Novume Solutions, Inc. — Q2 2018 Form 10-Q
Entity and period: The supplied filing is for Novume Solutions, Inc. and its subsidiaries, for the quarter and six months ended June 30, 2018; it does not identify Rekor Systems, Inc. as the registrant. Verify that this is the intended filing.
Business context and comparability
Novume reported a diversified services business spanning federal contracting support, crisis management and preparedness, traffic-safety technology, and contract staffing. The 2018 results include Brekford and Global, acquired in 2017, as well as BC Management and Secure Education in Firestorm. Prior-year reported results exclude Brekford and Global, and include Firestorm for only part of the six-month period. Therefore, reported growth largely reflects acquisitions and is not a like-for-like comparison. Management reported legacy-business revenue growth of 16.2% for Q2 and 13.5% for the first half.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $12.34 million | $3.47 million | $23.56 million | $6.71 million |
| Gross profit | $3.47 million | $1.62 million | $6.56 million | $3.15 million |
| Gross margin | 28.1% | 46.7% | 27.8% | 46.9% |
| Operating expenses, principally SG&A | $4.33 million | $2.45 million | $9.61 million | $4.94 million |
| Operating loss | $0.86 million | $0.83 million | $3.05 million | $1.79 million |
| Net loss | $0.92 million | $0.54 million | $3.12 million | $1.12 million |
Q2 revenue increased 256% and first-half revenue 251%, while consolidated gross margin declined as the acquired staffing and traffic-safety businesses carry lower margins than legacy professional services. Management cited legacy Q2 gross margin of 49.2%, versus 46.2% a year earlier, and first-half legacy margin of 49.2%, unchanged. SG&A rose in dollars, including higher professional, legal, board, corporate, and public-company compliance costs; as a share of revenue, it declined to 35.1% in Q2 and 40.8% for the first half.
The statement of operations reports basic and diluted loss per share of $0.07 for Q2 and $0.23 for the first half. The EPS note’s two-class calculation shows $0.06 and $0.21, respectively; investors should verify the differing presentations. No tax benefit was recorded in 2018 because the company maintained a full valuation allowance on deferred tax assets. Prior-year periods included tax benefits.
Cash flow, liquidity and debt
- First-half operating cash outflow was $1.81 million, versus $1.08 million in 2017. Investing activities provided $0.97 million, primarily from selling a note receivable for $1.475 million; financing activities provided $0.98 million. Cash increased $143,250 to $2.10 million.
- At June 30, cash was $2.10 million and working capital was negative $618,511, compared with positive working capital of $2.75 million at year-end 2017. Accounts receivable were $7.04 million, including $2.28 million of unbilled contracts.
- Reported borrowings included $2.87 million on revolving credit facilities, $2.39 million of current notes payable, and $0.93 million of long-term notes payable. The April 2018 $2 million loan is due May 1, 2019, carries 15% stated interest and a 20.8% effective rate, and is secured by Brekford assets. It also includes equity issuance and contingent participation terms.
- Preferred stock creates ongoing cash obligations: Series A carries a 7% annual dividend and Series B a 4.484% annual dividend. First-half preferred dividends paid or accrued totaled $229,816.
Outlook, risks and unusual items
- Going concern: Management stated that, without additional funding, available cash is not expected to fund operations for one year from issuance and that substantial doubt exists about the company’s ability to continue as a going concern. No additional capital had been obtained or committed as of the filing’s issuance date. Management anticipated continuing losses and said it may reduce or defer spending; financing is not assured.
- Outlook: Management expected federal spending and school-safety funding to support demand, but noted uncertainty beyond 2018 and the possibility that authorized spending could be delayed. Brekford’s Argos Guardian product was undergoing field testing, with pilots expected in several jurisdictions later in 2018. Management anticipated SG&A could continue to rise, though at a reduced pace.
- NeoSystems: The planned merger was terminated after the company failed to complete a required offering by February 28, 2018. The agreement provides for specified adviser and professional fees up to an aggregate $450,000; Novume reserved its rights regarding the termination.
- Controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2018. It reported no material changes in internal control over financial reporting during the quarter.
- Other: The filing reports no legal proceedings and no material changes to the risk factors in the prior Form 10-K. It says there were no material off-balance-sheet arrangements. The sale of the GPS note included an indemnity for principal and interest unpaid by the borrower.
Investor verification priorities
- Confirm the registrant identity: the request names Rekor Systems, but the filing is for Novume Solutions.
- Assess near-term liquidity, funding needs, and the company’s stated going-concern uncertainty against actual subsequent financing and cash use.
- Review the high-cost April 2018 loan, collateral, repayment date, and additional lender participation and share-issuance provisions.
- Separate acquisition-driven growth from organic performance and monitor gross margins, SG&A, receivables, and unbilled revenue.
- Reconcile the different per-share loss amounts shown in the statements and EPS note, and investigate the ineffective disclosure controls.
- Determine the final financial impact of the NeoSystems termination and the status of Argos Guardian testing and planned pilots.