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

Nov. 02, 2020 10:50 AM ETRekor Systems, Inc. (REKR)35 Comments
Western Edge profile picture
Western Edge


  • 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

This article was written by

Western Edge profile picture
I am a private investor.

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.

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Comments (35)

Tech Fan 2.0 profile picture
July 14, 2021
Rekor Systems Files Petition to Obtain Identity of Short Sellers Behind Recent False and Misleading Posts
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 profile picture
Thanks for your work. After reading your article and seeing todays price action I have to think this is an ugly company.
Western Edge profile picture
@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.
@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.
@Western Edge Timing? Its still up 237%
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 profile picture
Hear directly from the CEO of Rekor, recorded last week (January 2021).

Lots of good things occurring at Rekor.

23 Jan. 2021
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.
03 Feb. 2021
@Rich95 Print it, stock over $15 a share today on no news. Just getting started
This has not aged well since publication in the $4 range. Time for another short report?
Western Edge profile picture
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"

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.
06 Feb. 2021
@jwbarton See my Jan 23rd post...Rekor share price will continue,
Tech Fan 2.0 profile picture
@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.
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 profile picture
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 profile picture

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".
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 profile picture
@Western Edge Another research masterpiece and I appreciate that you are reaching out to the company offering an opportunity to respond.
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 profile picture
Author is short and failed to mention Rekor's partnership with Mastercard.

Analyze This profile picture
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 ?
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
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
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