Rekor Systems, Inc. (REKR) - 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended September 30, 2019. Rekor Systems, Inc. (formerly Novume Solutions, Inc.) operates in two primary segments: Technology (vehicle recognition software and hardware) and Professional Services (government contracting and staffing). In March 2019, the Company acquired OpenALPR Technology to bolster its Technology Segment. In Q3 2019, the Company classified its "Global" subsidiary (Global Technical Services and Global Contract Professionals) as held for sale, separating its results from continuing operations.
Key Financial Metrics (Nine Months Ended Sept 30, 2019)
| Metric | 2019 (9 Months) | 2018 (9 Months) |
|---|---|---|
| Total Revenue (Continuing Ops) | $14,884,000 | $15,271,000 |
| Gross Profit | $7,864,000 | $7,737,000 |
| Gross Margin | 53% | 51% |
| Net Loss (Continuing Ops) | $(10,978,000) | $(3,649,000) |
| Net Loss (Total) | $(11,428,000) | $(3,619,000) |
| Cash & Equivalents (Continuing Ops) | $1,273,000 | $2,069,000 (Dec 31, 2018) |
| Working Capital | $(107,000) Deficit | $(44,000) Deficit (Dec 31, 2018) |
| Total Debt (Notes Payable) | $20,076,000 | $875,000 (Dec 31, 2018) |
Material Changes vs. Prior Period
- Revenue Mix Shift: Technology Segment revenue increased 50% year-over-year (driven by the OpenALPR acquisition), while Professional Services revenue declined 14% due to the repositioning of the Firestorm subsidiary and the classification of Global as held for sale.
- Increased Operating Expenses: Operating expenses rose 32% to $14.75 million. This includes a $1.549 million impairment charge for intangible assets related to discontinued Firestorm operations and BC Management, and a $1.158 million loss on extinguishment of debt.
- Debt Financing: The Company issued $20 million in 2019 Promissory Notes (16% interest) in March 2019 to fund the OpenALPR acquisition and refinance prior debt. This significantly increased interest expense to $2.832 million for the nine-month period.
- Segment Reporting: Results for the "Global" subsidiary are now reported as "operations held for sale" rather than within the Professional Services segment.
Guidance, Outlook, and Risks
- Going Concern: Management has assessed the Company as a going concern for the next 12 months, relying on current cash, available borrowings, and an At-the-Market (ATM) equity offering program with $14.7 million remaining capacity.
- Strategic Focus: The Company is pivoting resources toward the Technology Segment (vehicle recognition) and expects to reverse the loss trend in 2020. It is actively seeking to sell the Global subsidiary.
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of September 30, 2019, due to material weaknesses in internal control over financial reporting that remain unremediated.
- Litigation: The Company filed suit against former executives of its Firestorm subsidiary alleging fraudulent inducement regarding the acquisition. Counterclaims have been asserted.
- Preferred Stock Obligations: The Company has accrued but unpaid dividends on Series A and Series B Preferred Stock totaling approximately $467,000 as of September 30, 2019.
Investor Verification Checklist
- Liquidity Runway: Verify the Company's ability to service its $20 million debt (due March 2021) and meet preferred dividend obligations given the working capital deficit.
- Internal Control Remediation: Monitor progress on the remediation plan for material weaknesses in financial reporting controls.
- Global Divestiture: Track the status of the sale of the "Global" subsidiary, which is currently held for sale.
- ATM Offering Utilization: Monitor the pace of share sales under the $15 million ATM agreement to fund operations.
- Firestorm Litigation: Assess the potential financial impact of the ongoing lawsuit against former Firestorm executives.