Rekor Systems: Sum Of Parts Analysis Implies 58% Downside, With Red Flags On Corporate Governance

Summary

• Rekor was formed as a shell company that went on a baffling spree of acquisitions only to divest or close the majority of its acquired companies after accumulating massive losses.
• What's left of Rekor bills itself as an AI-driven machine learning SaaS offering, but their only remaining business is banal red light cameras and cameras/software that recognize license plate numbers.
• Despite being down +40% from recent highs, my sum of parts analysis comes to a fair value of $1.86 per share, implying 58% in further downside from current levels.
• There are more questions than answers with respect to management's history and their actions at Rekor. Litigation with a former subsidiary unveils serious concerns.

Rekor Systems (NASDAQ:REKR) is one of the more confusing companies that you will come across. Formerly known as Novum Solutions, the shell was formed in Feb 2017 and from there it has been a chaotic array of mergers, acquisitions, failed acquisitions, divestitures, and business discontinuations. The below graphic will hopefully serve as a helpful roadmap as we navigate through the company's operations:

Source: Compiled by author, see appendix

Below are the business descriptions for all of these entities. The reader can judge for themselves if these business combinations make any kind of strategic sense:

1. Firestorm Solutions: A leader in crisis management, crisis communications, emergency response, and business continuity.
2. KeyStone Solutions: provides consulting and technical support services to assist clients seeking U.S. federal government contracts.
3. Brekford Traffic Solutions: a leading public safety technology service provider of fully integrated automated traffic safety enforcement solutions, including speed, red light, and distracted driving cameras.
4. Secure Education: comprised of an expert team of highly trained, former U.S. Secret Service Agents, assists clients by designing customized plans, conducting security assessments, delivering training, and responding to critical incidents.
5. BC Management: An executive search firm for business continuity, disaster recovery, crisis management and risk management professionals.
6. GTSI & GCP: Provides the U.S. Department of Defense and the aerospace industry with experienced maintenance and modification specialists.
7. NeoSystems (attempted acquisition did not go through): Specializes in providing strategic back office services. NeoSystems offers services in the areas of accounting, association management, and financial planning.
8. OpenALPR: Provides ALPR (automatic license plate recognition) technology used by both law enforcement and commercial clients.

All of the constant acquisitions, divestitures, and business closures makes an analysis of Rekor's historical financials to be something of a Herculean effort.

The quarterly income statements and balance sheets are constantly adding new businesses to consolidated results or shifting businesses to discontinued operations. The best approach to analyzing the financials is to treat the past as prologue and begin our focus on Q1 2019 where we can segregate Rekor's only remaining businesses that are in operation under the company today, Brekford Traffic Safety and OpenALPR.

Red light cameras and license plate recognition

The Rekor of today describes itself as a "company using AI to provide real-time roadway intelligence" and that they have "redefined an entire industry by using AI and machine learning to develop software that captures roadway information and identifies valuable patterns in real time." This description comes from a press release dated May 5th, 2020 whose purpose was to announce Rekor's "new visual identity". The keyword here is "visual" because as we'll see there was really nothing "new" with respect to their fundamental business.

Source: rekor.ai

Brekford Traffic Solutions

You can find brochures advertising Brekford's offerings here. They install red light cameras and various other cameras that captures traffic violations for law enforcement.

Most of Brekford's revenues derived from these operations appear to come from a traffic fine-sharing or fixed fee arrangement with the municipality. Here is an example from one of their tenured customers, the city of New Rochelle.

Brekford is responsible to install and maintain the cameras, to issue and adjudicate citations and collect fines in exchange for 35% of gross revenue. The total red light camera revenue for 2017 was $1,926,213.18 of which Brekford keeps $674,174.58 and the City of New Rochelle keeps $1,252,038.50.

This is a very niche business, and in Rekor's case, a business that is experiencing declining revenues. The following table shows Rekor's revenues by segment, "automated traffic safety enforcement" (Brekford) and "licensing and subscription revenue" (OpenALPR).

Source: Compiled by author

We see that the Brekford business did $3.4M in annual revenues in FY 2018 and was down slightly in FY 2019. Through the LTM of Q2 2020, revenues have declined about 4% from FY 2019's total to $3.2M. Not a precipitous drop and likely explainable by a sort of COVID impact, but there is clearly no growth in the topline going on at Brekford.

I estimate that Brekford's gross margins are typically a little less than 50%. During Q1 of 2019, 80% or Rekor's revenues were from Brekford and they reported a 51% gross margin. Given the other 20% was OpenALPR's much higher-margin business, we can conclude that Brekford's margins are south of 50%.

