Novume(REKR) - 2023 Q1 - Quarterly Report

FORM 10-Q Filing Information Registrant Information Rekor Systems, Inc. filed its Quarterly Report on Form 10-Q for the period ended March 31, 2023, as a non-accelerated filer and smaller reporting company, with its common stock trading on The Nasdaq Stock Market under REKR - Rekor Systems, Inc. is a non-accelerated filer and a smaller reporting company[3] Registrant Details | Metric | Value | | :--- | :--- | | Trading Symbol | REKR | | Exchange | The Nasdaq Stock Market | | Common Stock Outstanding (May 15, 2023) | 61,807,685 shares | SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS Forward-Looking Statements Disclaimer This report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially, and investors are cautioned against undue reliance without company obligation to update - Forward-looking statements are subject to substantial risks and uncertainties, including future results of operations, financial position, business strategy, and prospective products and services[7] - Readers are cautioned not to place undue reliance on such statements, and the company undertakes no obligation to update them[7] PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the company's unaudited condensed consolidated financial statements for the period ended March 31, 2023, including balance sheets, statements of operations, statements of shareholders' equity, and cash flow statements, along with related notes, providing detailed financial condition and operating performance information UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS As of March 31, 2023, total assets increased to $93,768 thousand, an 11.84% increase from December 31, 2022, driven by a significant rise in cash and cash equivalents, while total liabilities also increased, primarily due to 2023 Promissory Notes and related party notes Consolidated Balance Sheet Summary | Metric (Thousands of USD) | March 31, 2023 | December 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Assets | | | | | | Cash and cash equivalents | 12,066 | 1,924 | 10,142 | 527.13% | | Total current assets | 21,330 | 9,275 | 12,055 | 129.97% | | Total long-term assets | 72,438 | 74,565 | (2,127) | -2.85% | | Total Assets | 93,768 | 83,840 | 9,928 | 11.84% | | Liabilities | | | | | | Total current liabilities | 14,356 | 15,444 | (1,088) | -7.05% | | Total long-term liabilities | 27,435 | 19,059 | 8,376 | 43.95% | | Total Liabilities | 41,791 | 34,503 | 7,288 | 21.12% | | Shareholders' Equity | | | | | | Total shareholders' equity | 51,977 | 49,337 | 2,640 | 5.35% | | Total Liabilities and Shareholders' Equity | 93,768 | 83,840 | 9,928 | 11.84% | - Current assets of discontinued operations increased from $331 thousand to $579 thousand[13] - Long-term liabilities saw a significant increase, primarily due to the introduction of 2023 Promissory Notes and related party notes[13] UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS For the three months ended March 31, 2023, revenue increased by 108% year-over-year to $6,185 thousand, but operating costs and expenses also rose significantly, resulting in a net loss from continuing operations of $12,682 thousand, largely consistent with the prior year Consolidated Statements of Operations Summary | Metric (Thousands of USD) | March 31, 2023 | March 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | 6,185 | 2,975 | 3,210 | 108.00% | | Cost of revenue (excluding depreciation and amortization) | 2,868 | 1,537 | 1,331 | 86.60% | | Total operating expenses | 16,004 | 14,116 | 1,888 | 13.38% | | Operating loss | (12,687) | (12,678) | (9) | 0.07% | | Total other income (expense) | 5 | 5 | 0 | 0.00% | | Net loss from continuing operations | (12,682) | (12,673) | (9) | 0.07% | | Loss per share (basic and diluted) | (0.23) | (0.29) | 0.06 | -20.69% | | Weighted average shares outstanding (basic and diluted) | 54,680,048 | 44,087,911 | 10,592,137 | 24.03% | - Interest expense, net, increased significantly from $9 thousand in Q1 2022 to $761 thousand in Q1 2023, primarily due to the issuance of 2023 Promissory Notes[16] - A gain on extinguishment of debt of $527 thousand was recognized in Q1 2023, with no comparable amount in Q1 2022[16] UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY As of March 31, 2023, total shareholders' equity increased to $51,977 thousand, primarily driven by stock option exercises, RSU vesting, fair value allocation to 2023 Promissory Notes warrants, and common stock and warrant issuances, partially offset by net loss Consolidated Statements of Shareholders' Equity Summary | Metric (Thousands of USD) | March 31, 2023 | January 1, 2023 | Change Amount | | :--- | :--- | :--- | :--- | | Common stock | 6 | 5 | 1 | | Treasury