Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
Amendment No. 1
(Mark
One)
☒
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the quarterly period ended
September 30, 2017
OR
☐ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ______ to ______
Commission
File Number: 001-33883
Novume
Solutions, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
8742
|
81-5266334
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer Identification No.)
|
14420
Albemarle Point Place, Suite 200,
Chantilly,
VA, 20151
(703)
953-3838
(Address,
including ZIP code, and telephone number, including area code, of
registrant’s principal executive offices)
Corporation
Trust Company
1209
Orange Street
Wilmington,
DE 19801
(Name,
address, including ZIP code, and telephone number, including area
code, of registrant’s agent for service)
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒
No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ☒
No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated
filer ☐
|
Accelerated
filer ☐
|
|
Non-accelerated
filer ☐
|
(Do not check if a
smaller reporting company)
|
Smaller reporting
company ☒
Emerging growth
company ☐
|
If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
As of November 1,
2017 the Registrant had 14,308,784 shares of common stock,
$0.0001 par value per share outstanding.
EXPLANATORY NOTE
Novume
Solutions, Inc. (the “Company,” “Novume,”
“we” or “us”) is filing this amended Form
10-Q/A (the “Form 10-Q/A”) to amend its Quarterly
Report on Form 10-Q for the period ended September 30, 2017,
originally filed with the Securities and Exchange Commission (the
“SEC”) on November 13, 2017 (the “Original
Filing”), to restate our unaudited condensed consolidated
balance sheet as of September 30, 2017, our earnings per share
disclosures in our unaudited condensed consolidated statements of
operations for the three and nine months ended September 30, 2017,
our unaudited consolidated statement of shareholders’ equity
for the nine months ended September 30, 2017 and related footnote
disclosures for the three and nine months ended September 30, 2017
for an error with regard to the quarterly accounting for accretion
on our Series A Cumulative Convertible Redeemable Preferred Stock
(the “Series A Preferred Stock”). The previously filed
unaudited condensed consolidated financial statements for the
referenced periods should no longer be relied upon. This Form
10-Q/A also amends certain other items in the Original Filing, as
listed in “Items Amended in this Form 10-Q/A”
below.
Effects
of the restatement
We identified and
corrected an error in the accounting treatment related to the
accretion to redemption value on our Series A Preferred Stock as of
September 30, 2017. The Company had previously disclosed that
accretion would be recorded as of December 31, 2017. Based on the
Company’s revised internal analysis, we determined that the
accretion was material to our earnings per share calculations for
all quarters reported in fiscal year 2017 through September 30,
2017.
The Company
calculated year-to-date accretion of $115,731, $255,699 and
$400,616 for the three months ended March 31, 2017, six months
ended June 30, 2017 and nine months ended September 30, 2017,
respectively.
The adjustment had
disclosure impact on the unaudited condensed consolidated
statements of operations and comprehensive loss relating to
earnings (loss) per share disclosures and had no impact on cash
flows for the three and nine-months ended September 30,
2017.
The following table
illustrates the impact of the correction to the unaudited condensed
consolidated balance sheets and our unaudited consolidated
statement of shareholders’ equity:
|
As of September 30, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Series
A Cumulative Convertible Redeemable Preferred
Stock
|
$3,845,925
|
$400,616
|
$4,246,541
|
Additional
paid-in capital
|
$9,325,795
|
$(400,616)
|
$8,925,179
|
Total
Stockholders’ Equity
|
$6,731,826
|
$(400,616)
|
$6,331,210
|
|
As of June 30, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Series
A Cumulative Convertible Redeemable Preferred
Stock
|
$3,845,477
|
$255,699
|
$4,101,176
|
Additional
paid-in capital
|
$3,368,126
|
$(255,699)
|
$3,112,427
|
Total
Stockholders’ Equity
|
$1,677,439
|
$(255,699)
|
$1,421,740
|
|
As of March 31, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Series