Source: Compiled by author - table only contains figures for continuing operations

Thus I estimate that the Brekford line is currently doing ~$1.6M in gross profits before operating expenses, SG&A, etc. This would barely cover the 2019 compensation paid to Rekor's top three executives and board of directors which came in at +$1.4M. No one could argue that $1.6M in annual gross profits from a mature segment with flat to declining revenues could justify Rekor's ~$119M enterprise value, so that leaves us with Rekor's only other line of business, OpenALPR.

OpenALPR

OpenALPR's core product offering is Watchman. It is software that can be installed on video cameras which identifies when a license plate is in the frame of a picture and captures the license plate number. It can also identify the make and model of a vehicle. Below is a demo from YouTube:

Source: YouTube

Its acquisition by Rekor had industry members understandably scratching their heads:

Startup OpenALPR has been acquired by Novume, a company virtually unknown in the industry.

Source: IPVM

OpenALPR was known for being an open source ALPR software product, hence the name. This also means that before the Rekor acquisition, its software was available for free to anyone that wanted access to it.

I believe there are a lot of users here who use OpenALPR's Watchman software, the free license edition that allows you to use 2 cameras and they retain data in their cloud for a couple days - no alerts. I just went to their site and it looks like they are making changes. I see a new home license is showing at $5.00 per camera. My account has changed from the free level to a commercial trial that will expire at the end of Feb. I have not received any email about this change, but it looks like the free ride is over. Does anyone have any other details about what OpenALPR is doing?

Source: ipcamtalk.com, Jan 31 2020

While I'm not opposed to monetizing an offering that was previously free, ALPR is a crowded and undifferentiated niche field with no moats. Their target markets are logically law enforcement, toll roads, and parking management, but the IPVM (which bills themselves as the world's leading authority on video surveillance) has a directory of 60 ALPR competitors to OpenALPR.

Industry Research estimates the ALPR TAM to stand at $0.9B today and is projected to grow to $1.8B by 2026 (a respectable 11.6% CAGR). But industry leader Neology only maintains 6.95% of the market. Industry Research's report highlights 22 other companies, none of which are OpenALPR or Rekor (not surprising as they likely have a less than 0.50% market share - $5M in LTM pro forma revenues divided by current TAM of $900M).

Highlighted ALPR competitors:

Source: industryresearch.co

Rekor also sells a fixed video camera, a mobile video camera, a hard drive that is pre-loaded with Watchman software, tolling software, and CarCheck software. This encompasses its ALPR product offerings and we have now covered the entirety of Rekor's business.

In my opinion, investors would be smart to question if Rekor really has "redefined an entire industry by using AI and machine learning" as claimed. Banal red light cameras and license plate number recognition is not the path to the singularity, and I'm not the only one who has questioned Rekor's flamboyant description of their operations. The SEC had the following comments for Rekor after reviewing an investor presentation (Rekor's response can be found here):

We note an investor presentation where you indicate that Novume is transitioning to a technology company focused in artificial intelligence (AI), and that your current portfolio of AI technologies provides you with the opportunity to "disrupt." We further note your press release describing your planned acquisition of OpenALPR as furthering disruption of the vehicle recognition market through the use of “market-leading AI Technology.” Expand your disclosure here and where applicable to reflect this transition in business focus. You should discuss the company’s specific AI offerings, and how such products and/or services differ from more typical algorithmic computing. We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures

TAM

And since we've covered everything currently under the Rekor umbrella, one might be surprised when they look at Rekor's investor presentation materials and see a $31.6B TAM for the company by 2025.

Source: Investor presentation dated May 2020

The ALPR industry research clearly states that the ALPR TAM includes cameras, hardware, software, and services. This seems to cover OpenALPR's entire business. But here Rekor is throwing in the entire Video Surveillance, Parking Management, and Video Management Software industry TAMs to boot. I would estimate their TAM to be 94% lower than presented based on Industry Research's $1.8B forecast.

Growth expectations

Revisiting our revenue by segment, we see flat revenue trends in 2019 for the OpenALPR segment after it is fully consolidated in Q1 2019 followed by strong growth in Q1 and Q2 2020.

Source: Compiled by author - table only contains figures for continuing operations

But there is a major grain of salt to be taken here. In Q1 2020 the company announced a $1.79M five-year contract with the city of Lauderhill, FL to install 73 Rekor Edge cameras with associated Watchman software. At $249 per month per camera, this works out to $1.1M in subscription revenues over 5 years and would imply the remaining $0.69M is for installation. Given the size of this contract and competition, I would guess that there was a discount applied, but our exercise should still be approximate.

