Rekor Systems, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited; dollar amounts below are in millions unless noted. Rekor provides roadway-intelligence software, hardware and related services. The period includes Southern Traffic Services (STS) from its June 17, 2022 acquisition; the prior-year period includes Waycare from its August 2021 acquisition.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $7.425 | $2.615 | $15.371 | $11.105 |
| Net loss | $(48.085) | $(9.613) | $(76.288) | $(19.781) |
| Operating loss | $(47.639) | $(9.655) | $(75.793) | $(19.648) |
| Adjusted gross margin | 44.5% | 46.4% | 42.9% | 57.6% |
| Adjusted EBITDA | $(9.244) | $(6.716) | $(29.645) | $(12.751) |
- Q3 revenue rose 184%; nine-month revenue rose 38%. Recurring revenue increased 292% in Q3 to $4.839 million and 174% for the nine months to $8.616 million. STS contributed $3.503 million in Q3 and $3.990 million for the nine-month period.
- Adjusted gross margin declined year over year, which management attributed to lower-margin short-term pilot programs and certain hardware sales. These margins are non-GAAP measures.
- A $34.835 million goodwill impairment, following a significant decline in market capitalization, was recorded in Q3. The company also recorded $1.385 million of Q3 legal-settlement expense; the nine-month amount was $1.433 million.
- Operating cash flow used was $30.090 million for the nine months, versus $12.325 million used in the prior-year period. Investing activities used $10.571 million; financing activities provided $22.817 million. Cash, cash equivalents and restricted cash totaled $8.757 million at September 30, including $0.888 million restricted cash.
- Working capital was a $1.054 million deficit, compared with $16.989 million positive at December 31, 2021. Total assets were $93.458 million and total liabilities $38.160 million.
- Notes payable totaled $3.000 million, including $1.000 million current and $2.000 million long term. Operating lease liabilities totaled $15.559 million. The company did not pay the $1.000 million Firestorm note due in January 2022, citing its litigation and rescission request.
Changes, outlook and risks
- Operating expenses increased substantially, including higher sales and marketing and research and development spending. Management said it expects continued investment in sales, marketing and product development; it provided no quantified revenue or earnings guidance.
- Management stated existing cash and expected cash burn were insufficient to fund operations for the twelve months following issuance of the statements, raising substantial doubt about the company’s ability to continue as a going concern. It was evaluating external financing and said it could reduce or defer spending if financing is unavailable.
- The company raised $22.758 million net through its at-the-market (ATM) offering during the nine months, selling 9.019 million shares at a weighted-average $2.62 per share. The filing reports approximately $26.3 million of gross ATM capacity remaining, with slightly differing figures in separate sections. Shares outstanding were 54.3 million as of November 14, 2022.
- Remaining performance obligations were $28.606 million, up 27% from December 31, 2021; approximately 58% was expected to be recognized over the following twelve months. Contract wins were $8.297 million for the nine months, up 14% year over year. Management noted pilot-program conversion and customer adoption remain uncertain.
- STS acquisition consideration totaled $12.799 million, including cash, shares, notes, an earnout and contingent consideration. A $2.000 million payment is contingent on a future Georgia Department of Transportation contract extension.
- Fordham litigation resulted in a $1.320 million settlement payment in October 2022, which the company recorded as other expense. The Firestorm litigation remained unresolved, with trial rescheduled to February 2023; the company said it could not assess the likelihood of a favorable outcome.
- Other risks identified include access to capital, acquisition integration, competition, product development and adoption, regulatory changes, litigation, cybersecurity, and supply-chain or system disruptions. Management reported disclosure controls were effective as of September 30, 2022 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Cash runway, monthly cash burn, financing plans and the availability and practical capacity of the remaining ATM authorization.
- Whether recurring revenue and performance obligations convert into recognized revenue and cash collections, and whether pilot programs become longer-term contracts.
- The causes and potential persistence of lower gross margins and the company’s path toward improved operating economics.
- Goodwill valuation assumptions and any further impairment risk following the market-capitalization decline.
- Outcomes and potential costs of Firestorm litigation, the STS earnout and contingent payment, and any other material contingencies.
- Future dilution from equity financing, equity awards and other potentially dilutive securities.