A Cumulative Convertible Redeemable Preferred
Stock
|
$3,845,477
|
$115,731
|
$3,961,208
|
Additional
paid-in capital
|
$3,330,978
|
$(115,731)
|
$3,215,247
|
Total
Stockholders’ Equity
|
$2,286,406
|
$(115,731)
|
$2,170,675
|
2
The following table
illustrates the impact of the correction on our earnings per share
disclosures in our unaudited condensed consolidated statements of
operations:
|
For the three months ended September 30, 2017
|
For the nine months ended September 30, 2017
|
||||
|
As previously reported
|
Adjustment
|
Restated
|
As previously reported
|
Adjustment
|
Restated
|
Earnings
(loss) per share
|
$(0.07)
|
$(0.02)
|
$(0.09)
|
$(0.20)
|
$(0.03)
|
$(0.23)
|
|
For the six months ended June 30, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Earnings
(loss) per share
|
$(0.22)
|
$(0.05)
|
$(0.27)
|
|
For the three months ended March 31, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Earnings
(loss) per share
|
$(0.12)
|
$(0.02)
|
$(0.14)
|
Restatement
of Other Financial Statements
We are concurrently
filing amendments for the following filings:
●
Our Current Report
on Form 8-K/A filed with the SEC on November 21, 2017 for the
acquisitions of Global Technical Services, Inc. and Global Contract
Professionals, Inc. to similarly reflect the impact of the
accretion adjustments on the unaudited pro forma condensed combined
balance sheet as of September 30, 2017 and the unaudited pro forma
condensed combined statement of operations for the nine months
ended September 30, 2017 in Exhibit 99.2; and
●
Our Current Report
on Form 8-K/A filed with the SEC on November 28, 2017 for the entry
into a merger agreement with NeoSystems, Corp. to similarly reflect
the impact of the accretion adjustments on the unaudited pro forma
condensed combined balance sheet as of September 30, 2017 and the
unaudited pro forma condensed combined statement of operations for
the nine months ended September 30, 2017 in Exhibit
99.2.
Items
Amended in this Form 10-Q/A
For the convenience
of the reader, this Form 10-Q/A sets forth the Original Filing, in
its entirety, as modified and superseded as necessary to reflect
the restatements and amendments described above. The following
items in the Original Filing have been amended as a result of, and
to reflect, the restatement:
●
Part I, Item 1.
Financial Statements
●
Part II, Item 6.
Exhibits
In accordance with
applicable SEC rules, this Form 10-Q/A includes new certifications
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002,
as amended, from our Chief Executive Officer and Chief Financial
Officer dated as of the filing date of this Form
10-Q/A.
3
Novume
Solutions, Inc. and Subsidiaries
Form 10-Q/A
For
the Quarterly Period Ended September 30, 2017
|
|
Page
|
|
|
Number
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|
|
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PART I.
|
Financial
Information
|
5
|
Item 1.
|
Financial
Statements (Unaudited)
|
5
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
29
|
Item 3.
|
Quantitative and
Qualitative Disclosures About Market Risk
|
42
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Item 4.
|
Controls and
Procedures
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42
|
|
|
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PART II.
|
Other
Information
|
|
Item 1.
|
Legal
Proceedings
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43
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Item 1A.
|
Risk
Factors
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43
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Item 2.
|
Unregistered Sales
of Equity Securities and Use of Proceeds
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43
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Item 3.
|
Defaults Upon
Senior Securities
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43
|
Item 4.
|
Mine Safety
Disclosures
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43
|
Item 5.
|
Other
Information
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43
|
Item 6.
|
Exhibits
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43
|
|
|
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Signatures
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44
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4
PART
I – FINANCIAL INFORMATION
Item
1.
Financial Statements (Unaudited).
