Rekor Systems, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 9, 2020. Financial amounts below are in U.S. dollars unless noted. The company’s continuing business is AI-enabled vehicle recognition software, subscriptions, hardware and automated traffic-safety services. Following its strategic shift toward technology, it classified its Professional Services operations as discontinued.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2.126m | $1.536m | $6.399m | $3.962m |
| Gross profit / margin | $1.142m / 54% | $1.146m / 75% | $3.646m / 57% | $2.810m / 71% |
| Operating loss | $(3.367)m | $(2.491)m | $(8.749)m | $(5.287)m |
| Continuing-operations net loss | $(6.667)m | $(3.528)m | $(10.860)m | $(9.036)m |
| Total net loss | $(6.669)m | $(3.628)m | $(11.075)m | $(11.428)m |
| Basic and diluted loss per share | $(0.26) | $(0.20) | $(0.53) | $(0.63) |
- Q3 revenue rose 38%; nine-month revenue rose 62%. Licensing and subscription revenue was $1.341m in Q3 and $4.122m year to date, compared with $0.575m and $1.386m. Automated traffic-safety revenue was $0.785m and $2.277m, versus $0.961m and $2.576m.
- Q3 cost of revenue increased 152%, faster than revenue, and gross margin fell 21 percentage points. Management attributed lower early-stage margins to building camera, network and database infrastructure for large contracts; it expects later use of that infrastructure to have better margins.
- Operating expenses were $4.509m in Q3 and $12.395m year to date, up 24% and 53%. Management cited increased staffing, corporate build-out, marketing and product-development investment.
- Q3 included a $3.081m loss on extinguishment of debt. Year-to-date other income included a $3.631m gain on sale of businesses. Total net loss improved year over year for nine months, while the continuing-operations loss worsened; discontinued-operations losses were lower.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $24.154m, restricted cash was $0.573m, and working capital was $21.230m. At December 31, 2019, cash was $1.075m and working capital was a deficit of $1.786m.
- For the first nine months, continuing-operations operating cash use was $7.860m, versus $4.394m in 2019; total operating cash use including discontinued operations was $11.744m. Investing activities provided $5.681m, primarily from business-sale proceeds. Continuing-operations financing provided $24.756m, principally from the ATM stock offering.
- Total reported debt was $1.850m, including $0.874m of PPP loans and $0.976m of long-term notes. The high-cost 2019 promissory notes were fully retired in September following a stock exchange and cash repayments. Warrants issued with those notes remained outstanding.
- The company raised $29.930m net through its ATM in the first nine months, issuing 5.217m shares at a weighted-average $5.92. It terminated the ATM on September 21 after aggregate gross proceeds of $34.154m. Common shares outstanding increased from 21.596m at year-end 2019 to 32.912m at September 30, 2020.
Material changes, outlook and risks
- The company sold AOC Key Solutions in April and TeamGlobal in June 2020 for $4m each, consisting of cash and notes; it also classified Firestorm as discontinued. Management described this as a strategic concentration on technology products and services. The note receivable from AOC was repaid; the TeamGlobal sale included a secured $1.7m note.
- Remaining performance obligations were approximately $16.459m at September 30; management expected to recognize about 27% over the following 12 months and the balance over the next two to five years. This is contracted value, not current-period revenue or cash collected.
- No specific full-year revenue or earnings guidance is provided. Management said it expects near-term operating losses and continued investment in product development and sales. It believed forecasts supported going-concern operations for one year from issuance, while noting that additional funding could be needed and that expense reductions or deferrals were contingency measures.
- COVID-19 slowed growth and disrupted equipment delivery and installation, customer approvals and project implementation. The company said the full effect remained uncertain and could adversely affect revenue, operations and cash flow.
- The company received $874,000 through PPP loans and intended to apply for forgiveness. Forgiveness was uncertain; repayment, compliance and reputational risks were disclosed.
- Management identified competitive and adoption risks, long customer sales cycles, dependence on government budgets and partners, customer collection risk, and execution and financing needs. Customer concentration was notable: one customer represented 20% of nine-month 2020 revenue; two customers accounted for 19% and 16% of receivables at quarter-end.
- Litigation included the Firestorm dispute and a patent suit brought by Vigilant Solutions, as well as claims involving former customer Plate Capture Solutions. The filing text also reports a confidential Vigilant settlement in November 2020; investors should verify its timing and terms against subsequent filings. Management said ordinary-course proceedings were not expected to be material, but could not assess the likely outcome of the Firestorm litigation.
Investor verification priorities
- Check whether revenue growth—particularly subscriptions—persists after accounting for OpenALPR’s inclusion for a fuller period in 2020 and the shift to discontinued-operations presentation.
- Track gross-margin recovery on infrastructure-heavy contracts and confirm whether subsequent deployments use that infrastructure at improved economics.
- Compare continuing-operations cash burn with available unrestricted cash, and assess funding needs after termination of the ATM program.
- Monitor conversion of the $16.459m remaining performance obligations into revenue, collections and cash, including timing and customer concentration.
- Verify PPP forgiveness or repayment, the status of the TeamGlobal note, preferred-stock obligations and remaining warrants, and the dilution impact of equity issuance and potential conversions.
- Review subsequent disclosures on COVID-19 effects, litigation outcomes and any material change to management’s going-concern assessment.