Novume(REKR) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Rekor Systems reported a net loss from continuing operations of $11.0 million on $14.9 million in total revenues for the nine months ended September 30, 2019, with total assets growing to $30.8 million and liabilities to $32.5 million, resulting in a stockholders' deficit Condensed Consolidated Balance Sheet (Unaudited) | (In thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $30,823 | $18,055 | | Total Current Assets | $10,715 | $8,530 | | Goodwill | $6,336 | $1,402 | | Intangible assets, net | $7,300 | $2,627 | | Total Liabilities | $32,525 | $9,547 | | Total Current Liabilities | $10,822 | $8,574 | | Notes payable | $20,076 | $875 | | Total Stockholders' (Deficit) Equity | ($7,308) | $3,456 | Condensed Consolidated Statement of Operations (Unaudited) | (In thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Total Revenue | $14,884 | $15,271 | | Gross Profit | $7,864 | $7,737 | | Loss from Operations | ($6,889) | ($3,438) | | Net Loss from Continuing Operations | ($10,978) | ($3,649) | | Net Loss | ($11,428) | ($3,619) | | Loss Per Share (Basic & Diluted) | ($0.63) | ($0.31) | Condensed Consolidated Statements of Cash Flows (Unaudited) | (In thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash used in operating activities | ($9,255) | ($1,098) | | Net cash (used in) provided by investing activities | ($406) | $519 | | Net cash provided by financing activities | $9,100 | $106 | | Net decrease in cash | ($561) | ($473) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a strategic shift towards the Technology Segment, driven by the OpenALPR acquisition, leading to increased technology revenue and operating expenses, financed by new debt and equity offerings, despite ongoing operating losses - The company has reorganized into two business segments: Technology and Professional Services, reflecting a strategic focus on technology products and services, particularly following the acquisition of OpenALPR Technology[200][201] - In Q3 2019, the company classified its subsidiary 'Global' (GTS and GCP) as held for sale, removing its results from continuing operations to concentrate on the Technology Segment[206] - The company funded the OpenALPR acquisition and operations by issuing $20 million in promissory notes with 16% interest and warrants, and also initiated a $15 million at-the-market (ATM) equity offering[208][265] Revenue by Segment (Continuing Operations) | (In thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Technology | $3,962 | $2,639 | +50% | | Professional Services | $10,922 | $12,632 | -14% | | Total Revenue | $14,884 | $15,271 | -3% | Operating Expenses (Continuing Operations) | (In thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Change (%) | | :--- | :--- | :--- | :--- | | General and administrative | $10,435 | $9,953 | +5% | | Selling and marketing | $2,012 | $1,095 | +84% | | Research and development | $757 | $127 | +496% | | Impairment of intangibles | $1,549 | $0 | N/A | | Total Operating Expenses | $14,753 | $11,175 | +32% | Quantitative and Qualitative Disclosures About Market Risk As a "smaller reporting company," Rekor is exempt from providing quantitative and qualitative disclosures about market risk - The company is classified as a "smaller reporting company" and is therefore exempt from providing quantitative and qualitative disclosures about market risk[274] Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of September 30, 2019, due to un-remediated material weaknesses, despite ongoing remediation efforts - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were not effective as of September 30, 2019[276] - Management's assessment concluded that internal control over financial reporting was not effective due to material weaknesses identified in prior years (2017 and 2018) that had not yet been fully remediated[278][279] - Remediation efforts include hiring a CFO, forming a disclosure committee, augmenting accounting staff, and engaging an accounting firm to improve internal control processes[279] PART II - OTHER INFORMATION Legal Proceedings The company is involved in a significant legal proceeding against former Firestorm executives, alleging fraudulent inducement in the acquisition and seeking rescission, with counterclaims filed by the former executives - On August 17, 2019, Rekor filed a lawsuit against the former executives of Firestorm, alleging fraudulent inducement in the acquisition of Firestorm[283] - The company seeks rescission of the Membership Interest Purchase Agreement, including the notes and warrants issued to the Firestorm principals The principals have filed counterclaims[283] Risk Factors No material changes have occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes have been made to the risk factors disclosed in the Annual Report on Form 10-K filed on April 11, 2019[284] Unregistered Sales of Equity Securities and Use of Proceeds The company issued unregistered shares and warrants for the OpenALPR acquisition and sold shares through an At-the-Market program, with proceeds primarily funding R&D and sales & marketing for its strategic technology shift - On March 12, 2019, the company issued 600,000 unregistered shares of common stock and warrants to purchase 2,500,000 shares as part of the OpenALPR acquisition and related financing[285] - On August 14, 2019, the company entered into an At-the-Market (ATM) sales agreement to sell up to $15 million of common stock[292] - In September 2019, the company sold 103,566 shares under the ATM agreement at an average price of $2.84 per share, raising net cash of $29,000 after commissions and fees[293] - Proceeds have been primarily used for research and development, sales, and marketing expenses related to the OpenALPR software, reflecting the company's strategic shift[294] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[295] Mine Safety Disclosures This item is not applicable to the company - Not applicable[296] Other Information The company reported no other information for this item - None[297] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL data, incorporating previously filed documents by reference - The exhibits include CEO and CFO certifications under Rule 13a-14(a)/15d-14(a) and Section 1350, as well as XBRL instance documents[299]