Novume
Solutions, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets (Unaudited)
|
September 30, 2017
(Restated)
|
December 31, 2016
|
ASSETS
|
|
|
CURRENT ASSETS
|
|
|
Cash
and cash equivalents
|
$3,762,265
|
$2,788,587
|
Accounts
receivable, net of $24,000 and $0 of allowance for doubtful
accounts
|
3,300,742
|
1,997,831
|
Inventory
|
169,232
|
-
|
Notes
receivable - current portion
|
300,000
|
-
|
Other
current assets
|
253,607
|
81,011
|
Total
current assets
|
7,785,846
|
4,867,429
|
PROPERTY AND EQUIPMENT:
|
|
|
Furniture
and fixtures
|
160,749
|
137,784
|
Office
equipment
|
976,835
|
463,937
|
Camera
systems
|
969,003
|
-
|
Vehicles
|
151,224
|
-
|
Leasehold
improvements
|
59,051
|
33,259
|
|
2,316,862
|
634,980
|
Less:
accumulated depreciation
|
(1,951,826)
|
(515,911)
|
Net
property and equipment
|
365,036
|
119,069
|
Goodwill
|
1,960,345
|
-
|
Intangibles,
net
|
2,168,941
|
-
|
OTHER ASSETS
|
|
|
Notes
receivable - net of current portion
|
1,649,000
|
-
|
Deferred
offering and financing costs
|
-
|
236,963
|
Deferred
tax asset
|
1,184,359
|
219,982
|
Investment
at cost
|
262,140
|
-
|
Deposits
|
39,387
|
39,282
|
Total
other assets
|
3,134,886
|
496,227
|
Total
Assets
|
$15,415,054
|
$5,482,725
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
CURRENT LIABILITIES
|
|
|
Accounts
payable
|
$1,385,852
|
$577,268
|
Accrued
expenses and other current liabilities
|
1,904,493
|
575,203
|
Deferred
revenue
|
72,500
|
-
|
Total
current liabilities
|
3,362,845
|
1,152,471
|
LONG-TERM LIABILITIES
|
|
|
Note
payable
|
1,419,753
|
457,289
|
Deferred
rent
|
54,705
|
56,709
|
Total
long-term liabilities
|
1,474,458
|
513,998
|
Total
liabilities
|
4,837,303
|
1,666,469
|
|
|
|
Series
A Cumulative Convertible Redeemable Preferred stock, $0.0001 par
value, 505,000 and 500,000 shares authorized, 502,327 and 301,570
shares issued and outstanding as of September 30, 2017 and December
31, 2016, respectively
|
4,246,541
|
2,269,602
|
|
|
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STOCKHOLDERS’ EQUITY
|
|
|
Common
stock, $0.0001 par value, 25,000,000 shares authorized, 13,933,784
and 5,000,000 shares issued and outstanding as of September 30,
2017 and December 31, 2016, respectively
|
1,394
|
500
|
Preferred
stock, $0.0001 par value, 7,500,000 and zero shares authorized,
505,000 and 500,000 shares designated as Series A as of September
30, 2017 and December 31, 2016, respectively
|
-
|
-
|
Additional
paid-in capital
|
8,925,179
|
1,976,549
|
(Accumulated
deficit) retained earnings
|
(2,595,363)
|
(430,395)
|
Other
comprehensive income
|
-
|
-
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Total Stockholders’ Equity
|
6,331,210
|
1,546,654
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Total Liabilities and Stockholders’
Equity
|
$15,415,054
|
$5,482,725
|
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
5
Novume
Solutions, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations (Unaudited)
|
Three Months ended September 30,
|
Nine Months ended September 30,
|
||
|
2017
(Restated)
|
2016
|
2017
(Restated)
|
2016
|
REVENUE
|
$4,421,574
|
$2,405,529
|
$11,131,825
|
$9,582,874
|
Cost
of revenue
|
2,457,806
|
1,334,436
|
6,017,982
|
5,496,588
|
Gross
profit
|
1,963,768
|
1,071,093
|
5,113,843
|
4,086,286
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
Selling,
general, and administrative expenses
|
2,997,566
|
1,151,514
|
8,036,339
|
3,624,005
|
(Loss)
income from operations
|
(1,033,798)
|
(80,421)
|
(2,922,496)
|
462,281
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
Interest
expense
|
(33,720)
|
(15,656)
|
(97,624)
|
(28,693)
|
Other
income
|
51,016
|
-
|
142,283
|
-
|
Total
other income (expense)
|
17,296
|
(15,656)
|
44,659
|
(28,693)
|
(Loss)
income before taxes
|
(1,016,502)
|
(96,077)
|
(2,877,837)
|
433,588
|
Income
tax benefit (expense)
|
225,142
|
40,535
|
964,377
|
(13,380)
|
Net (loss) income
|
$(791,360)
|
$(55,542)
|
$(1,913,460)
|
$420,208
|
|
|
|
|
|
(Loss)
earnings per common share - basic
|
$ (0.09)
|
$(0.01)
|
$ (0.23)
|
$0.06
|
(Loss)
earnings per common share - diluted
|
$ (0.09)
|
$(0.01)
|
$ (0.23)
|