Rekor's Q2 10-Q tells us that one customer represented 35% of their quarterly revenues in Q2, or $937k out of the total $2.7M. Given they announced no other major wins of this size in their "recent developments" comments in the same 10-Q or in their press releases, I suspect that this $937k represents the FL installation, a one-time event. If we adjust for the one-time nature of this lumpy revenue, their QoQ revenue growth goes from 129% to 18%. This theory was further validated on Oct 28th as Rekor pre-released Q3 revenues at +$2.1M, a ~22% decline from Q2 2020.

We also see a big pop in gross margins to 81% once OpenALPR is completely consolidated in Q2 2019 but these gains have steadily been eroded all the way down to 52% in Q2 2020. This steady drop is difficult to explain given flat Brekford sales, but it suggests a negative trend and the possibility of big discounts on OpenALPR's offerings.

Company valuation

Rekor paid 6.8x FY '18 revenues for OpenALPR in 2019. A steep multiple, but conceivably a fair value given their traditionally strong margins and the fact that the business had a positive net income before being burdened with Rekor's overhead. A P/S of 6.8x should still be appropriate for OpenALPR's segment notwithstanding the unexplained drop in gross margins. 6.8x is also a consistent multiple compared to other small/micro-cap SaaS stocks. See PROS Holdings (PRO), Pluralsight (PS), Intelligent Systems Corp (INS), or even the Global X Cloud Computing ETF (CLOU) at 5.4x, 6.1x, 8.9x, and 9.0x on a LTM basis respectively (CLOU includes nose-bleed names like SHOP, ZM, etc.). I will also leave in the one-time Florida contract revenues as I would expect Rekor to secure lumpy wins such as this one from time to time.

Brekford reported $780k in operating expenses in Q1 2017 before being acquired. This resulted in a negative operating income then and it would result in a negative operating income for stand alone Brekford now. Only a strategic buyer in a similar business could realize value with Brekford, but for the sake of not totally writing off the business, I'll assign a value of 1x gross profits.

Rekor also recently completed a large equity issuance and debt exchange to raise cash and render the company debt free, but the cost of this was a jaw-dropping 40% dilution to the existing shares outstanding. Rekor reported 22.9M in diluted shares outstanding in their latest 10Q and subsequently sold an estimated 5M in shares as part of their At Market Issuance Sale Agreement and exchanged $15M in debt for 4.3M shares (a $3.47 per share exchange).

This sum-of-parts valuation that I arrive at gives a target share price of $1.86 per share and implies 58% in downside from Oct 29th's closing price of $4.33.

Source: Compiled by author

You will notice that almost 40% of this valuation comes from my estimate of Rekor's cash held on the balance sheet after their equity issuance. Rekor apparently saw the need to raise a cash balance that equates to +320% of their LTM revenues from continuing operations and that ~$5.00 to $6.00 was a good price to sell stock after the big FL contract. I suspect that this elevated cash balance will not last long. During the first 6 months of 2020, Rekor realized a $(10.5)M free cash flow.

Since Rekor is now debt free, we should add interest back to their FCF along with losses from their discontinued operations which would give us a pro forma FCF of $(8.1)M for the 6 months through June 2020, and a run-rate annual FCF of $(16.2)M. At this rate Rekor's cash would last a little less than 2 years before they would need to embark on an additional dilutive capital raise. But there is certainly a risk of further non-strategic acquisitions that would repeat the capital destructive cycle that we've previously witnessed at Rekor.

Stale data on financial websites

58% in downside is a huge number. Why would investors be paying so much more for Rekor today? It may have something to do with the fact that many online resources still display Rekor's financials that include their discontinued operations. If you look Rekor up on yahoo! finance and are convinced that they're a hot SaaS company, you might be willing to pay the ~6x TEV / Sales ratio that yahoo! finance shows...

Source: Compiled by author

Surprise! Those TTM revenues are actually $7.3M now and Rekor is trading at a EV/Sales ratio that is 167% higher than you would have thought if you didn't dissect Rekor's numbers. How many investors are unaware that the revenue figures they're going to see for Rekor are about to plummet and that they just paid 16x revenues for a money losing company? Not to beat a dead horse, but Rekor's current investors have paid $119M in EV for an operation that did $7.3M in LTM revenues (45% of which came from mature red light cameras) and a mere $4.6M in gross profits.

Management background

Many of the complications surrounding Rekor's management have been touched on in two previous pieces of analysis from a securities attorney which I'd highly recommend (they can be found here and here). I'll touch on my more pressing concerns.

Rekor's CEO Robert Berman appears to have no background in the industry that Rekor currently operates in. He lists previous roles at little known finance oriented companies Avon Road Partners and Cinium Financial. Mr. Berman appears to be one of two employees that have worked at Avon (the other being a family relative), and although Cinium's website has been taken down, they were in the business of writing surety bonds for riskier general contractors with imperfect credit. Mr. Berman seems to have come to Rekor/KeyStone after leaving this defunct surety bond company that he headed as CEO.