stock | (506) | (417) | (89) | | Additional paid-in capital | 218,157 | 202,747 | 15,410 | | Accumulated deficit | (165,680) | (152,998) | (12,682) | | Total Shareholders' Equity | 51,977 | 49,337 | 2,640 | - Additional paid-in capital increased by $15,410 thousand, driven by stock-based compensation ($1,112 thousand), fair value allocated to warrants with 2023 Promissory Notes ($5,125 thousand), and issuance of common stock and warrants ($9,158 thousand)[18] - Accumulated deficit increased by $12,682 thousand due to the net loss for the period[18] UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the three months ended March 31, 2023, net cash and restricted cash and cash equivalents increased by $10,555 thousand, primarily due to $20,643 thousand provided by financing activities, offsetting cash used in operating and investing activities Consolidated Statements of Cash Flows Summary | Cash Flow Activity (Thousands of USD) | March 31, 2023 | March 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (9,360) | (12,156) | 2,796 | -23.00% | | Net cash used in investing activities | (728) | (1,964) | 1,236 | -62.93% | | Net cash provided by financing activities | 20,643 | 3,113 | 17,530 | 563.10% | | Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | 10,555 | (11,007) | 21,562 | -195.89% | | Cash and cash equivalents and restricted cash and cash equivalents at end of period | 13,023 | 15,594 | (2,571) | -16.49% | - Net cash provided by financing activities increased significantly due to net proceeds from 2023 Promissory Notes ($4,000 thousand), 2023 Promissory Notes – related party ($7,100 thousand), and 2023 Registered Direct Offering ($9,159 thousand)[20] - Net cash used in operating activities decreased by $2,796 thousand, primarily due to adjustments for non-cash items like depreciation, amortization of debt discount, and share-based compensation, despite a net loss[20] NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed notes to the company's unaudited condensed consolidated financial statements, covering key information such as accounting policies, recent acquisitions, investments, debt, equity transactions, leases, income taxes, commitments, contingencies, and loss per share calculations - The Company provides products and services for the collection, distribution, and analysis of transportation data, focusing on roadway intelligence infrastructure[26] - On December 6, 2022, the Company divested its Automated Traffic Safety and Enforcement (ATSE) business, which is now presented as discontinued operations[27] - The Company believes existing cash is insufficient to fund operations for the next twelve months, raising substantial doubt about its ability to continue as a going concern, and is actively reviewing external financing options and contingency plans for expense reduction[36][37] NOTE 1 – GENERAL, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note explains the basis of financial statement preparation, use of significant accounting estimates, reclassification adjustments, and assessment of going concern, with the company providing transportation data products and services, having divested ATSE and acquired STS in 2022 Revenue Recognition Company revenue primarily derives from licensing and sales of roadway data and traffic management products and services, including recurring revenue from SaaS, subscriptions, e-commerce, and customer support, as well as product and service revenue from implementation, perpetual licenses, hardware sales, engineering services, and contactless compliance, recognized when control is transferred Revenue by Type | Revenue Type (Thousands of USD) | March 31, 2023 | March 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Recurring revenue | 4,204 | 1,695 | 2,509 | 147.90% | | Product and service revenue | 1,981 | 1,280 | 701 | 54.77% | | Total Revenue | 6,185 | 2,975 | 3,210 | 108.00% | Revenue by Customer Type | Customer Type (Thousands of USD) | March 31, 2023 | March 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Urban mobility | 2,754 | - | 2,754 | N/A | | Traffic management | 719 | 708 | 11 | 1.55% | | Licensing and other revenue | 2,712 | 2,267 | 445 | 19.63% | | Total Revenue | 6,185 | 2,975 | 3,210 | 108.00% | - Urban mobility revenue, initiated in June 2022, contributed $2,754 thousand in Q1 2023, representing a new significant revenue stream[59][60] Contract Liabilities As of March 31, 2023, contract liabilities increased to $5,591 thousand from $4,049 thousand on December 31, 2022, with $1,134 thousand recognized as revenue in Q1 2023 Contract Liabilities by Year | Year | Amount (Thousands of USD) | | :--- | :--- | | 2023 (remaining) | 3,802 | | 2024 | 1,048 | | 2025 | 480 | | 2026 | 186 | | 2027 | 70 | | Thereafter | 5 | | Total | 5,591 | - Contract liabilities increased from $4,049 thousand as of December 31, 2022, to $5,591 thousand as of March 31, 2023[67] - $1,134 thousand of the December 31, 2022 contract liabilities balance was recognized as revenue during the three months ended March 31, 2023[67] NOTE 2 – ACQUISITIONS The company completed the acquisition of Southern Traffic Services (STS) on June 17, 2022, for a total consideration of $12,799 thousand, including cash, contingent consideration, common stock, and notes, with STS's operating results included in the company's Q1 2023 consolidated statements of operations - The Company acquired 100% of Southern Traffic Services (STS) on June 17, 2022, for a total consideration of $12,799 thousand[79] - Consideration included $6,500 thousand cash, $1,001 thousand STS Earnout, $1,298 thousand STS Contingent Consideration, $2,000 thousand in common stock, and a $2,000 thousand note[79] - The acquisition resulted in the recognition of $1,977 thousand in goodwill, $3,400 thousand in customer relationships, and $700 thousand in marketing-related intangible assets[80] NOTE 3 – INVESTMENTS The company holds 19.9% equity in Global Public Safety and 50% in Roker Inc., both valued at $0 as of March 31, 2023, and invested $2,005 thousand in Roker SAFE, accounted for using the cost method - The Company holds a 19.9% equity interest in Global Public Safety and a 50% equity interest in Roker Inc., both valued at $0 as of March 31, 2023[86][88] - The Company invested $2,005 thousand in the Roker SAFE (Simple Agreement for Future Equity), which is recorded on the cost method of accounting as a long-term asset[90] NOTE 4 – SUPPLEMENTAL NON CASH DISCLOSURES OF CASH FLOW INFORMATION This note discloses non-cash cash flow information for the three months ended March 31, 2023, and 2022, including financing activities related to 2023 Promissory Notes warrants issuance and the conversion of 2022 Promissory Notes to 2023 Promissory Notes Non-Cash Activities | Non-Cash Activity (Thousands of USD) | March 31, 2023 | | :--- | :--- | | 2022 Promissory Notes exchanged for 2023 Promissory Notes (related party) | 1,000 | | Warrants issued in connection with 2023 Promissory Notes | 1,640 | | Warrants issued in connection with 2023 Promissory Notes (related party) | 3,485 | | New lease recognized (right-of-use assets) | - | | New lease recognized (lease liabilities) | (4,404) | | Lease incentive recognized | 919 | - In Q1 2023, $1,000 thousand of 2022 Promissory Notes were exchanged for 2023 Promissory Notes – related party[92] - Warrants issued in connection with the 2023 Promissory Notes totaled $1,640 thousand, and related party warrants totaled $3,485 thousand[92] NOTE 5 – OPERATING LEASES The company leases office facilities in the U.S. and Israel for 1 to 9 years, with operating lease right-of-use assets of $9,509 thousand and total lease liabilities of $14,941 thousand as of March 31, 2023, and operating lease expense of $524 thousand in Q1 2023 Operating Lease Details | Metric (Thousands of USD) | March 31, 2023 | | :--- | :--- | | Operating lease right-of-use assets | 9,509 | | Current lease liabilities | 1,074 | | Long-term lease liabilities | 13,867 | | Total Lease Liabilities | 14,941 | | Weighted average remaining lease term | 9.22 years | | Weighted average discount rate | 9.0% | | 2023 (remaining) lease payments | 1,776 | | 2024 lease payments | 2,320 | | 2025 lease payments | 2,295 | | 2026 lease payments | 2,258 | | 2027 lease payments | 2,302 | | Thereafter lease payments | 11,159 | | Total Lease Payments | 22,110 | | Less: estimated interest | 7,169 | | Lease Liabilities Maturity | 14,941 | - Operating lease expense from continuing operations was $524 thousand for the three months ended March 31, 2023, an increase from $408 thousand in the prior year[94] - Cash paid for operating lease liabilities from continuing operations was $594 thousand in Q1 2023, significantly higher than $22 thousand in Q1 2022[94] NOTE 6 – INTANGIBLE ASSETS AND GOODWILL As of March 31, 2023, net identifiable intangible assets were $20,258 thousand, a decrease from December 31, 2022, with amortization expense of $1,041 thousand this quarter, and no goodwill impairment identified Intangible Assets Summary | Intangible Asset Type (Thousands of USD) | March 31, 2023 | December 31, 2022 | Change Amount | | :--- | :--- | :--- | :--- | | Customer relationships | 3,516 | 3,581 | (65) | | Marketing-related | 641 | 684 | (43) | | Technology-related | 15,986 | 16,849 | (863) | | Internally capitalized software | 115 | 185 | (70) | | Total (after amortization) | 20,258 | 21,299 | (1,041) | | Accumulated amortization | (9,973) | (8,932) | (1,041) | | Net