$0.06
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
Basic
|
11,756,560
|
9,713,956
|
10,920,866
|
7,016,373
|
Diluted
|
11,756,560
|
9,713,956
|
10,920,866
|
7,123,160
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
Novume
Solutions, Inc. and Subsidiaries
Condensed
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
|
Shares of Common Stock
|
Common Stock
|
Additional Paid-In Capital
(Restated)
|
Retained Earnings
|
Total Stockholders’ Equity (Accumulated Deficit)
(Restated)
|
Balance
as of December 31, 2016
|
5,000,000
|
$500
|
$1,976,549
|
$(430,395)
|
$1,546,654
|
Net
common stock issued in Firestorm acquisition
|
488,094
|
49
|
976,237
|
-
|
976,286
|
Effect
of stock split and contribution to Novume Solutions, Inc. on August
28, 2017
|
5,158,503
|
516
|
(516)
|
-
|
-
|
Net
common stock issued in Brekford acquisition
|
3,287,187
|
329
|
5,850,864
|
|
5,851,193
|
Stock-based
compensation
|
-
|
-
|
227,470
|
-
|
227,470
|
Issuance
of warrants
|
-
|
-
|
295,191
|
-
|
295,191
|
Preferred
stock dividends
|
-
|
-
|
-
|
(251,508)
|
(251,508)
|
Accretion of preferred stock
|
-
|
-
|
(400,616)
|
-
|
(400,616)
|
Net
loss
|
-
|
-
|
-
|
(1,913,460)
|
(1,913,460)
|
Balance
as of September 30, 2017
|
13,933,784
|
$1,394
|
$ 8,925,179
|
$(2,595,363)
|
$ 6,331,210
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
Novume
Solutions, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
For the Nine Months ended September 30,
|
|
|
2017
|
2016
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
(loss) income
|
$(1,913,460)
|
$420,208
|
Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
|
|
|
Depreciation
and amortization
|
404,143
|
39,498
|
Bad
debt expense
|
24,000
|
-
|
Deferred
taxes
|
(964,377)
|
-
|
Share-based
compensation
|
227,470
|
-
|
Deferred
rent
|
(18,588)
|
-
|
Warrant
expense
|
67,491
|
-
|
Changes
in operating assets and liabilities
|
|
|
Accounts
receivable
|
(870,426)
|
(453,985)
|
Inventory
|
(1,460)
|
-
|
Deposits
|
(105)
|
-
|
Notes
receivable
|
51,000
|
(24,000)
|
Prepaid
expenses and other current assets
|
(50,909)
|
20,932
|
Other
assets
|
-
|
(124,919)
|
Accounts
payable
|
(196,460)
|
542,077
|
Accrued
expenses and other current liabiltities
|
987,522
|
139,724
|
Deferred
revenue
|
50,007
|
-
|
Net
cash used in operating activities
|
(2,204,152)
|
559,535
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
Capital
expenditures
|
(52,985)
|
(35,377)
|
Net
cash used in investing activities
|
(52,985)
|
(35,377)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
Stockholders'
distributions
|
-
|
(125,615)
|
Deferred
stock offering costs
|
75,655
|
(670,091)
|
Proceeds
from notes payable
|
47,341
|
500,000
|
Loan
origination costs
|
-
|
(38,285)
|
Acquisition
of Firestorm - net of cash acquired
|
(417,704)
|
-
|
Acquisition
of Brekford - net of cash acquired
|
1,943,777
|
-
|
Net
proceeds from issuance of preferred stock
|
1,745,347
|
-
|
Payment
of preferred dividends
|
(163,601)
|
-
|
Net
cash provided by financing activities
|
3,230,815
|
(333,991)
|
Net
increase in cash and cash equivalents
|
973,678
|
190,167
|
Cash
and cash equivalents at beginning of year
|
2,788,587
|
567,866
|
Cash
and cash equivalents at end of period
|
$3,762,265
|
$758,033
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
8
Novume
Solutions, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
September
30, 2017 and 2016
NOTE
1 – NATURE OF OPERATIONS AND RECAPITALIZATION
Nature of Operations
Novume Solutions,
Inc. (the “Company” or “Novume”) was formed
in February 2017 and began operations upon the merger of KeyStone
Solutions, Inc. (“KeyStone”) and Brekford Traffic
Safety, Inc. (“Brekford”) in August 2017 (the
“Brekford Merger”) and is headquartered in Chantilly,
Virginia. The financial results of Brekford are included in the
results of operations from August 28, 2017 through September 30,
2017. For narrative purposes, Company and Novume references will
include the Brekford, KeyStone and Firestorm entities. The historical financial statements for Novume
prior to the merger with Brekford reflect the historical financial
statements of KeyStone.