Empire Resorts

But the more notable firm on Mr. Berman's resume is Empire Resorts, a casino/gaming enterprise for which he lists himself as a co-founder and former CEO. The stock chart for Empire doesn't paint a particularly successful picture:

Source: barchart.com

While Mr. Berman's bio only references a short time at the helm of Empire from 2002 to 2005, he was actually the driving force behind this lengthy initiative which started in the 1990s and was hatched out of an idea to build a casino on land donated in trust for an Indian tribe. The entire colorful history of Empire can be found here.

The Empire Resorts operation was eventually taken private by Genting Malaysia Bhd as Empire was on the brink of filing for bankruptcy.

Casino operator Genting Malaysia Bhd says it has concluded the acquisition of a 38.3-percent stake in loss-making United States-based casino operator Empire Resorts Inc. The US$128.6-million deal – announced in August – is part of a proposed operation to take Empire Resorts private.

Source: ggrasia.com

The reason Empire is notable for Rekor is the fact that four out of seven of Rekor's board members all have connections from Empire:

1. CEO and Executive Chairman of the Board Robert Berman is a co-founder and former CEO of Empire. 2019 comp: $518,004
2. Board member Paul DeBary was formerly a director and audit committee chair for Empire . 2019 comp: $103,276
3. Board member David Hanlon is a former CEO of Empire (though it is not mentioned in his Rekor bio, you can find him in Empire's 2008 Proxy) and has extensive experience in casinos, gaming, and hotels. 2019 comp: $51,215
4. Board member Steven Croxton served as an underwriter for Empire. 2019 comp: $62,877

Why has the Rekor board turned into a second home for this group of former "loss-making" Empire Resorts colleagues? What does Rekor's business have to do with gaming and casinos?

Acquisition logic and a litany of red flags

I previously characterized Rekor's business acquisitions as baffling. The docket from Rekor's ongoing lawsuit against the former owners of discontinued Firestorm Solutions offers a window into Rekor's process for finding acquisition candidates and conducting due diligence. Rekor is alleging that Firestorm " fraudulently induced the execution of the Membership Interest Purchase Agreement". Below are some highlights from the defendants' responses:

Source: PACER, REKR v Laughlin status letter, document 69

As the documents above show, Rekor was targeting a business that was owned by "childhood friends" of Rekor's CEO and that Rekor seems to have been extremely lax in its due diligence. Firestorm co-owner Harry Rhulen even expressed concerns to CEO Berman in an email dated Oct 2nd, 2016: "As much as I would like to do a deal with Firestorm, I don’t know what one would look like. A purchase would have to be based on brand value and intellectual property, not a financial measure". "I am very concerned that your investors see prudent behavior. I am not sure buying Firestorm will be seen that way unless the deal smells right". (Source: REKR v. Laughlin reply and counterclaim document 34)

I requested comment from Rekor's IR on 10/27/20, specifically with respect to the defendant's allegation on due diligence and the personal attacks on CEO, Robert Berman. After quickly being notified that the query had been escalated and following up a second time on 10/28/20, I have yet to receive a further response. I will update this article if/when a response is received.

Combining details revealed from this lawsuit with other publicly disclosed events at Rekor raises numerous red flags over the company's short history. We see an auditor resigning after being threatened with litigation by an unnamed executive over questions of an independent valuation, a CFO abruptly resigning after only serving for 9 months, and four separate Board investigations into Rekor's CEO. A timeline graphic will again be helpful here:

Source: Compiled by author

While the appendices contain the complete source information for this graphic, I'll specifically cite the exact source for the more troubling items:

Auditor's resignation:

Immediately preceding CohnReznick’s resignation, there was a disagreement between the Company’s management and CohnReznick as to whether an outside valuation of the Company’s common stock and warrants was necessary

[...]

On April 25, 2017, an executive officer of the Company, after being informed that an outside valuation of the Company’s common stock and warrants was necessary, stated to CohnReznick that litigation against CohnReznick would be initiated by the Company

[...]

CohnReznick advised the Company that it was resigning from its engagements with the Company because CohnReznick’s independence was impaired.

Four separate board investigations (Source: Rekor v. Laughlin Document 34):

I requested comment from Rekor's IR on 10/27/20, specifically with respect to their auditor's resignation, CFO's resignation, and the four Board investigations of CEO, Robert Berman. After quickly being notified that the query had been escalated and following up a second time on 10/28/20, I have yet to receive a further response. I will update this article if/when a response is received.

