Rekor Systems, Inc. Reports Second Quarter of 2020 Financial Results

Highlights:

• Second quarter 2020 gross revenue increased 89% to $2.7 million as compared to $1.4 million in the second quarter of 2019
• Completion of the sale of non-core businesses, AOC Key Solutions and TeamGlobal
• Agreement to exchange over 77% of its 2019 notes payable to common stock and other related loan modifications

Rekor Systems, Inc, (REKR) (“Rekor”), a Maryland-based company providing real-time roadway intelligence through AI-driven decisions, today reported its unaudited financial results for the second quarter of 2020.

Commenting on the results, Eyal Hen, Chief Financial Officer of Rekor, stated: “The second quarter was highlighted by strength and continuing growth in our top line. The solid performance translated into a growth in revenue for the three and six months ended June 30, 2020 of 89% and 76%, respectively, compared to the same periods in 2019. We successfully continued executing on our strategic plan to grow our revenues, divest our non-core businesses and focus on our technology segment. On July 15, 2020, we completed a debt exchange transaction with holders of our 2019 Notes.”

Mr. Hen continued, “During the second quarter of 2020, we completed the sale of both of our remaining non-core businesses to their respective management teams at a gain and reached an agreement to exchange over 77% of our debt for equity and extended the maturity of the remaining debt to December 2021. The debt exchange was completed on July 15 and reduced our debt by over 77%. This will allow us to use more of our increasing revenue for operations. We expect it to have a major effect on our bottom line due to lower interest expense as well.”

Since January 2020, Rekor has been selected by various resellers and formed partnerships with various companies, including Fortune 50 and Fortune 500 companies, to use its AI software in retail, public safety and parking operations. In June of 2020, Rekor announced a joint venture with Cygnet-Infotech, a premier product engineering company (www.cygnet-infotech.com), to launch a smart permit and parking management startup, named Roker Inc. (www.rokerinc.com) ("Roker"), in which we have 50% equity interest. Roker is designed to automate parking enforcement and enable higher revenue recovery for both public safety institutions and private businesses alike. In July 2020, the Company made an initial investment of $45,000 into the joint venture.

Financial Summary

Second Quarter Results

Revenues

The increase in revenue for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, was a result of additional products the Company offered during the period corresponding to the Company’s increased focus on expanding its technology offerings. Additionally, the increase in revenue during the three months ended June 30, 2020, was attributable to substantial completion of the implementation phase of large software and hardware contract in Florida which generated up-front revenue due to building infrastructure.

The increase in revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to the expanded technology offerings and large contracts stated above, as well as the fact that operational results from our OpenALPR acquisition have only been included in operations since March 2019. During the six months ended June 30, 2020, revenue attributable to OpenALPR was recognized for the full six-month period compared to only a three and half a month period in the corresponding period in 2019.

Cost of Revenue, Gross Profit and Gross Margin

For the three and six months ended June 30, 2020, compared to the three and six months ended June 30, 2019, the increase in gross profit was primarily attributable to the increase in revenue for the corresponding period. For the three and six months ended June 30, 2020 the gross margin decreased to 52% and 59%, respectively, which was primarily attributable to building infrastructure in connection with large software and hardware contracts. These contracts included construction and assembly of fixtures for our vehicle recognition cameras and the infrastructure necessary to support database and communications operations on a shared basis with other municipalities. As this early stage of building the network is more costly, the initial margins for such projects are lower than expected than for future operations that will be able to use the same infrastructure.

Loss from Operations

Operating loss for the three months ended June 30, 2020 increased to $2.8 million, compared to $1.6 million in the same period in 2019. Additionally, operating loss for the six months ended June 30, 2020, increased to $5.4 million, compared to $2.8 million in the same period in 2019. The increase in the operating loss during the year is attributable mainly to the increased expenses in connection with the implementation of our go-to-market plan to develop and promote our technology products and services. Additionally, the Company brought on additional officers and executives to support the Company’s growth plan and solidify the corporate structure.

Performance Obligations

As of June 30, 2020, we had approximately $15,237,000 of licensing and subscription contracts that were closed prior to June 30, 2020 but have a contractual subscription period beyond June 30, 2020. These subscription contracts generally cover a term of one to five years, in which the Company will recognize revenue ratably over the contract term. We currently expect to recognize approximately 33% of this amount over the succeeding twelve months, and the remainder is expected to be recognized over the following four years. On occasion our customers will prepay the full contract or a substantial portion of the contract. Amounts related to the prepayment of the subscription contract for a service period that is not yet met are recorded as part of our contract liabilities balance.

The table below reflects the 86% quarter by quarter growth in the unaudited remaining contract value of licensing and subscription contracts from June 30, 2019 through June 30, 2020 (dollars in thousands):

Proforma balance sheet

The following unaudited pro forma combined financial information gives effect to the Company’s recent debt for equity exchange as if it was consummated as of June 30, 2020. This unaudited pro forma financial information is presented for informational purposes only and is not intended to present actual results that would have been attained had the transaction been completed as of June 30, 2020 or to project potential operating results as of any future date or for any future periods.

EBITDA and Adjusted EBITDA

We calculate EBITDA as net loss before interest, taxes, depreciation and amortization. We calculate Adjusted EBITDA as net loss before interest, taxes, depreciation and amortization, adjusted for (i) impairment of intangible assets, (ii) loss on extinguishment of debt, (iii) stock-based compensation, (iv) losses or gains on sales of subsidiaries, and (v) other unusual or non-recurring items. EBITDA and Adjusted EBITDA are not measurements of financial performance or liquidity under accounting principles generally accepted in the U.S. (“U.S. GAAP”) and should not be considered as an alternative to net earnings or cash flow from operating activities as indicators of our operating performance or as a measure of liquidity or any other measures of performance derived in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA are presented because we believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of a company’s ability to service and/or incur debt. However, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do.

The following table sets forth the components of the EBITDA and Adjusted EBITDA for the periods included (dollars in thousands):