Identifiable Intangible Assets | 20,258 | 21,299 | (1,041) | - Amortization expense for the three months ended March 31, 2023, was $1,041 thousand, an increase from $983 thousand in the prior year[97] - The Company did not identify any events that would cause it to assess goodwill for impairment as of March 31, 2023[38] NOTE 7 – DEBT Company debt includes STS notes and 2023 Senior Secured Promissory Notes totaling $12,500 thousand with warrants, bearing 12% interest, maturing July 18, 2025, and including early redemption clauses, with related party investors participating in the 2023 notes issuance - The Company issued $2,000 thousand in unsecured, subordinated STS notes with a 3.0% interest rate, maturing in June 2024 and June 2025[99] - On January 18, 2023, the Company issued $12,500 thousand in senior secured 2023 Promissory Notes and warrants to purchase 6,250,000 shares of common stock, bearing a 12% annual interest rate and maturing on July 18, 2025[101][103] - Related parties, including the CEO Robert A. Berman and Arctis Global Master Fund Limited, invested $2,000 thousand and $6,500 thousand, respectively, in the 2023 Promissory Notes[106] Interest Expense For the three months ended March 31, 2023, net interest expense significantly increased to $761 thousand from $9 thousand in the prior year, primarily due to higher contractual interest and amortization of debt discount from the 2023 Promissory Notes issuance Interest Expense Summary | Interest Expense Type (Thousands of USD) | March 31, 2023 | March 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Contractual interest expense (income), net | 317 | 7 | 310 | 4428.57% | | Amortization of debt discount | 444 | 2 | 442 | 22100.00% | | Total Interest Expense, Net | 761 | 9 | 752 | 8355.56% | - The significant increase in interest expense is primarily attributable to the issuance of the 2023 Promissory Notes[193] NOTE 8 – INCOME TAXES The company maintains a full valuation allowance against its net deferred tax assets, as the realization of future benefits is deemed unlikely, and has not recorded interest or penalties related to unrecognized tax benefits - The Company maintains a full valuation allowance against its net deferred taxes, excluding the deferred tax liability related to indefinite-lived intangibles, due to the unlikelihood of realizing future benefits[114][115] - No U.S. Federal, state, or foreign income tax audits were in process as of March 31, 2023[114] NOTE 9 – COMMITMENTS AND CONTINGENCIES The company settled all pending litigation with Firestorm Principals on March 22, 2023, involving mutual release of claims, asset transfer, a $175 thousand payment, and Firestorm Principals waiving rights to notes and warrants, with no other pending litigation currently - On March 22, 2023, the Company entered into a settlement agreement with the Firestorm Principals, resolving all existing and potential actions[121] - The settlement involved transferring certain Firestorm assets, a payment of $175 thousand, and the extinguishment of Firestorm Principals' rights to promissory notes and warrants[121] - As a result of the settlement, the Company recorded a reduction to notes payable and cancelled warrants to purchase 631,254 shares of common stock[122] NOTE 10 – STOCKHOLDERS' EQUITY This note details the company's equity activities in Q1 2023, including capital raised through a registered direct offering and 2023 Promissory Notes warrants issuance, equity issued for the STS acquisition, and summarized warrant activity - The Company completed a 2023 Registered Direct Offering on March 27, 2023, raising approximately $10,000 thousand in gross proceeds by issuing common stock, pre-funded warrants, and warrants[124] - In connection with the 2023 Promissory Notes, the Company issued warrants to purchase 6,250,000 shares of common stock, valued at $5,125 thousand at issuance, with an exercise price of $2.00 per share[126][128] - The Company issued 798,666 shares of common stock as part of the consideration for the STS acquisition[132] NOTE 11 – EQUITY INCENTIVE PLAN The company grants stock options and restricted stock units (RSUs) under its 2017 Equity Incentive Plan, with $0 stock option compensation expense and $1,112 thousand RSU compensation expense in Q1 2023, and $6,678 thousand unrecognized RSU compensation expense remaining - Stock compensation expense related to stock options was $0 for the three months ended March 31, 2023, down from $28 thousand in 2022[137] - Stock compensation expense related to RSUs was $1,112 thousand for the three months ended March 31, 2023, a decrease from $1,872 thousand in 2022[139] - As of March 31, 2023, there was $6,678 thousand of unrecognized stock compensation expense related