KeyStone was formed
in March 2016 as a holding company for its wholly-owned subsidiary
AOC Key Solutions, Inc. (“KSI”), which is headquartered
in Chantilly, Virginia. KSI provides consulting and technical
support services to assist clients seeking U.S. Federal government
contracts in the technology, telecommunications, defense, and
aerospace industries.
On January 25,
2017, Novume (KeyStone) acquired Firestorm (See Note 2), a
nationally-recognized leader in crisis management, crisis
communications, emergency response, and business continuity,
including workplace violence prevention, cyber-breach response,
communicable illness/pandemic planning, predictive intelligence,
and other emergency, crisis and disaster preparedness initiatives.
Firestorm is headquartered in Roswell, Georgia.
Brekford,
headquartered in Hanover, Maryland, is a leading public safety
technology service provider of fully-integrated automated traffic
safety enforcement (“ATSE”) solutions, including speed,
red light, and distracted driving camera
systems.
Recapitalization
On March 15,
2016, the stockholders of KSI formed KeyStone as a holding company
with the same proportionate ownership percentage as KSI. On that
same date KSI entered into a merger agreement (the “KSI
Merger Agreement”) with KeyStone and KCS Merger Sub, Inc.
(“Merger Sub”), a wholly-owned subsidiary of KeyStone
with no activity. Pursuant to the KSI Merger Agreement, on
March 15, 2016, Merger Sub was merged with and into KSI, and
thus KSI became a wholly-owned subsidiary of KeyStone (the
“KSI Merger”). To complete the KSI Merger, the
stockholders exchanged 100% of the outstanding common stock of KSI
for newly issued common stock of KeyStone, representing 100% of the
outstanding common stock. This effectively transferred 100% of the
voting equity interest and control of KSI to KeyStone. The
undistributed earnings totaling $1,192,844 of KSI as of that date
were considered a capital contribution to KeyStone and were
therefore reclassified to additional paid-in capital. The
operations of KSI did not change, nor have any assets or operations
transferred to either KeyStone or Merger Sub. The KSI Merger
transaction resulted in no gain or loss to either entity. The
stockholders’ proportionate ownership of KeyStone remained
the same as it was for KSI. KeyStone accounted for the merger
transaction as a recapitalization in the accompanying consolidated
financial statements.
NOTE
2 – ACQUISITION
Brekford Acquisition
On August 28, 2017,
the mergers by and among Novume, KeyStone, Brekford, Brekford
Merger Sub, Inc. (“Brekford Merger Sub”), and KeyStone
Merger Sub, LLC (“KeyStone Merger Sub”), were consummated as a
result of a merger agreement (the “Brekford Merger
Agreement”). As a result, Brekford became a wholly-owned
subsidiary of the Novume, and Brekford Merger Sub ceased to exist.
KeyStone Merger Sub also became a wholly-owned subsidiary of
Novume, and KeyStone Solutions, Inc. ceased to exist. When KeyStone
Merger Sub filed its certificate of merger with the Secretary of
State of the State of Delaware, it immediately effectuated a
name-change to KeyStone Solutions, LLC, the name by which it is now
known. For the purposed of this document any references to KeyStone
are to KeyStone Solutions, Inc. prior to August 28, 2017 and to
KeyStone Solutions, LLC on and after August 28,
2017.
Upon completion of the Brekford Merger, the merger consideration
was issued in accordance with the terms of the Brekford Merger
Agreement. Immediately upon completion of the Brekford Merger, the
pre-merger stockholders of KeyStone owned approximately 80% of the
issued and outstanding capital stock of Novume on a fully-diluted
basis, and the pre-merger stockholders of Brekford owned
approximately 20% of the issued and outstanding capital stock of
Novume on a fully-diluted basis.
9
As the Brekford
Merger has recently been completed, the Company is currently in the
process of completing the purchase price allocation treating the
Brekford Merger as a business combination. The final purchase price
allocation for Brekford will be included in the Company’s
consolidated financial statements in future periods. The table
below shows the preliminary analysis related to the Brekford
acquisition:
Common
stock issued
|
$5,851,193
|
Total
consideration
|
5,851,193
|
Less
cash received
|
(1,943,778)
|
Less
other assets
|
(3,139,007)
|
Plus
liabilities assumed
|
1,191,937
|
Net
goodwill/intangible recorded
|
$1,960,345
|
The initial
determination of the fair value of the assets acquired and
liabilities assumed, which includes approximately $2.0 million of
goodwill, is based on a preliminary valuation and the estimates and
assumptions for these items are subject to change as we obtain
additional information during the measurement period. Subsequent
changes to the purchase price or other fair value adjustments
determined during the measurement period will be recorded as an
adjustment to goodwill and possibly intangibles.
