Rekor Systems, Inc. — filing identity and reporting period
Important identity check: The supplied 10-Q identifies the registrant as Novume Solutions, Inc., not Rekor Systems, Inc. Confirm that this is the intended filing before relying on the figures. The report covers the quarter ended March 31, 2018 and was filed May 15, 2018.
Novume combined federal-contracting consulting, crisis-management services, public-safety traffic technology, and contract staffing through acquisitions. Q1 2018 included Brekford and Global, acquired in 2017, and the BC Management and Secure Education businesses; Q1 2017 did not include Brekford or Global and included Firestorm only from January 25. Consequently, reported year-over-year growth is not directly comparable.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $11.22 million | $3.47 million |
| Gross profit / margin | $3.08 million / 27.5% | $1.62 million / 46.7% |
| Operating expenses (SG&A) | $5.28 million | $2.45 million |
| Operating loss | $2.20 million | $834,318 |
| Net loss | $2.19 million | $544,317 |
| Loss per common share, basic and diluted | $0.16 | $0.12 |
| Cash from operating activities | $455,250 | ($909,930) |
Revenue rose 223%, primarily because the 2018 quarter included Brekford and Global. Those businesses contributed $7.63 million of revenue and $1.32 million of gross profit. Legacy Novume revenue increased 3.3%. Consolidated gross margin fell to 27.5%, reflecting the lower-margin staffing business; legacy Novume’s gross margin was 49.2% versus 46.7% a year earlier. SG&A increased 115%; management cited professional, legal, board, corporate, acquisition, compliance, and product-development costs. The company recorded $94,657 of other income from a reduction in Global acquisition holdback consideration. No income-tax benefit was recorded in Q1 2018 because deferred tax assets were fully reserved.
At March 31, cash and cash equivalents were $2.18 million, working capital was $740,505, and total assets were $18.23 million. Working capital had been $2.75 million at December 31, 2017. Current liabilities were $7.83 million; current assets were $8.57 million. Accounts receivable were $5.70 million, including $1.88 million of unbilled contracts. Cash from operations was positive, supported in part by collections and increases in payables and accrued liabilities; investing cash inflow of $1.41 million primarily reflected sale of the note receivable. Financing used $1.64 million, mainly for short-term borrowing repayments and preferred dividends.
Current lines of credit totaled $2.14 million outstanding at quarter-end, secured by eligible receivables; the facilities had maximum commitments of $5 million for Global and $3 million for AOC Key Solutions. Long-term notes payable, net, were $1.41 million. Total liabilities were $9.29 million. Series A preferred stock carried a 7% annual dividend and Series B a 4.484% annual dividend; both are convertible and add potential dilution. Common shares outstanding were 14,496,697 at quarter-end.
Material changes, outlook, and risks
- Acquisitions and comparability: Brekford and Global materially expanded the consolidated business and revenue base. BC Management and Secure Education were added to Firestorm around year-end and January 1, 2018; their purchase-price allocations were preliminary.
- Liquidity and going concern: Management reported recurring losses and reliance on operating cash, credit lines, and asset-sale proceeds. It expected improved operations to support the business for one year from issuance and described plans to reduce or defer spending if results did not improve. In April 2018, Novume received a $2 million loan, increasing cash but creating costly secured obligations.
- Subsequent financing: The April 3 loan is due May 1, 2019, bears 15% annual interest with a 15% minimum, and is secured by all Brekford assets. The lender also received 35,000 common shares, may receive another 15,000 if registration conditions are not met, and has contingent participation rights tied to a Brekford sale and future earnings.
- NeoSystems transaction: The proposed merger terminated after the company failed to complete a qualifying offering by February 28, 2018. The agreement provides for certain termination expenses capped at $450,000; Novume reserved its rights regarding the termination.
- Management outlook: Management expected federal spending and school-safety funding to support demand, but acknowledged uncertainty beyond 2018 and the possibility of delayed government spending. Brekford expected to launch its Argos Guardian traffic-safety product in summer 2018. No quantified financial guidance was provided.
- Controls and other matters: Management concluded disclosure controls and procedures were not effective as of March 31, 2018. The filing reported no material changes to previously disclosed risk factors and no legal proceedings.
Investor facts to verify
- Confirm the registrant and ticker: this document is for Novume Solutions, Inc., although the request identifies Rekor Systems, Inc.
- Assess whether revenue and cash generation are sustainable without acquisition effects, receivable collections, working-capital movements, and the note sale.
- Review liquidity after the April $2 million, 15% secured loan, including its collateral, minimum interest, share issuance, and contingent payment rights.
- Evaluate the drivers of the lower consolidated gross margin and higher SG&A, and whether acquired businesses can improve operating performance.
- Monitor the NeoSystems termination costs, preferred dividends and conversion dilution, and management’s remediation of ineffective disclosure controls.