to unvested RSUs, to be recognized over an average remaining period of 2.09 years[141] NOTE 12 – LOSS PER SHARE For the three months ended March 31, 2023, basic and diluted loss per share from continuing operations was $0.23, an improvement from $0.29 in the prior year, with 16,375,816 potentially dilutive securities excluded due to the net loss Loss Per Share Summary | Metric | March 31, 2023 | March 31, 2022 | | :--- | :--- | :--- | | Net loss from continuing operations (Thousands of USD) | (12,682) | (12,673) | | Net loss attributable to shareholders (Thousands of USD) | (12,682) | (12,601) | | Weighted average common shares (basic and diluted) | 54,680,048 | 44,087,911 | | Basic and diluted loss per share from continuing operations | (0.23) | (0.29) | | Potentially dilutive securities excluded | 16,375,816 | 3,858,220 | - The exercise of 772,853 pre-funded warrants was considered virtually assured and included in the denominator for both basic and diluted loss per share[143] - Potentially dilutive securities, including outstanding warrants, options, and RSUs, were excluded from diluted EPS calculation due to the net loss[144][145] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses the company's financial condition and operating results for the period ended March 31, 2023, focusing on revenue growth, cost structure, operating expenses, non-GAAP financial measures, and liquidity and capital resources, as the company aims to be a leading provider of roadway intelligence and data-driven mobility insights Cautionary Note Regarding Forward-Looking Statements Forward-looking statements in this quarterly report, concerning future operating results, financial condition, business strategy, and product services, are subject to various risks and uncertainties that could cause actual results to differ materially from expectations, and investors should exercise caution, with no obligation for the company to update them - Forward-looking statements are subject to risks including operating risks, reputational risks, financial market conditions, acquisition integration, and ability to access capital markets[148] - Other factors include political, legal, regulatory, governmental, administrative, and economic conditions, litigation, competition, product development, and global health emergencies[148][154] General Rekor aims to be the premier global provider of roadway intelligence and data-driven mobility insights, serving public safety, urban mobility, and transportation management markets with AI-driven solutions that collect, connect, and organize global mobility data via the Rekor One™ platform for real-time and predictive insights, enabling smarter, safer, and more sustainable roadways - Rekor's mission is to be the premier provider of roadway intelligence and data-driven mobility insights globally, transforming public safety, urban mobility, and transportation management[152] - The Company's core technology, Rekor One™ roadway intelligence engine, uses AI-driven, edge-based IoT devices and integrated data sets to provide real-time and predictive actionable insights[155][159][160] - Rekor's solutions support diverse use cases including incident detection, traffic operations, vehicle classification, and contactless compliance, aiming to be the foundation of a digital-enabled internet for roadways[161][164] Opportunities, Trends and Uncertainties The company sees opportunities in the growing smart city market, AI in infrastructure, connected vehicle data, new uses for vehicle recognition systems, expanded automated enforcement, GPU improvements, and edge processing, while facing challenges from government budget pressures and COVID-19 uncertainties - Key opportunities include the growing Smart City market, application of AI for infrastructure, leveraging Connected Vehicle Data, and expanded uses for Vehicle Recognition Systems[166] - Technological advancements like GPU improvements and Edge Processing are expected to benefit the business by enhancing image recognition and reducing data transfer needs[168] - Uncertainties include pressure on government budgets, the potential resurgence of COVID-19, and the adaptability of the market to new technologies despite existing long-term contracts with competitors[166][168][172] Components of Operating Results This section details the components of the company's operating results, including revenue recognition principles, cost of revenue, operating expenses (such as general and administrative, sales and marketing, R&D, depreciation, and amortization), other income (expense), and income tax provision - Revenue is recognized upon transfer of control of promised products and services, including data aggregation, traffic management, and