The result of all these movements has been that while many individuals have left Rekor under opaque circumstances, CEO Berman remains firmly in control and new individuals with previous ties to Empire Resorts join the Board. David Hanlon joins in Nov '18, Steven Croxton joins in Jun '19, and Berman himself is named Executive Chairman of the Board with the departure of former Chairman James McCarthy who retires from the Board in Jul '20.

One curious aspect of McCarthy's exit is that he enters into a private agreement to sell his entire stake in Rekor to Berman for $2.57 per share on Aug 5th, 2020, a 32% discount to the closing price of $3.76. Days later on Aug 27th, Rekor's stock surges 26% on the day to $6.74 with day over day volume going from 606k shares to 5.9M shares, all on no news whatsoever. The retail community is stumped:

Source: https://stocktwits.com/ and Finviz

The next day on the 28th Rekor increases the size of their ongoing At Market Issuance equity offering from $15M to $40M, and this compares against LTM revenues of $7.3M from continuing ops.

While it is entirely possible that momentum traders were simply piling into a breakout on the 27th, the timing of events still makes for an interesting situation when you consider the fact that Rekor's former chairman was willing to part with his stock at $2.57 per share only for the stock to close 162% above that amount in 22 days as non-insider investors are willing to buy at $6.74. The fact that there were no press releases and only one immaterial 8-k filed during this timeline suggests that the outlook for Rekor's business should not have materially changed during these 22 days (the S&P 500 was +4.7% during the same time-frame).

Litigation risks

To top it all off, Rekor faces a potentially large threat in the form of a patent lawsuit that has been brought against them by Motorola subsidiary Vigilant Solutions on Feb 21, 2020.

Source

Rekor's response appears to be based on the premise that Vigilant's patent is, in their opinion, invalid. But Vigilant's history of successfully defending patents does not bode well for Rekor. On May 8, 2014, Vigilant brought suit against MVTRAC for patent infringement and the parties ultimately reached a settlement one year later and agreed to a cross-licensing agreement.

Source

This was the second time that Vigilant had successfully pursued MVTRAC. Their first suit was also resolved in a settlement with MVTRAC agreeing to license Vigilant's patent.

Their comments in the press release sends a clear warning to firms like Rekor:

MVTRAC’s intellectual property will be protected at all costs, so licensees such as DRN and Vigilant Video can grow their businesses knowing that anyone with a low-cost camera and a computer cannot dip into their market share without the significant investment needed to achieve long-term success.

Source

Patent litigation can easily cost a company over $1M in legal expenses as it drags along and Motorola backed Vigilant clearly has the resources to wage a legal battle. If the court rules in favor of Vigilant, Vigilant is requesting that the court "permanently enjoin Defendants from infringing the '169 Patent". I.e. Rekor could no longer sell Watchman and the company is toast. If the outcome is similar to MVTRAC and Rekor obtains a patent license from Vigilant, it would still be a heavy blow to Rekor. Patent license royalties generally range from anywhere between 3% and 6% of gross revenues and would be a serious dent to Rekor's already declining margins.

Either way, Rekor's enthusiastic retail investor base seems oblivious to this risk.

Conclusion

Despite a flashy website and buzzword-laden press releases, Rekor's business is an extremely small operation that incinerates cash and is led by a team whose backgrounds and strategic decisions demonstrate a confusing lack of direction.

Q3's financial results have come down dramatically from Q2's figures which appear to have been temporarily boosted by one-time contract revenues. The ceiling on Rekor's business is much lower than investors currently believe and as cash continues to be consumed and losses accumulate, I expect reality to set in for the stock price and that it will trend towards my fair value estimate which would represent ~58% in downside with risk skewed even lower given litigation issues and ongoing cash losses.

While Rekor is a small cap stock with limited liquidity, it has a very small short interest along with a very low cost to borrow shares.

Appendix:

Timeline of Rekor acquisitions

Data sources: Keystone, Brekford, & Firestorm financials, OpenALPR financials, GTSI & GCP financials, Secure Education press release, NeoSystems' termination, name change press release

