Rekor Systems, Inc. (then Novume Solutions, Inc.) — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter report; the filing does not provide a clear Q4-only set of financial results. The company’s results consolidate acquired businesses, with several included for a full year in 2018 but only part of 2017. The company later announced a name change to Rekor Systems and renamed its Brekford subsidiary Rekor Recognition Systems.
Business context
The company provided government-contracting support, aerospace and aviation staffing, crisis and risk-management services, and traffic-safety technology. In March 2019, it acquired substantially all of OpenALPR’s assets, expanding its vehicle-recognition software business. Management anticipated organizing operations into professional-services and technology divisions beginning in 2019.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $48.56 million | $22.14 million |
| Gross profit | $13.80 million | $8.34 million |
| Gross margin | 28.4% | 37.7% |
| SG&A | $18.83 million | $12.98 million |
| Operating loss | $5.04 million | $4.64 million |
| Net loss | $5.70 million | $5.04 million |
| Net loss per common share | $0.44 | $0.51 |
| Cash used in operating activities | $2.05 million | $3.17 million |
Revenue rose 119%, primarily because acquired Brekford and Global businesses contributed for a full year in 2018; management reported Legacy Novume revenue of $16.53 million, up 6.1%. Gross margin declined chiefly because Global’s staffing operations carried lower margins. SG&A increased 45.1%, while SG&A as a share of revenue fell to 38.6% from 58.6%. The net loss widened despite the lower per-share loss, which also reflects a larger weighted-average share count.
Cash, liquidity and debt
- Year-end cash and cash equivalents were $2.77 million, versus $1.96 million a year earlier. Working capital was reported as a deficit of approximately $43,871; the filing’s liquidity discussion says this figure includes the March 2019 early retirement of $2.5 million of long-term debt.
- Financing activities provided $2.47 million in 2018; investing activities provided $395,146, mainly from selling a note receivable, partly offset by capital expenditures.
- At December 31, 2018, notes payable totaled $3.59 million before unamortized interest and financing costs, and lines of credit totaled $1.66 million. The lines were secured by receivables; the notes included secured borrowing.
- In March 2019, investors lent the company $20 million under senior secured notes due March 11, 2021, bearing 16% stated interest (at least 10% payable in cash) and a disclosed 24.87% effective interest rate. The notes are secured by substantially all company assets and include a $1 million maturity exit fee and covenants. The company used proceeds in part to repay prior notes and fund the OpenALPR acquisition.
- Management said its forecasts supported continued operations for the year following the filing, citing the March financing, while noting plans to monitor liquidity and reduce or defer spending if needed. The company had recurring losses and negative operating cash flow.
Outlook, risks and unusual items
- Management anticipated continued losses in the foreseeable future, with ongoing spending on product development, commercialization, personnel and public-company costs. It expected demand for government-contracting support to benefit from higher federal spending, but said spending beyond 2019 remained uncertain. No quantified revenue or earnings guidance was provided.
- OpenALPR was acquired on March 12, 2019 for $7 million cash, 600,000 common shares and a $5 million promissory note; the purchase-price allocation was still being completed. The acquisition is subsequent to the reporting year and is not included in FY 2018 results.
- The company reported material weaknesses in internal control over financial reporting, including insufficient controls for complex transactions and financial close/review. Management said remediation efforts were ongoing, but the weaknesses were not remediated as of year-end; disclosure controls were also deemed ineffective. The auditor gave an unqualified opinion on the financial statements but did not opine on internal-control effectiveness.
- Nasdaq notified the company in December 2018 that its share price had failed the $1 minimum-bid requirement, with a compliance deadline of June 11, 2019. Delisting could reduce trading liquidity and access to financing.
- Series A preferred holders may require redemption beginning in November 2021 at $15 per share plus accrued unpaid dividends, potentially materially affecting liquidity. Preferred dividends, debt service, possible dilution, acquisition integration, customer renewals, cybersecurity/privacy obligations, government spending changes and geographic revenue concentration were also identified as risks.
- Unusual items included a $225,000 fee after termination of the planned NeoSystems merger and a $262,140 impairment of the investment in Global Public Safety. The 2018 public offering raised approximately $2.8 million net and issued 4.125 million shares at $0.80 per share.
Important facts for investors to verify
- Whether the March 2019 financing and subsequent cash uses leave sufficient liquidity, and whether the company can meet the secured notes’ interest, covenants and 2021 maturity obligations.
- Whether OpenALPR meets management’s growth expectations, its final purchase-price allocation, and the impact of acquisition costs and integration on margins and cash flow.
- Progress in remediating the disclosed material weaknesses and whether subsequent filings show effective controls.
- Whether the company regained Nasdaq’s minimum-bid compliance by the stated deadline and the resulting status of its listing.
- The potential cash, dilution and share-price effects of preferred-stock redemption rights, warrants and other convertible securities.