licensing offerings[170] - Operating expenses consist of general and administrative, sales and marketing, research and development, and depreciation and amortization, with personnel costs being the most significant component[173] - The Company maintains a full valuation allowance against its net deferred tax assets due to a history of losses, expecting to continue this for the foreseeable future[180] Results of Operations For the three months ended March 31, 2023, revenue increased by 108% to $6,185 thousand, primarily due to the STS acquisition, with operating loss consistent year-over-year, but interest expense significantly rose due to 2023 Promissory Notes issuance, and a $527 thousand gain on extinguishment of debt from the Firestorm litigation settlement Operating Results Summary | Metric (Thousands of USD) | March 31, 2023 | March 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | 6,185 | 2,975 | 3,210 | 108% | | Cost of revenue (excluding depreciation and amortization) | 2,868 | 1,537 | 1,331 | 87% | | Total operating expenses | 16,004 | 14,116 | 1,888 | 13% | | Operating loss | (12,687) | (12,678) | (9) | 0% | | Gain on extinguishment of debt | 527 | - | 527 | 100% | | Interest expense, net | (761) | (9) | (752) | -8356% | | Other income | 239 | 14 | 225 | 1607% | | Net loss from continuing operations | (12,682) | (12,673) | (9) | 0% | - Revenue increase was primarily attributable to the acquisition of STS, contributing $2,754 thousand in Q1 2023[186] - Selling and marketing expenses increased by 40% ($538 thousand) due to increased marketing efforts and staffing to support growth, while R&D expenses increased by 21% ($866 thousand) due to development of new transportation management products[188][190][191] Non-GAAP Measures The company discloses non-GAAP financial measures such as EBITDA, Adjusted EBITDA, Adjusted Gross Profit, and Adjusted Gross Margin to provide additional insight into operating performance and debt service capability, with Adjusted Gross Margin improving from 48.3% to 53.6%, reflecting enhanced operational efficiency Non-GAAP Reconciliation (EBITDA) | Metric (Thousands of USD) | March 31, 2023 | March 31, 2022 | | :--- | :--- | :--- | | Net loss from continuing operations | (12,682) | (12,673) | | Income tax expense | - | - | | Interest expense | 761 | 9 | | Depreciation and amortization | 1,955 | 1,364 | | EBITDA | (9,966) | (11,300) | | Stock-based compensation expense | 1,112 | 1,900 | | Gain on extinguishment of debt | (527) | - | | Adjusted EBITDA | (9,381) | (9,400) | Non-GAAP Reconciliation (Adjusted Gross Profit) | Metric (Thousands of USD) | March 31, 2023 | March 31, 2022 | | :--- | :--- | :--- | | Revenue | 6,185 | 2,975 | | Cost of revenue (excluding depreciation and amortization) | 2,868 | 1,537 | | Adjusted Gross Profit | 3,317 | 1,438 | | Adjusted Gross Margin | 53.6% | 48.3% | - Adjusted Gross Margin increased to 53.6% from 48.3%, indicating improved operational efficiencies as the Company scales and standardizes its product offerings[199] Key Performance Indicators The company's key performance indicators show recurring revenue increased by 148% to $4,204 thousand, total contract value grew by 692% to $12,083 thousand, and total remaining performance obligations rose to $24,330 thousand, with approximately 67% expected to be recognized within the next twelve months Key Performance Indicators Summary | Metric (Thousands of USD) | March 31, 2023 | March 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Recurring revenue | 4,204 | 1,695 | 2,509 | 148% | | Total contract value | 12,083 | 1,525 | 10,558 | 692% | | Total remaining performance obligations | 24,330 | 21,412 (Dec 31, 2022) | 2,918 | 14% | - The increase in total contract value is primarily related to a large statewide contract closed with the Florida DOT for the class, count, and speed application[202] - Approximately 67% of the remaining performance obligations are expected to be recognized as revenue over the succeeding twelve months, with the remainder over the next two to four years[204] Liquidity and Capital Resources As of March 31, 2023, cash and cash equivalents increased from $2,178 thousand to $12,444 thousand, and working capital shifted from a deficit to a surplus, with financing activities providing $20,643 thousand, mainly from 2023 Promissory Notes and a registered direct offering; however, existing cash is still insufficient for the next twelve months' operations, raising substantial doubt about the company's ability to continue as a going concern Cash Flow Activities | Cash Flow Activity (Thousands of USD) | March 31, 2023 | March 31, 2022 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Net cash used in operating activities | (9,490) | (12,260) | 