1. Novume Solutions, Inc. (the “Company” or “Novume”) was formed in February 2017 and began operations upon the merger of KeyStone Solutions, Inc. (“KeyStone”) and Brekford Traffic Safety, Inc. (“Brekford”) in August 2017 (the “Brekford Merger”)
2. On January 25, 2017, Novume (KeyStone) acquired Firestorm
3. On October 1, 2017 (the “Global Closing Date”), the Company completed its acquisition of Global Technical Services, Inc. (“GTS”) and Global Contract Professionals, Inc. (“GCP)
4. On December 31, 2017 and January 1, 2018, respectively, Firestorm acquired certain assets of BC Management, Inc. (“BC Management”) and Secure Education Consultants, LLC
5. In March 2019, the Company acquired substantially all of the assets of a software development company, OpenALPR Technologies, Inc
6. As part of evaluating the future of Firestorm, management decided to sell or transfer the Secure Education and BC Management lines of business to their founders in the second quarter of 2019
7. During the first quarter of 2020... the Company determined to present the operations of Firestorm Solutions, LLC (“Firestorm Solutions”) and Firestorm Franchising, LLC (“Firestorm Franchising” and together with Firestorm Solutions, “Firestorm”) as discontinued operations.
8. On April 2, 2020, the Company entered into a Stock Purchase Agreement (the “AOC Key Solutions Purchase Agreement”) by and among the Company, AOC Key Solutions, and PurpleReign, LLC, a Virginia limited liability company owned by the members of AOC’s management (the “AOC Key Solutions Buyer”)
9. On June 29, 2020, the Company entered into a Stock Purchase Agreement (the “TeamGlobal Purchase Agreement”) by and among the Company, TeamGlobal, and Talent Teams LLC, a Texas limited liability company owned by the members of TeamGlobal’s management (the “TeamGlobal Buyer”)

Quotes from PACER, REKR v. Laughlin reply and counterclaim document 34

Timeline of corporate red flags

• Apr 2017 - Rekor's auditor CohnReznick resigns - "an executive officer of the Company, after being informed that an outside valuation of the Company’s common stock and warrants was necessary, stated to CohnReznick that litigation against CohnReznick would be initiated by the Company".
  • Their next auditor reported no other clients before being engaged by KeyStone/Brekford according to their PCAOB records and has had only one non-related client since then.
• Dec 2017 - Marta Tienda joins Rekor's Board of Directors and is to serve on the Governance Committee and Compensation Committee.
• Feb 2018 - CFO Carl Kumpf resigned after 9 months with the company. Rekor provided no public explanation in the 8-k announcing his resignation. Former CFO Riaz Latifullah is appointed "Principal Financial and Accounting Officer".
  • But the Laughlin lawsuit reveals that "As a result of Carl Kumpf’s resignation, the Board commenced an investigation into Rekor CEO, Robert Berman". The results of which have been sealed.
  • Also, "at about the same time as the Kumpf Investigation, Riaz Latifullah complained to the Board about the conduct of Robert Berman", resulting in a second investigation.
• Mar 2018 - NeoSystems terminated their merger agreement as Rekor failed to complete a Qualified Offering by the Feb 28, 2018 deadline (the same date as Mr. Kumpf's resignation).
• Jun 2018 - President "Harry Rhulen made a whistle blower complaint to the Board concerning Robert Berman". This results in a third investigation.

  • Subsequently, "In September 2018, Harry Rhulen was demoted from President of Rekor to Executive Vice President of Rekor. After Harry Rhulen was demoted to the position of Executive Vice President of Rekor, Harry Rhulen advised Robert Berman that it was his belief that, although he had been demoted, as an officer of Rekor, he still had a fiduciary duty to Rekor and the shareholders of Rekor. In October 2018, Harry Rhulen was demoted from Executive Vice President of Rekor to Executive Vice President of Firestorm Solutions, which was a sub-subsidiary of Rekor."

• Jul 2018 - "The four Presidents of the then four operating divisions of Rekor complained about the conduct of Robert Berman". This results in a fourth investigation.
• Nov 2018 - Rekor closed an equity offering on Nov 1st. Marta Tienda resigned from Rekor's board after serving for less than a year on Nov 5th and is replaced by former Empire CEO David Hanlon.
• Dec 2018 - Suzanne Loughlin resigned as General Counsel and Chief Administrative Officer.

Analyst’s Disclosure: I am/we are short REKR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[Tech Fan 2.0]

July 14, 2021
Rekor Systems Files Petition to Obtain Identity of Short Sellers Behind Recent False and Misleading Posts
www.rekor.ai/...

[RM05443]

At $10/share, this market is pricing in future top line revenue of $60mm from current rev of $9mm. I don't have the visibility for the probability of this company landing a couple of larger military or municipal contracts but the upside asymmetry might get interesting if this stock starts to trade a couple bucks lower.

[charly333]

Thanks for your work. After reading your article and seeing todays price action I have to think this is an ugly company.

[Western Edge]

@charly333 Thanks for the compliment. While the timing of my calling REKR a short in Nov 2020 was obviously not great, my opinion on the company is unchanged and I have a very bearish outlook.

