Rekor Systems, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 11, 2022. Rekor develops AI-enabled software, hardware and services for transportation management, public safety and commercial markets. It acquired Southern Traffic Services (STS) on June 17, 2022; Waycare was acquired in August 2021.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $4.334m | $4.274m | $7.942m | $8.491m |
| Net loss | $15.602m | $4.762m | $28.203m | $10.168m |
| Loss per share | $0.33 | $0.12 | $0.62 | $0.27 |
| Adjusted gross margin | 38.5% | 67.7% | 41.5% | 61.1% |
| Adjusted EBITDA loss | $11.156m | $2.916m | $20.449m | $6.036m |
- Recurring revenue was $2.078m in Q2, up 133%, and $3.773m for the six months, up 115%. Product and service revenue declined to $4.169m for the half-year from $6.734m.
- Operating loss was $15.551m in Q2 and $28.155m for the first half. Q2 operating expenses increased 127% to $17.219m; first-half expenses increased 107% to $31.449m.
- Operating cash used was $22.829m in the first half, versus $6.843m a year earlier. Investing cash use was $9.407m; financing provided $20.486m. Cash, cash equivalents and restricted cash ended at $14.854m.
- At June 30, cash and cash equivalents were $13.988m, restricted cash $0.865m, and working capital from continuing operations was reported as $7.285m. Total liabilities were $37.635m.
- Debt included $3.0m of notes and $0.479m of loans; operating lease liabilities totaled $15.337m. The $1.0m Firestorm note was past maturity and unpaid amid litigation. STS acquisition consideration included $2.0m in new notes.
Material changes versus prior period
- Q2 revenue rose 1%, while first-half revenue fell 6%. Management attributed the half-year decline mainly to fewer one-time hardware and software sales, including a $1.673m prior-year sale to one customer; growth in recurring revenue and acquisitions partly offset the decline.
- Cost of revenue increased 93% in Q2 and 41% for the half-year. Management cited higher direct costs, lower-margin hardware sales and short-term pilot programs with upfront costs.
- First-half net loss widened to $28.203m from $10.168m, reflecting higher operating expenses, including increased staffing, product development, marketing and acquisition-related costs.
- Cash declined by $11.747m in the first half. Rekor raised $20.408m net through its at-the-market (ATM) program, issuing 7.599m shares at a weighted-average $2.79 per share. The ATM had $28.788m of gross capacity remaining at June 30.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects recurring revenue to grow as the company shifts toward longer-term contracts, and expects sales, marketing and research-and-development spending to remain elevated in the near term.
- Management said its forecasts supported the ability to continue as a going concern for at least one year from issuance. It also said it may need additional funding if access to capital is unavailable and could reduce or defer expenses. The company has a history of losses and depends on financing as well as operations.
- Remaining performance obligations were approximately $31.940m; management expected to recognize about 57% over the following 12 months. The reported total contract value of contracts won in the first half fell 14% year over year to $4.979m, which management partly attributed to smaller initial pilot commitments.
- The STS acquisition’s preliminary consideration was $14.5m, including cash, shares, notes, an earnout and contingent consideration. It added $4.999m of goodwill; purchase accounting remained preliminary.
- Goodwill impairment testing was performed after a significant market-capitalization decline; no impairment was identified at June 30. The outcome depends in part on estimates and assumptions.
- Firestorm litigation and related suits remain unresolved; the trial was rescheduled to February 13, 2023. Rekor said it could not assess the likelihood of a favorable outcome. In the Fordham underwriting dispute, both parties’ motions were returnable August 18, 2022; outcome likelihood was also unclear.
- Risks identified include financing access, acquisition integration, competition, product adoption, supply-chain and operating disruptions, cybersecurity, regulation and litigation. Management reported disclosure controls were effective at quarter-end and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether recurring-revenue growth and pilot conversions can offset declining one-time product and service sales and restore gross margins.
- Cash burn, runway and reliance on further equity issuance; monitor ATM usage and resulting shareholder dilution.
- Acquisition integration and STS earnout or contract-contingent payments, as well as final purchase-price accounting.
- Progress and financial exposure in Firestorm and Fordham litigation, and repayment status of the overdue Firestorm note.
- Whether the $31.940m performance-obligation balance converts to revenue on the expected schedule and supports improved operating economics.