2,770 | 23% | | Net cash used in investing activities | (728) | (1,964) | 1,236 | 63% | | Net cash provided by financing activities | 20,643 | 3,113 | 17,530 | 563% | | Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | 10,425 | (11,111) | 21,536 | 194% | - As of March 31, 2023, cash and cash equivalents from continuing operations were $12,444 thousand, and working capital was $6,974 thousand, compared to $2,178 thousand cash and a $6,010 thousand working capital deficit as of December 31, 2022[210] - The Company believes existing cash is insufficient to fund operations for the next twelve months, raising substantial doubt about its ability to continue as a going concern, and is actively seeking external financing and implementing expense reductions[214][215] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a "smaller reporting company," Rekor is not required to provide quantitative and qualitative disclosures about market risk - As a "smaller reporting company," Rekor is not required to provide quantitative and qualitative disclosures about market risk[222] ITEM 4. CONTROLS AND PROCEDURES Company management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2023, concluding they were effective, with no material changes in internal control over financial reporting during the quarter - The Company's disclosure controls and procedures were effective as of March 31, 2023, based on management's evaluation[225] - There were no changes in internal control over financial reporting during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[226] PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company settled all pending litigation with Firestorm Principals on March 22, 2023, involving mutual release of claims, asset transfer, a $175 thousand payment, and Firestorm Principals waiving rights to notes and warrants, with no other pending litigation currently - The Company settled a lawsuit with Firestorm Principals on March 22, 2023, mutually releasing all claims[230] - The settlement involved transferring Firestorm assets, a $175 thousand payment, and the extinguishment of rights to promissory notes and warrants for 631,254 shares of common stock[230][231] - As a result of the settlement, there is no litigation pending against the Company at this time[231] ITEM 1A. RISK FACTORS The risk factors disclosed in this quarterly report are not materially changed from those in the company's 2022 Form 10-K annual report, and investors are encouraged to review the 2022 Form 10-K for risks and uncertainties - There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2022[234] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company issued 798,666 unregistered common shares in the STS acquisition and sold senior secured promissory notes and warrants to qualified investors in the 2023 Promissory Notes issuance, with proceeds primarily used for R&D, legal, financing, acquisition costs, and sales and marketing for new product development and strategic shifts - As part of the STS acquisition, the Company issued 798,666 unregistered shares of common stock, valued at $2,000,000, under Section 4(a)(2) of the Securities Act[235] - In connection with the 2023 Promissory Notes, the Company issued $12,500,000 in senior secured promissory notes and warrants to purchase 6,250,000 shares of common stock in a private placement[236] - Proceeds have been primarily used for research and development, legal, financing costs, acquisition costs, and sales and marketing expenses related to new product development and strategic shifts[237] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company reports no defaults upon senior securities occurred during this quarter - There were no defaults upon senior securities[238] ITEM 4. MINE SAFETY DISCLOSURES This disclosure is not applicable to the company's business - Mine safety disclosures are not applicable to the Company[239] ITEM 5. OTHER INFORMATION The company reports no other information requiring disclosure this quarter - No other information is reported[240] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q report, including the company's articles of incorporation, certification documents, and XBRL files - The exhibits include the Amended and Restated Certificate of Incorporation, Certificates of Amendment, Amended and Restated Bylaws, CEO and CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), and Inline XBRL documents[242] SIGNATURES This quarterly report was formally signed by Robert A. Berman, Chief Executive Officer, and Eyal Hen, Chief Financial Officer, of Rekor Systems, Inc. on May 15, 2023 - The report was signed by Robert A. Berman, Chief Executive Officer, and Eyal Hen, Chief Financial Officer, on May 15, 2023[246]