[jwbarton]

@Western Edge Your opinion can't be unchanged since you wrote the original post as most of what you wrote about at that time has been made irrelevant by events.
REKR now has a strong balance sheet with ample cash. You pointed to debt and an ATM (since cancelled) and a burn rate that called financing into question. None of that applies now.
You questioned the tech, but failed to mention the MA deal which is rolling out now, and the OK UVED program which also validates the tech and creates a whole revenue vertical that wasn't even in prospect at the time of your earlier writing.
You wrote about the Vigilant lawsuit, which was agreed to be settled even as you wrote and is now no issue.

Today's price action results from disappointment over the timing of REKR adding additional states uninsured driver programs. Given the turn key revenue flow to states desperate for budget solutions, I think it'd a bad bet to assume OK will be their sole customer. Uninsured drivers are a problem. Unlike with red light cameras, a case where people don't like to be monitored, most drivers are insured and don't want an uninsured driver causing an accident that their involved in, and they don't want their rates to reflect others irresponsibility. Other states will follow Oklahoma.

You're free to be bearish, of course. Have at it. As I wrote when the stock was around $4 after your original post, I think this is a dumb short. The optionality is too high and now that the balance sheet is cash rich and debt free the prospect of the need for capital pressuring the stock is off the table.

But if you say that your current short thesis is unchanged from what you wrote originally you're not allowing your thesis to reflect changing facts on the ground. That's a sign of serious bias and undermines your opinion.

[Ziggy60]

@Western Edge Timing? Its still up 237%

[Ziggy60]

It’s strange that the best performing stock in my portfolio is still showing this article as the last one. It’s almost like this story has been retired and no one else is allowed to post here

[Tech Fan 2.0]

Hear directly from the CEO of Rekor, recorded last week (January 2021).

Lots of good things occurring at Rekor.

noble.mediasite.com/...

[Rich95]

I love articles like this. It displays how out of touch people are with how tech and trending tech stocks will displace current businesses. You can look back at prior stories about REKR and drive-through restaurants using their LIDAR tech to track customers and their prior order history. Give that some thought...

The recent story with REKR and the state of OK using a disruptive policy to encourage OK vehicle owners to get their insurance legal. This is a great public policy move for OK and this company. That is just a small part of OK, what happens with other states adopt this disruptive tech.

Rekor already is consolidating its interests with the military bases (namely the Army). They are slow to adopt but are consistent customers who pay well, albeit with our tax money. More military bases will soon adopt the same tech, with the rise of terrorism to monitor risk in real-time.

I normally don't post but you are missing it if you don't embrace companies like this.

Disclosure I am long obviously, up over 178% so far. This stock will be $25 with the next couple of military contracts or other states adopting and phasing in what Oklahoma has done.

Every state in the union are starving for additional revenue sources, this is an easy sell to them. Encourage public motor vehicle compliance but do it in a positive way by asking customers to sign up and pay a one-time fee to get legal.

This is disruption and it is coming to your state.

[Rich95]

@Rich95 Print it, stock over $15 a share today on no news. Just getting started

[mo'money]

This has not aged well since publication in the $4 range. Time for another short report?

[Western Edge]

Update: Looks like REKR's lone analyst from their investment bank that completed their equity offering finally woke up. The analyst slashed FY '20 revenue estimates from $16M to $9.4M. Given we're already half way through the year, this means their projected revenues for the 2nd half of 2020 were reduced from $11.7M to $5.2M, a 56% reduction.

How should their clients feel that bought the stock above $6.00? What is their excuse for such a huge miss when this article pointed out the obvious one-time nature of a large portion of Q2's revenues?

"The Consensus EPS Estimates For Rekor Systems, Inc. (NASDAQ:REKR) Just Fell A Lot"

simplywall.st/...

[jwbarton]

1) No one invested in this stock is looking at the near term numbers. This is entirely a story about revenue lines that are only just becoming sales and i suspect everyone knows that.

2) Without arguing it's a long, I'll argue it's a very dumb short. The cash balance is higher than I expected it to be. You're short a call option on a highly volatile underlying. Here, by underlying, I'm not referring to volatile stock. I mean the volatile firm value, over which the equity is a call option. Between MA, VRRM, and the OK state deal (which others we assume will join), with rokerinc.com offering the prospect of funding that would imply asset value at REKR, and sundry other well telegraphed deals, you're short a call option with a very long life and known reasons to expect a highly volatile value driver. Dimes/steamrollers, etc.

[Rich95]

@jwbarton See my Jan 23rd post...Rekor share price will continue,

[Tech Fan 2.0]

@Rich95 Agreed. Texas currently considering the same legislation as Oklahoma.

