
For the first nine months, operating cash outflow was $26.7 million from continuing operations ($27.1 million including discontinued operations), compared with $30.4 million from continuing operations in 2022. Investing activities provided $0.6 million, while financing activities provided $31.4 million. Cash and cash equivalents were $7.0 million at September 30; restricted cash was another $0.3 million. Working capital was $3.6 million, compared with a $6.0 million deficit at December 31, 2022.
At September 30, total liabilities were $44.6 million and shareholders’ equity was $43.6 million. Notes payable had a carrying value of $11.2 million, net of $3.7 million in unamortized discount; disclosed principal due totaled $14.9 million. The senior secured 2023 notes bear 12% interest and mature July 18, 2025. Lease liabilities totaled approximately $16.1 million.
Changes, outlook and risks
- Revenue growth reflects STS, acquired in June 2022, as well as software and contactless-compliance sales. Management reported $10.7 million of STS revenue in the first nine months of 2023, compared with $4.0 million in the comparable 2022 period.
- Cash increased during the nine months chiefly because of financing. The company raised funds through promissory notes, a registered direct offering and warrant exercises. Common shares outstanding increased from 54.4 million at December 31, 2022 to 69.1 million at September 30, 2023; 9.6 million warrants remained outstanding.
- Management stated existing cash was insufficient to fund the current operating plan for the twelve months following issuance of the financial statements, raising substantial doubt about the company’s ability to continue as a going concern. The company was exploring external financing and said it could further reduce or defer spending if financing was unavailable.
- No specific revenue or earnings guidance was provided. Management expects recurring revenue growth as it markets its integrated platform, but notes adoption, market growth and margin improvement are uncertain.
- Remaining performance obligations were approximately $30.2 million, with about 73% expected to be recognized over the next twelve months. Total contract value, a company-defined measure based on assumptions including renewals and usage, was $38.1 million for the nine-month period.
- Risks highlighted include access to capital, cash burn, competition and customer adoption, government budgets and regulatory changes, execution and integration, supply-chain or system disruptions, cybersecurity, and litigation. One customer represented 13% of Q3 revenue and another 10%; a customer represented 13% of receivables at quarter-end.
- Unusual items included a $34.8 million goodwill impairment in Q3 2022, a Firestorm litigation settlement involving a $175,000 payment and transfer of certain assets alongside mutual releases and extinguished debt and warrant claims, and $1.9 million in proceeds related to the Roker SAFE transaction, including $423,000 held in escrow at quarter-end.
Key facts for investors to verify
- Whether subsequent financing or spending reductions address the going-concern warning and provide adequate operating runway.
- The cash-burn trajectory, collection of receivables, and conversion of reported performance obligations into revenue and cash.
- The terms, covenants, interest burden and maturity funding plan for the 12% secured notes, including potential early-redemption provisions.
- The effect of share issuance and outstanding warrants on dilution, including any later exercises or changes to the capital structure.
- Whether recurring revenue, software mix and adjusted gross-margin gains persist; these measures do not establish profitability or positive operating cash flow.