Rekor Systems, Inc. (formerly Novume Solutions, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; financial statements are unaudited. The company changed its name to Rekor Systems and its Nasdaq ticker to REKR on April 26, 2019.
Business context
Rekor reports two groups: Technology, including Rekor Recognition and OpenALPR, and Professional Services, including government-contract consulting, staffing, and crisis-management businesses. The company acquired certain OpenALPR Technology assets on March 12, 2019; consequently, its reported results include OpenALPR only from that date.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $11.63 million | $11.22 million |
| Gross profit | $3.10 million | $3.08 million |
| Gross margin | 26.7% | 27.5% |
| SG&A | $4.57 million | $5.28 million |
| Operating loss | $1.47 million | $2.20 million |
| Net loss | $2.88 million | $2.19 million |
| Loss per common share, basic and diluted | $0.17 | $0.17 |
| Cash used in operating activities | $1.97 million | Cash provided: $0.46 million |
Revenue increased 4% year over year; management attributed growth to staffing and placements, partly offset by lower proposal-services activity during the federal shutdown. Gross profit was nearly flat and margin declined. Lower SG&A improved operating loss, but net loss widened, primarily due to a $1.11 million debt-extinguishment loss and higher interest expense. The 2019 loss includes $11,761 of income-tax expense.
Liquidity, debt and other key metrics
- At March 31, cash and cash equivalents were $5.05 million, working capital was $4.78 million, and current assets/current liabilities were $12.90 million/$8.12 million. At December 31, 2018, working capital was a deficit of $43,871.
- Cash increased by $2.28 million during the quarter, principally because of financing inflows; operating activities used $1.97 million and investing activities used $0.31 million.
- Debt included $2.41 million drawn on lines of credit and approximately $19.46 million of notes payable on the balance sheet, net of unamortized financing costs and interest. The $20 million senior secured notes issued in March mature March 11, 2021, bear 16% stated interest (at least 10% payable in cash), include a $1 million exit fee at maturity, and are secured by substantially all company assets. Their disclosed effective interest rate is 24.87%.
- Total liabilities were $28.26 million; total assets were $34.95 million. The company had $16.31 million of net intangible assets, including preliminary OpenALPR technology intangibles of approximately $11.85 million.
Material changes and notable items
- OpenALPR consideration included $7 million cash, 600,000 common shares valued at $396,600, and $5 million in promissory-note principal. The purchase-price allocation was preliminary.
- The March financing was also used to retire prior debt, including a $2 million 2018 note and a $500,000 related-party note. The 2018 lender received $1.05 million for its participation right; related amounts contributed to the $1.11 million extinguishment loss.
- The new notes were issued with warrants to purchase 2.5 million shares at $0.74 per share. Common shares outstanding rose to 19,367,619 from 18,767,619 at year-end.
- Management reported that the 2018 federal shutdown reduced government requests for proposals and hurt proposal-services opportunities. It also noted uncertainty about government spending after 2019.
Outlook, risks and contingencies
- No specific revenue, earnings, or other numerical guidance was provided. Management said it expected near-term losses but anticipated the trend reversing for the year ending December 31, 2019; this is a forward-looking expectation, not a quantified forecast.
- Management believes available resources and forecasts support operations for at least one year from issuance of the financial statements. It cited ongoing losses, cash burn, and reliance on financing, and said it may reduce or defer spending if operations weaken or financing is unavailable.
- Disclosure controls and internal control over financial reporting were both deemed ineffective as of March 31, 2019. Previously identified material weaknesses had not been remediated, although remediation efforts were underway.
- The company disclosed Nasdaq’s notice that its share price had failed the $1 minimum bid requirement and a compliance deadline of June 11, 2019. Failure to regain compliance could result in delisting.
- Senior-note covenants include liquidity, fixed-charge and capital-expenditure requirements. The company reported that the two bank-credit borrowers met their financial covenants for the quarter.
- Management reported no material legal proceedings known as of March 31, 2019 and no material change to the risk factors in its 2018 Form 10-K. It also disclosed a post-quarter sublease entered May 9, 2019.
Investor verification priorities
- Track operating cash burn, receivable collections, and whether the stated liquidity outlook remains supported.
- Review the full senior-note terms, covenant headroom, cash interest burden, exit fee, and dilution from warrants and preferred securities.
- Assess OpenALPR’s post-acquisition revenue, margins, integration progress, and final purchase-price allocation; Q1 includes only a short post-close period.
- Monitor remediation of material weaknesses and the status of Nasdaq minimum-bid compliance.
- Compare subsequent government-contract demand and Technology Group performance with management’s stated 2019 expectation.