Rekor Systems, Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing was signed March 12, 2021. This is an annual report, not a standalone fourth-quarter report; quarterly results are not provided in the supplied filing text.
Business context
Rekor shifted its focus to AI-powered vehicle recognition and intelligent roadway products, including software subscriptions, licensing, hardware, and traffic-safety services. In 2020, it sold AOC Key Solutions and TeamGlobal and classified its remaining Professional Services operations as discontinued. Continuing operations comprise one reportable segment. Products are used in approximately 80 countries.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $9.234 million | $5.469 million |
| Gross profit / gross margin | $5.701 million / 62% | $3.817 million / 70% |
| Operating expenses | $17.549 million | $11.351 million |
| Loss from operations | $(11.848) million | $(7.534) million |
| Net loss from continuing operations | $(13.962) million | $(12.405) million |
| Net loss, including discontinued operations | $(14.182) million | $(15.884) million |
| Continuing-operations operating cash flow | $(11.175) million | $(7.256) million |
Revenue increased 69%, led by expanded technology offerings, a large software-and-hardware contract, a full year of OpenALPR contribution versus about nine and a half months in 2019, and eCommerce growth. Licensing and subscription revenue rose to $6.207 million from $2.066 million; automated traffic-safety enforcement revenue declined to $3.027 million from $3.403 million. eCommerce revenue increased 97% to $865,000.
Gross margin fell eight percentage points, which management attributed mainly to upfront network and infrastructure costs on large contracts. General and administrative expense rose 46%, selling and marketing expense 37%, and research and development expense 123%, reflecting added staffing, litigation costs, marketing, and product development. Adjusted EBITDA, a non-GAAP measure, was a loss of $9.029 million versus a loss of $5.510 million.
Liquidity, cash flow and debt
At year-end, continuing operations had $20.595 million of unrestricted cash and $18.324 million of working capital, compared with $1.075 million of cash and a $1.786 million working-capital deficit a year earlier. Continuing-operations investing activities provided $5.188 million, primarily from business-sale proceeds; financing activities provided $24.847 million, including $29.930 million net proceeds from the at-the-market stock program. Cash used in continuing operations increased to $11.175 million.
Rekor exchanged approximately $17.398 million of 2019 promissory notes for common shares and paid cash to retire the remainder in September 2020, eliminating those notes. Year-end balance-sheet debt included $980,000 of long-term notes and $986,000 of loan payable; the loan balance included the PPP loans, whose forgiveness application was still under review. Total reported liabilities were $8.542 million. The company also reported $2.084 million in contract liabilities and $16.705 million in remaining performance obligations, about 30% expected to be recognized within the next 12 months.
Material changes and subsequent events
- Rekor completed its strategic exit from the Professional Services businesses, receiving $4 million of consideration for each of AOC Key Solutions and TeamGlobal, in cash and promissory notes. The sales generated a combined $3.631 million gain.
- In February 2021, the company raised approximately $70.1 million net from a public offering of 6,126,936 shares at $12.25 per share. Series A and B preferred shares converted into common stock; the filing reports 40,804,219 common shares outstanding as of March 12, 2021.
- Rekor launched Rekor One, a multi-agency roadway-intelligence platform, and Rekor Go, a mobile vehicle-recognition application. It also announced partnerships and customer wins, including Mastercard’s AI-powered drive-through platform and Oklahoma’s uninsured-vehicle enforcement program.
- A proposed acquisition offer for Iteris was declined in February 2021. No agreement resulted.
Outlook, risks and unusual items
Management gave no quantified revenue, earnings, or margin guidance in the supplied filing text. It plans to invest in product development, sales, and marketing and pursue subscription growth, government roadway programs, partnerships, and potential strategic acquisitions. Management expected to have resources to continue operations for at least one year from the filing, citing forecasts and the February 2021 offering, but noted it may need additional funding and could reduce or defer spending if conditions weaken.
- COVID-19 slowed growth and disrupted equipment delivery, installations, customer approvals, travel, and marketing; the ultimate financial impact remained uncertain.
- The company has a history of losses and cash burn; management warned that profitability is not assured and that funding may be needed. Further equity financing could dilute shareholders.
- Growth depends on customer adoption, renewals, long and uncertain sales cycles, execution of new products, competition, and government budgets and legislation. The shift toward lower-margin upfront infrastructure contracts contributed to the 2020 margin decline.
- Privacy, data-protection, cybersecurity, service interruptions, intellectual-property claims, and reliance on third-party data centers pose operational and legal risks.
- The company reported litigation involving former Firestorm principals and a Fordham Financial underwriting dispute; management could not assess the likelihood of favorable outcomes. A patent dispute with Vigilant Solutions was settled confidentially in November 2020. PPP loan forgiveness remained unresolved.
- Unusual income-statement items included a $3.281 million debt-extinguishment loss and the $3.631 million gain on business sales. These items affected comparisons and should be distinguished from recurring operations.
Most important facts for investors to verify
- Whether revenue growth converts into recurring subscription revenue and whether the $16.705 million of remaining performance obligations are delivered and collected as expected.
- Whether the large-contract infrastructure costs are reusable and margins improve as those networks mature.
- Cash burn, operating-loss trajectory, use of the February 2021 offering proceeds, and any further financing or dilution.
- Final PPP loan forgiveness outcome and the timing and collectability of sale-related promissory notes.
- Progress and economics of Oklahoma’s program, other government deployments, and Mastercard’s drive-through pilots.
- Developments in the Firestorm and Fordham litigation and any resulting financial exposure.