Rekor Systems, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Figures are in millions of dollars unless stated otherwise. The company focuses on AI-based vehicle recognition and roadway-intelligence software, products and services for commercial and government customers. Comparisons below are with the corresponding 2020 periods and primarily reflect continuing operations.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $4.274 | $2.677 | $8.491 | $4.273 |
| Gross profit | $2.842 | $1.401 | $5.097 | $2.503 |
| Gross margin | 66% | 52% | 60% | 59% |
| Operating loss | $(4.685) | $(2.779) | $(9.991) | $(5.382) |
| Net loss | $(4.762) | $(0.618) | $(10.168) | $(4.406) |
| Loss per share, basic and diluted | $(0.12) | $(0.04) | $(0.27) | $(0.23) |
- Q2 revenue rose 60%; first-half revenue nearly doubled. Licensing and subscription revenue was $3.175 million in Q2 and $6.478 million in the first half. Automated traffic safety solutions contributed $1.099 million and $2.013 million, respectively.
- Management attributed growth to additional products and programs, direct and partner sales, Oklahoma’s uninsured-vehicle enforcement program, and eCommerce growth. Q2 eCommerce revenue was $0.405 million versus $0.197 million; first-half revenue was $0.848 million versus $0.373 million.
- Q2 gross margin expanded largely because perpetual software-license sales carry higher margins; 2020 margins were affected by infrastructure costs on large software and hardware contracts.
- Operating expenses increased 80% in Q2 to $7.527 million and 91% in the first half to $15.088 million. Increases reflected hiring, equity compensation, marketing and product development. Q2 stock-based compensation was $1.125 million; first-half expense was $1.906 million.
- Q2 net loss widened substantially from 2020, when a $3.636 million business-sale gain and higher interest expense affected results. First-half interest expense declined to $0.050 million from $2.250 million after retirement of the 2019 promissory notes in 2020.
- Management-reported adjusted EBITDA was a loss of $2.915 million in Q2 versus $2.130 million, and a loss of $6.032 million for the first half versus $4.140 million. This non-GAAP measure excludes specified items and is not a substitute for GAAP results or cash flow.
Cash, liquidity and debt
- At June 30, 2021, cash and cash equivalents were $69.032 million, restricted cash was $0.856 million, and short-term U.S. Treasury investments were $12.998 million. Working capital was $79.891 million, compared with $18.324 million at December 31, 2020.
- First-half operating cash use from continuing operations was $6.843 million, compared with $6.234 million in 2020. Investing cash use was $14.713 million, including $12.995 million for short-term investments and a $1.000 million Roker SAFE investment. Financing provided $70.439 million, mainly from the February public offering’s $70.125 million net proceeds.
- Reported debt at June 30 included $1.956 million of notes payable and $0.966 million of PPP loans, approximately $2.922 million in total. The PPP loan forgiveness application was under review; the filing notes uncertainty around public-company eligibility.
- The company reported working capital and cash resources sufficient, based on management’s forecasts, to support operations for at least one year from issuance of the financial statements. It cautioned that further funding could be needed if access to funds becomes unavailable and described contingency plans to reduce or defer spending.
Changes, outlook and risks
- The 2021 public offering raised approximately $70.125 million net and increased common shares issued. Series A and Series B preferred shares converted into common stock, retiring all outstanding preferred shares. The filing reports 41.0 million common shares issued at June 30 and 41.0 million outstanding as of August 16.
- Remaining performance obligations were approximately $15.174 million at June 30. The company expected to recognize about 34% over the succeeding 12 months and the balance over the following two to four years. This is contracted revenue, not a forecast of total company revenue.
- No specific revenue or earnings guidance was provided. Management expects continued investment and expense growth in general and administration, sales and marketing, and research and development, while expressing an expectation that some expense categories may decline as a percentage of revenue over time.
- After quarter-end, Roker agreed to acquire certain SecurePark assets for undisclosed cash and stock consideration, reducing Rekor’s Roker ownership from 50% to 48%. Rekor also signed an agreement to acquire Waycare for approximately $61 million in cash and stock; closing was anticipated in Q3 2021, subject to customary conditions.
- Material risks include competition, uncertain product adoption and sales cycles, execution and integration of acquisitions, access to capital, regulatory and legislative changes affecting automated enforcement, cybersecurity and system failures, supply-chain risks, COVID-19 effects, and litigation. The filing describes ongoing Firestorm-related litigation, a former-customer dispute, an underwriting dispute, and a putative shareholder class action; management could not assess the likelihood of favorable outcomes in several matters.
- Management stated disclosure controls were effective at June 30, 2021 and reported no material changes to internal control over financial reporting during the quarter.
Investor facts to verify
- Whether revenue growth, particularly commercial and subscription revenue, persists and whether the $15.174 million performance-obligation balance converts to revenue as expected.
- Whether gross-margin gains from perpetual licenses are repeatable as product and customer mix changes.
- Cash burn and the use of offering proceeds, including spending on growth initiatives, acquisitions and product development.
- Final terms, financing mix, closing and integration costs for the Waycare acquisition, and the implications of the company’s reduced Roker ownership.
- Resolution and potential financial impact of the PPP forgiveness review and the disclosed legal proceedings.