Filing summary
Entity note: Although the request identifies Rekor Systems, Inc., the supplied Form 10-Q is for Novume Solutions, Inc. This summary reflects the filing provided. It covers the quarter ended September 30, 2017; the financial statements are unaudited.
Business context and reporting period
Novume combined government-contracting consulting and technical services (KSI), crisis-management services (Firestorm), and public-safety traffic-enforcement technology (Brekford). Firestorm was acquired in January 2017; Brekford merged into Novume on August 28, 2017. Accordingly, the reported results include Firestorm from January 25 and Brekford only from August 28, limiting direct year-over-year comparability. The company reported one operating segment.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $4.42 million vs. $2.41 million in 2016, up 83.8% | $11.13 million vs. $9.58 million, up 16.2% |
| Gross profit / margin | $1.96 million / 44.4%, versus $1.07 million / 44.5% | $5.11 million / 45.9%, versus $4.09 million / 42.6% |
| Operating income (loss) | $(1.03) million vs. $(0.08) million | $(2.92) million vs. $0.46 million |
| Net income (loss) | $(0.79) million vs. $(0.06) million; $(0.07) per share | $(1.91) million vs. $0.42 million; $(0.20) per share |
| Operating cash flow | Not provided for the quarter | $(2.20) million vs. $0.56 million |
Quarterly gross margin was nearly flat overall, but management said legacy Novume’s margin declined to 41.4% from 44.5%, citing greater consultant use and non-billable expenses. For the nine-month period, legacy Novume’s gross margin was approximately 42.9%, versus 42.6%.
At September 30, cash was $3.76 million and working capital was $4.42 million. Current assets were $7.79 million and current liabilities $3.36 million. Total liabilities were $4.84 million, including $1.42 million of notes payable; the Sandy Spring Bank line of credit had been terminated in August with no balance outstanding. Series A preferred stock, classified as temporary equity, was $3.85 million and carried a 7% annual dividend. Total assets were $15.42 million.
Nine-month investing cash outflow was $0.05 million; financing cash inflow was $3.23 million, principally reflecting preferred-stock proceeds and cash from the Brekford acquisition, partly offset by acquisition and dividend payments. Cash increased by $0.97 million during the period.
Material changes and unusual items
- Revenue growth reflects acquisitions as well as higher KSI contract volume; reported results are not a like-for-like comparison. Firestorm contributed $1.25 million of nine-month revenue, and Brekford contributed $0.22 million after closing.
- Nine-month selling, general and administrative expense more than doubled to $8.04 million. Management attributed the increase to acquired businesses, higher holding-company and compliance costs, professional and legal services, operational ramp-up, and approximately $0.47 million for the company’s new television program.
- The nine-month net loss included a $0.96 million income-tax benefit, primarily deferred. The filing reports a $1.18 million net deferred tax asset and approximately $2.66 million of net operating loss carryforwards.
- The Brekford acquisition was accounted for using a preliminary purchase-price allocation, including approximately $2.0 million of goodwill; final valuation adjustments could change reported amounts. Firestorm’s completed allocation included approximately $2.5 million of intangible assets, amortized over five years.
- After quarter-end, on October 1, Novume acquired Global Technical Services and Global Contract Professionals. Consideration included $0.75 million cash, 375,000 common shares and 240,861 Series B preferred shares. Novume also paid $0.37 million toward acquired debt, guaranteed the companies’ Wells Fargo facilities and paid $0.18 million to reduce facility borrowings.
Outlook, risks and contingencies
Management expected to fund the next 12 months primarily from existing cash and operating cash flow, supplemented if needed by credit access or additional capital. It stated that it expected demand in the government-contracting sector to remain promising, while noting uncertainty around federal spending and the potential for program delays. The filing gives no quantified revenue or earnings guidance. Management expected general and administrative expenses to continue increasing, though at a lower rate, and noted seasonality, staffing utilization, and variable demand as factors affecting results.
Management concluded the company was a going concern. Nevertheless, it reported that disclosure controls were ineffective as of September 30, 2017 and that remediation was underway. The filing also describes previously identified material weaknesses in controls over complex transactions and financial close/review; management cautioned that remediation could not be assured. Other items to monitor include preferred dividends and future redemption/conversion rights, lease commitments of $1.57 million through 2020, and the post-quarter guarantees of acquired-company credit facilities. The company reported no legal proceedings and no material change to the risk factors in its referenced S-4.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is Novume Solutions, Inc., not Rekor Systems, Inc.
- Assess underlying, organic performance separately from Firestorm and Brekford acquisition contributions, particularly given Brekford’s short inclusion period.
- Track cash burn, collections and working capital, and determine whether operations or additional financing can support the stated 12-month outlook.
- Review the final Brekford purchase-price allocation and integration costs, as well as the financial impact of the Global acquisition and its guaranteed credit facilities.
- Evaluate the burden of Series A preferred dividends and redemption/conversion terms, dilution from common shares, warrants and options, and progress on control remediation.