Rekor Systems, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Although the request references 2019 Q4, this is an annual filing; the supplied text does not provide standalone fourth-quarter financial results.
Business context
Rekor shifted its strategy toward AI-based vehicle recognition products and services after acquiring OpenALPR in March 2019. It moved Technology sales from perpetual licenses toward subscriptions and reorganized reporting into Technology and Professional Services. Global was classified as held for sale; after year-end, the company also planned to sell AOC Key Solutions. The financial comparisons below generally present continuing operations, excluding Global.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Continuing-operations revenue | $19.320 million | $20.054 million |
| Gross profit / margin | $10.262 million / 53% | $10.076 million / 50% |
| Operating loss | $9.089 million | $5.123 million |
| Continuing-operations net loss | $14.412 million | $5.709 million |
| Consolidated net loss, including held-for-sale operations | $15.884 million | $5.703 million |
| Cash used in continuing operating activities | $11.767 million | $3.076 million |
- Technology revenue rose 55% to $5.469 million; Professional Services revenue fell 16% to $13.851 million. Technology gross margin increased to 70% from 53%; Professional Services margin declined to 47% from 50%.
- Operating expenses rose 27% to $19.351 million, including $1.549 million of intangible impairment, higher R&D and selling costs. Interest expense was $4.098 million, and debt-extinguishment loss was $1.158 million.
- Management-reported adjusted EBITDA, a non-GAAP measure, was a loss of $4.911 million, versus a loss of $3.673 million in 2018.
- At year-end, continuing-operations unrestricted cash was $1.180 million and the working-capital deficit was $912,000. Continuing operating cash use increased, including a $5.101 million cash outflow from accounts receivable timing. Consolidated operating cash use, including held-for-sale operations, was $21.332 million.
- Notes payable were $20.409 million net of discounts and costs; the 2019 notes had $21 million principal due in 2021, a stated 16% annual rate (at least 10% payable in cash), and a reported effective rate of 24.87%. The debt is secured by substantially all Rekor assets. Continuing short-term borrowings were $1.894 million; Global had a further $1.842 million of secured borrowings classified with held-for-sale liabilities.
- Financing included $2.949 million net proceeds from 2019 ATM share sales. At December 31, $11.727 million remained available under the program; the filing reports $9.655 million available as of March 30, 2020.
Material changes and unusual items
- The OpenALPR acquisition had total consideration of $12.397 million and contributed $2.055 million of 2019 revenue. Pro forma Technology revenue, including OpenALPR for the comparable prior period, increased 23% to $6.438 million.
- The shift to subscriptions increases the portion of license revenue recognized over the contract term. Technology contract liabilities rose to $1.524 million from $207,000; remaining Technology performance obligations were approximately $10.102 million at year-end, with about 46% expected to be recognized in the next 12 months.
- Firestorm-related restructuring and discontinued activities led to $1.549 million of intangible impairment and $333,000 of restructuring charges. Global recorded a separate $1.022 million non-cash goodwill impairment and a $1.472 million held-for-sale operating loss.
- Global’s held-for-sale operations generated $26.207 million revenue and a $1.472 million loss in 2019. These amounts are separate from the continuing-operations results above.
Outlook, risks and contingencies
- Management said it believed available cash and expected funding could support operations for the next 12 months, with contingency plans to reduce or defer spending if needed. This depends on collections, Technology growth, asset-sale execution, access to capital and debt covenant compliance; it is not a revenue or earnings forecast.
- The March 2020 extension moved the 2019 notes’ maturity to June 12, 2021; covenant relief was also disclosed. The company reported prior dependence on covenant waivers, and failure to refinance or repay could expose assets to foreclosure.
- Series A preferred holders may require redemption from November 2021 at $15 per share plus accrued dividends; accrued dividends were $551,000 at year-end. The company increased authorized common shares from 30 million to 100 million in March 2020, enabling potential further dilution.
- Management identified COVID-19’s potential impact as uncertain. Other material risks include continued losses, capital needs, long government and enterprise sales cycles, customer concentration and collection timing, competition, data privacy and cybersecurity, and dependence on key personnel.
- Litigation includes a February 2020 patent-infringement complaint by Vigilant Solutions, counterclaims by former customer Plate Capture Solutions, and the company’s suit and related counterclaims concerning the Firestorm acquisition. The company said it intends to defend these matters; outcomes and potential financial exposure are not clear from the filing.
- No specific quantitative financial guidance was provided. The company described plans to build Technology sales, broaden reseller distribution and pursue vehicle-recognition applications, while evaluating sales of Professional Services businesses.
Key facts for investors to verify
- Standalone Q4 results, which are not stated in the supplied filing text.
- Cash runway and subsequent ATM issuance, customer collections, and the timing and terms of any financing.
- 2019 note covenant status, waivers, maturity extension, interest burden and refinancing plan.
- Whether Global and AOC Key Solutions were sold, and the proceeds and impact on continuing operations.
- Subscription renewals and conversion of remaining contract obligations into recognized revenue and cash.
- Developments, potential costs and disclosure updates for the patent, customer and Firestorm-related litigation.