Business context and reporting period
Issuer identification: The supplied filing is Novume Solutions, Inc.’s Form 10-Q, not a filing for Rekor Systems, Inc. It covers the quarter and nine months ended September 30, 2018; statements are unaudited. Novume provides federal-contracting consulting, crisis-management services, public-safety technology, and contract staffing through its subsidiaries.
Comparisons are substantially affected by acquisitions: 2017 periods do not include Global, and include only limited Brekford results. In 2018, results include AOC Key Solutions, Firestorm, Brekford, and Global, as well as Firestorm’s BC Management and Secure Education acquisitions.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $13.15 million, up 197% year over year | $36.71 million, up 230% |
| Gross profit / margin | $3.92 million / 29.8%; prior-year margin 44.4% | $10.48 million / 28.5%; prior-year margin 45.9% |
| Operating loss | $0.24 million; prior-year loss $0.99 million | $3.29 million; prior-year loss $2.79 million |
| Net loss | $0.50 million; prior-year loss $0.79 million | $3.62 million; prior-year loss $1.91 million |
| Loss per common share | $0.05 | $0.31 |
| Cash from operations | Nine-month use of $1.10 million, versus $2.20 million used in 2017 |
For the third quarter, gross margin was 48.9% for legacy Novume and 28.5% for Brekford and Global combined. Management attributed the consolidated margin decline to Global’s staffing business, which has higher service costs. Nine-month revenue growth includes $24.07 million attributed to Brekford and Global.
At September 30, cash and cash equivalents were $1.48 million, working capital was $1.18 million, and current assets and current liabilities were $8.82 million and $7.64 million, respectively. Total current and long-term notes payable were approximately $3.39 million; lines of credit totaled approximately $2.09 million. The company reported total liabilities of $11.07 million and stockholders’ equity of $2.73 million. Cash declined $0.47 million from year-end 2017.
Material changes and unusual items
- Third-quarter revenue rose sharply, largely reflecting the inclusion of acquired businesses. Despite higher consolidated revenue, gross margin fell markedly versus the prior-year period.
- Third-quarter net loss narrowed, helped by higher gross profit and lower legacy-company SG&A. For the nine-month period, net loss increased as SG&A and interest expense rose; the prior-year period also included a $0.96 million income-tax benefit, while 2018 recognized a $22,082 tax provision.
- Interest expense was $507,841 for the first nine months, versus $97,624 a year earlier. The April 2018 $2 million note carries 15% stated interest and an effective rate reported as 22.5% in the debt note; the MD&A gives a different effective-rate figure of 20.8%.
- The company sold a note receivable for $1.475 million in February 2018. Nine-month investing cash flow was positive $0.52 million, primarily due to those proceeds, partly offset by $0.96 million of capital expenditures.
Outlook, risks, and contingencies
- Management said its forecasts indicated the company could continue as a going concern for one year from the filing date and that the substantial doubt disclosed at June 30, 2018 had been alleviated. This assessment relied in part on extended debt maturities and approximately $2.8 million of net proceeds from a November 1, 2018 stock offering. Management continued to seek funding and warned that unavailable or unacceptable financing could force it to abandon the OpenALPR acquisition, cut or defer spending, or restrict operations.
- Novume had a nonbinding letter of intent to acquire OpenALPR assets for approximately $15 million, subject to financing, due diligence, and definitive agreements, with a target closing by February 28, 2019. A services agreement with OpenALPR was also entered into after quarter-end. The acquisition was not assured.
- The November offering issued 4.125 million shares at $0.80 per share and generated approximately $2.8 million net. The offering also included an underwriter over-allotment option and warrants, creating potential additional dilution.
- After quarter-end, the $500,000 Avon Road note maturity was extended to March 2020 and the $2 million secured note maturity to May 2020. The latter extension required a $62,500 payment and retained additional interest and participation terms.
- The Series A preferred stock has a holder redemption right from November 2021 at $15 per share plus accrued unpaid dividends, which could materially affect liquidity if conversion is not available or attractive.
- Management reported that disclosure controls and procedures were not effective as of September 30, 2018. It said a Chief Accounting Officer had been hired and control-improvement initiatives begun. No material change in internal control over financial reporting during the quarter was reported.
- The NeoSystems merger agreement was terminated in March 2018 after the required offering was not completed; termination-related fees and expenses were capped at $450,000. The filing reported no legal proceedings.
Most important facts for investors to verify
- Confirm the issuer: this document identifies Novume Solutions, Inc., despite the request metadata naming Rekor Systems, Inc.
- Review the effect of acquisitions on year-over-year comparability, especially the contribution and margins of Global and Brekford.
- Check liquidity after the November equity offering, the company’s ongoing operating cash use, and its ability to fund the proposed OpenALPR transaction.
- Reconcile the April 2018 note’s disclosed effective interest rates (22.5% in the debt note versus 20.8% in MD&A) and assess its security, extension cost, and contingent payment terms.
- Assess dilution from the November share issuance, preferred-stock conversion and redemption rights, and outstanding warrants and options.
- Track remediation of the ineffective disclosure controls and any subsequent changes in cash, debt, or going-concern assumptions.