Wait until some homeowners associations follow adoption by retailers (Mastercard/ White Castle partnership w Rekor, parking management, car washes, etc) and governments ( federal, state, and local). Smart ap developers will also find new and innovation ways to leverage the tech. Tolls no longer need a device on windshield. These are massive markets and a mega trend.

I was reading a public procurement review where the police chief told the city council that Rekor tech was lower cost and higher quality than the competition - I will dig out the link and post.

[jwbarton]

The imbalanced presentation here raises a question of the biases.

1) As others have mentioned the MA deal is significant. It validates the tech. It comes with meaningful potential revenue.

2) The author points to dilution from the debt swap, and from the ATM. He fails to point out the significantly improved capital structure that results. The company had a weak balance sheet and no clear source to fund operating costs. Those transactions delevered the company and answered the funding question. They're achievements to point to, not dilution to criticize.

3) The author mentions the upsized ATM, but fails to note it was terminated post raising sufficient capital.

4) The author highlights the sale of shares by a departing director, and fails to equally note that they they were purchased by Berman. Berman's stake is real at risk capital and not a typical overly generous options stake.

No one is invested in this company for the historical financials. Highlighting them brings no incremental information and an investment thesis based on them, long or short, is way off base.

The CEOs May letter outlined the path the company is on. The first item on the list from that letter proved to be the MA deal. It lived up to its billing. Investors are here for that, and the remaining items on the list.

[Analyze This]

I guess you own this stock and love the company. Using fundamentals can you tell me why I should buy this stock (no rhetoric please) ?

[Western Edge]

@jwbarton

1. Maybe the MA deal will be significant, maybe not. MA is testing an initiative at White Castle and Dunkin Donuts. From what I can gather, the idea is that customers pay for their QSR by linking their payment information to their vehicle/license plate? Isn't this something of a glorified toll tag? Maybe this will catch on, maybe not. I personally don't want QSR's linking my license plate number with my identity and credit card information, but maybe others feel differently. Regardless, I gave the ALPR segment a 6.8x P/S multiple to reflect future opportunities like the MA deal which might one day bring in business for the company. The MA testing might be a complete flop and we might never hear anything else related to it again, or maybe not. Does the MA experiment mean the ALPR segment is worth 25x revenues? I find that a hard case to make, and that is what you would need to justify a ~$4.30 share price.

2. The debt was taken out at egregious terms as a form of bridge financing until it could be paid off via new investors. ATM new investors are essentially REKR bagholders, ask them if they think it was a good deal. The weak balance sheet was a direct consequence of ongoing losses and value destruction from Rekor's random acquisitions and divestitures.

3. It was terminated after the company raised $34.2M out of the $40M limit. They utilized 76% of the upsizing.

4. I clearly state that Berman bought the shares. "he enters into a private agreement to sell his entire stake in Rekor to Berman for $2.57 per share".

[jwbarton]

Using rear view fundamentals, no. Nor is that in any way unusual for an early stage technology growth story. I'm not going to tell you that you should do anything with the stock.

If you wanted to analyze it you'd have to estimate revenue from business still in prospect. You could start with the MA deal: how many drive throughs at the initial partners locations? Over what time? What % penetration of that might happen? Will MA add more brands to the initial set? etc. Then - what other use cases can REKR develop? The CEO's letter to shareholders from last spring gave investors a healthy list of what to expect.

This is an early story, in a case where better/cheaper does not just allow a new entrant to take share from existing applications, but where the dramatically cheaper tech expands the use cases meaningfully. MA's application of the tech is one example.

[Sergio Heiber]

@Western Edge Another research masterpiece and I appreciate that you are reaching out to the company offering an opportunity to respond.

[mo'money]

failed to mention the future - Mastercard, Verra mobility, Conduet...system integrators....seems more like go short issue a report about the past and forget the future and cover - fair and balance? you be the judge

[Tech Fan 2.0]

Author is short and failed to mention Rekor's partnership with Mastercard.

finance.yahoo.com/...

[Analyze This]

I read the press release and it doesn't say anything about making money. Does anyone know what this partnership means in terms of revenues and profits ? If not.... is the press release simple one of those "name dropping" press releases that are meaningless to the bottom line ?

[mo'money]

I believe its too early to put numbers to the agreement until MA decide when to roll out their product and how aggressive into which markets. Until then the company really doesn't know when revenues will hit - unlike other companies that throw out huge meaningless numbers. FTR - I AM LONG

[mo'money]

Well, there are 3.6 million drive thru worldwide plus gas stations and convenience stores ...a 3% penetration sometime in next 3-5 years = 100,000 stores. You will have to assume avg price per month per store of x. my assumption it gets you major 9 figures a year. when? who knows but bazooka optionality