Rekor Systems, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial figures below are in U.S. dollars; amounts are in millions unless otherwise noted. The filing was signed August 3, 2020.
Business context and strategic shift
Rekor develops AI-enabled vehicle identification and management technology, including software subscriptions, hardware, and related services. In 2020 the company completed its shift toward technology by selling AOC Key Solutions and TeamGlobal and classifying its Professional Services segment, including Firestorm, as discontinued operations. Results below distinguish continuing technology operations from discontinued operations where relevant.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Continuing-operations revenue | $2.677 | $1.416 | $4.273 | $2.426 |
| Gross profit | $1.401 | $1.145 | $2.503 | $1.665 |
| Gross margin | 52% | 81% | 59% | 69% |
| Operating loss | $(2.779) | $(1.609) | $(5.382) | $(2.795) |
| Net loss from continuing operations | $(0.419) | $(2.991) | $(4.193) | $(5.509) |
| Total net loss, including discontinued operations | $(0.618) | $(4.927) | $(4.406) | $(7.802) |
| Basic and diluted loss per share, total | $(0.04) | $(0.27) | $(0.23) | $(0.44) |
Q2 revenue increased 89% year over year, and six-month revenue increased 76%. Licensing and subscription revenue was $1.943 million in Q2 versus $0.624 million a year earlier; automated traffic safety enforcement revenue was $0.734 million versus $0.792 million. Management attributed growth to expanded technology offerings, a large Florida contract, and the longer inclusion of OpenALPR in the 2020 comparison period.
Gross margin declined as large contracts required upfront construction and assembly of camera and shared network infrastructure, which management said carries lower initial margins than later operations. Operating expenses rose 52% in Q2 and 77% for the six-month period, reflecting increased staffing, marketing, and product development. Q2 included a $3.636 million gain on the sales of AOC Key Solutions and TeamGlobal; despite that gain, the company reported a total net loss.
- Cash flow: For the six months, continuing-operations operating cash use was $6.234 million; total operating cash use, including discontinued operations, was $10.121 million. Continuing-operations investing activities provided $5.253 million, primarily from the business sales. Total cash, cash equivalents, and restricted cash increased $0.567 million to $2.433 million.
- Liquidity: June 30 unrestricted cash from continuing operations was $1.933 million, restricted cash was $0.496 million, and working capital deficit was $0.092 million. The company reported $22.603 million in total assets and $27.243 million in total liabilities, plus $6.222 million of Series A preferred stock classified outside liabilities.
- Debt: Total debt was reported at $20.877 million, including $14.636 million of notes classified as subject to exchange for stock. The 2019 Promissory Notes bore 16% stated interest, had an effective interest rate of 24.87%, and were secured by substantially all Rekor assets; financial covenant waivers were in place through December 31, 2021.
- Contracted revenue: Remaining performance obligations were approximately $15.237 million at June 30; Rekor expected to recognize about 33% over the next 12 months and the balance over the following two to four years.
- Non-GAAP measures: Q2 EBITDA was $1.140 million, while Adjusted EBITDA was a loss of $2.130 million. For the six months, EBITDA was a loss of $1.041 million and Adjusted EBITDA a loss of $4.140 million. These are non-GAAP measures and should not be treated as substitutes for GAAP results or cash flow.
Material changes, outlook, and risks
- Debt-for-equity exchange after quarter-end: On July 15, 2020, Rekor completed the exchange of approximately $17.398 million of notes, fees, and related amounts for 4,349,497 common shares at $4 per share. Approximately $4.450 million of principal plus a $0.216 million exit fee remained. The filing’s pro forma presentation showed total liabilities falling from $27.243 million to $12.607 million and stockholders’ deficit becoming equity of $4.053 million, assuming the exchange at June 30. This transaction materially diluted shareholders.
- Capital access and going concern: Management concluded the company could continue as a going concern for one year from issuance, citing available ATM capacity and expense-contingency plans. The company had $9.482 million available under its at-the-market sales agreement as of June 30 and expected to raise capital through it as needed. Management also said the company expected near-term operating losses and might need additional funding if ATM access were unavailable.
- Management outlook: No quantified revenue or earnings guidance was provided. Management expected continued investment in sales and marketing and research and development, and cited uncertain adoption rates, sales cycles, scaling capacity, competition, and customer conversion as business uncertainties.
- COVID-19 and PPP: Rekor cited remote work, travel and event restrictions, customer disruption, and possible effects on revenue, suppliers, and capital access. Rekor received $874,000 in PPP loans and intended to apply for forgiveness, but disclosed uncertainty over eligibility and the possibility of repayment or other consequences.
- Customer concentration: Customer A represented 35% of Q2 continuing revenue and 22% of six-month revenue. Customer A and Customer C together represented 61% of accounts receivable at June 30.
- Legal matters: The filing describes litigation involving former Firestorm executives, a patent infringement claim by a Motorola Solutions subsidiary, and a former OpenALPR customer’s proposed claims. Rekor said it intended to defend the matters and believed the claims against it were without merit; outcomes remain uncertain.
- Other notable items: The company received $874,000 in PPP loans for continuing operations; the TeamGlobal PPP loan was assumed by the buyer. A 50%-owned parking-management joint venture, Roker Inc., received an initial $45,000 investment in July. The board chairman retired effective July 23, and Robert Berman became Executive Chairman.
Most important facts for investors to verify
- Whether post-quarter debt exchange completion and remaining debt terms match the filing’s description, and how the share issuance affects fully diluted ownership.
- Cash burn, actual ATM proceeds and remaining availability, and whether further financing is required to fund operations.
- Whether technology revenue growth converts to recurring subscription revenue and improved gross margins after infrastructure buildout.
- Collection of receivables given customer concentration, and realization timing for the $15.237 million of remaining performance obligations.
- PPP loan forgiveness status and the potential financial or regulatory consequences if forgiveness is denied.
- Developments and potential financial exposure from the disclosed litigation, as well as COVID-19 effects on customers, sales, and operations.