Business context and reporting period
Rekor Systems, Inc. (Nasdaq: REKR), formerly Novume Solutions, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company reports Technology and Professional Services segments. It acquired OpenALPR in March 2019 and is shifting strategic focus toward vehicle-recognition technology; the acquired business is included in results from March 12, 2019.
Financial results and position
Amounts are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2018 period.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $12.329 | $12.338 | $23.956 | $23.557 |
| Gross profit | $3.892 | $3.473 | $6.997 | $6.557 |
| Gross margin | 31.6% | 28.2% | 29.2% | 27.8% |
| Operating loss | $(3.460) | $(0.856) | $(4.925) | $(3.053) |
| Net loss | $(4.927) | $(0.922) | $(7.800) | $(3.116) |
| Basic and diluted loss per share | $(0.27) | $(0.08) | $(0.44) | $(0.25) |
- Technology revenue was $1.416 million in Q2, up 62%, and $2.426 million for the half, up 39%; OpenALPR contributed about $0.620 million and $0.813 million, respectively. Professional Services revenue fell 5% in Q2 to $10.913 million and was down less than 1% for the half to $21.530 million.
- Operating expenses were $7.352 million in Q2 and $11.922 million for the half. Q2 included a $1.549 million intangible-asset impairment. Six-month results also included a $1.113 million loss on extinguishment of debt.
- Interest expense was $1.417 million in Q2 and $1.705 million for the half. The company recorded income-tax provisions of $12,000 and $24,000, respectively.
- For the six months, operating cash outflow was $3.766 million, investing cash outflow $0.241 million, and financing cash inflow $4.907 million. Cash, cash equivalents and restricted cash increased $0.900 million to $3.668 million; unrestricted cash was $3.096 million.
- At June 30, current assets were $11.507 million and current liabilities $9.122 million. Working capital was reported as $2.385 million in the going-concern note, but later MD&A gives $2.285 million; the filing does not provide a clear reconciled value.
- Debt included $19.744 million of long-term notes payable on the balance sheet, plus $2.790 million of lines of credit. The $20 million senior secured notes issued in March bear 16% stated interest (at least 10% cash-pay), mature March 2021, and have a reported effective interest rate of 24.87%; principal repayment schedule also reflects a $1 million exit fee. Operating lease liabilities totaled $1.185 million.
Material changes versus prior period
- Quarterly revenue was essentially flat; first-half revenue grew 2%. Technology growth, including the OpenALPR acquisition, was offset by softer Professional Services revenue.
- Gross profit rose 12% in Q2 and 7% for the half, with reported gross margins higher in both periods. Nevertheless, operating and net losses widened substantially, reflecting higher operating costs, impairment, and sharply higher interest expense.
- OpenALPR acquisition consideration was $12.397 million: $7 million cash, a $5 million seller note, and 600,000 shares valued at $397,000. Final purchase accounting recorded $7.436 million of intangible assets and $4.934 million of goodwill.
- The company sold Secure Education for $250,000 in June and discontinued BC Management. Firestorm-related actions and franchisee terminations led to $1.549 million of impairment. A $333,000 restructuring charge was recorded; the company said restructuring activities were completed by June 30.
- Technology software contracts shifted from perpetual licenses to monthly subscriptions, which management said may affect near-term revenue recognition while total long-term revenue impact is expected to be consistent.
Outlook, commentary, risks and unusual items
- Management said it may continue to operate at a loss in the near term, but anticipated the trend reversing during 2020. It cited product development and commercialization costs, public-company overhead, and subsidiary performance. No quantified revenue or earnings guidance was provided.
- Management concluded its forecasts indicated the company could continue as a going concern for one year from issuance, citing capital-market access and plans to reduce or defer spending if needed. The company had incurred losses since inception and relied on borrowing and external financing.
- Bank lenders waived financial covenant requirements through September 30, 2019. The senior secured notes also have financial covenants, deferred until September 2019; they are secured by substantially all company assets.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of June 30, 2019; previously identified material weaknesses had not been remediated, despite ongoing remediation efforts.
- Risks highlighted include financing availability, acquisition integration, technology competition and adoption, ability to scale production, uncertain sales cycles, government contracting conditions, and operational, cyber, regulatory and litigation risks. One Professional Services customer represented 15% of first-half revenue; two customers together represented 35% of receivables at quarter-end.
- The company alleged that former Firestorm executives fraudulently induced its acquisition and asserted that the acquisition agreement and related warrant issuances may be subject to rescission. The filing said it was not aware of material legal proceedings as of June 30.
- Management cited product launches and commercial activity, including Numerus electronic tolling, Rekor Edge, orders from government and commercial customers, and a Nokia smart-city platform relationship. These developments are not quantified as firm future revenue commitments in the provided filing text.
Important facts for investors to verify
- Reconcile the filing’s $2.385 million versus $2.285 million working-capital figures and assess liquidity against ongoing operating cash burn.
- Review the senior-note cash interest burden, effective cost, maturity and exit fee, alongside the covenant deferrals and availability of credit lines.
- Track whether Technology subscription sales and the OpenALPR integration generate recurring revenue and improve operating performance enough to support management’s 2020 outlook.
- Assess the basis and implications of Firestorm impairment, discontinued operations, acquisition-related claims, and the company’s asserted rescission position.
- Monitor remediation of material weaknesses in financial reporting controls and customer concentration, including receivable collection and contract-liability obligations.