Firestorm Acquisition
On January 25,
2017 (the “Firestorm Closing Date”), Novume acquired
Firestorm Solutions, LLC and Firestorm Franchising, LLC
(collectively, the “Firestorm Entities” or
“Firestorm”).
Membership Interest Purchase Agreement
Pursuant to the
terms of the Membership Interest Purchase Agreement (the
“MIPA”), by and among Novume, each of the Firestorm
Entities, each of the Members of the Firestorm Entities (described
below), and a newly-created acquisition subsidiary of Novume,
Firestorm Holdings, LLC, a Delaware limited liability company
(“Firestorm Holdings”), Novume acquired all of the
membership interests in each of the Firestorm Entities for the
following consideration:
●
$500,000 in cash in
the aggregate paid by Novume as of the Firestorm Closing Date to
the three principals (Harry W. Rhulen, Suzanne Loughlin, and James
W. Satterfield, collectively the “Firestorm
Principals”) of Firestorm. Of that aggregate amount $250,000
was paid to Mr. Satterfield, and $125,000 was paid to each of
Mr. Rhulen and Ms. Loughlin;
●
$1,000,000 in the
aggregate in the form of four unsecured, subordinated promissory
notes issued by Novume payable over five years after the Firestorm
Closing Date, to all the Members of the Firestorm Entities
(consisting of the Firestorm Principals and Lancer Financial Group,
Inc. (“Lancer”)). The principal amount of the note
payable to Lancer is $500,000 (the “Lancer Note”). The
principal amount of the note payable to Mr. Rhulen is
$166,666.66. The principal amount of the notes payable to each of
Mr. Satterfield and Ms. Loughlin is $166,666.67. (The
notes payable to Mr. Rhulen, Ms. Loughlin and
Mr. Satterfield are individually referred to herein as a
“Firestorm Principal Note” and collectively, as the
“Firestorm Principal Notes”). The Firestorm Principal
Notes are payable at an interest rate of 2% and the Lancer Note is
payable at an interest rate of 7%. $907,407 was recorded to notes
payable to reflect the net fair value of the notes issued due to
the difference in interest rates. The Lancer Note also has a capped
subordination of $7,000,000, subject to the consent of
Lancer;
●
Each of the
Firestorm Principals was issued 162,698 (315,625 post Brekford
Merger) shares of the common stock, par value $0.0001 per share, of
Novume (“Novume Common Shares”), for an aggregate
issuance of 488,094 (946,875 post Brekford Merger) Novume Common
Shares;
●
Each of the
Firestorm Principals received warrants to purchase 105,209 Novume
Common Shares, exercisable over a period of five years after the
Firestorm Closing Date, at an exercise price of $2.58 per share;
and
●
Each of the
Firestorm Principals received warrants to purchase 105,209 Novume
Common Shares, exercisable over a period of five years after the
Firestorm Closing Date, at an exercise price of $3.60 per
share.
10
The Company has
completed its analysis of the purchase price allocation. The table
below shows the final breakdown related to the Firestorm
acquisition.
Cash
paid
|
$500,000
|
Notes
payable issued
|
907,407
|
Common
stock issued
|
976,286
|
Warrants
issued, at $2.58
|
125,411
|
Warrants
issued, at $3.61
|
102,289
|
Total
consideration
|
2,611,393
|
Less
cash received
|
(82,296)
|
Less
other assets
|
(137,457)
|
Less
intangible and intellectual property
|
(2,497,686)
|
Plus
liabilities assumed
|
106,046
|
Net
goodwill recorded
|
$-
|
The determination
of the fair value of the assets acquired and liabilities assumed
includes approximately $2.5 million of intangible and intellectual
property which will be amortized over the useful life of five
years. In connection with the acquistion, Novume has also entered
into employment agreements with three of the founders of the
Firestorm Entities as set forth below.
Harry W. Rhulen Employment Agreement
The Rhulen
Employment Agreement provides that upon the Firestorm Closing Date
his employment agreement will become effective for an initial
five-year term as President of Novume Solutions, Inc. His base
salary will be $275,000 per annum, and he will be eligible for a
bonus as determined by Novume’s compensation committee.
Mr. Rhulen will also be eligible to receive all such other
benefits as are provided by Novume to other management employees
that are consistent with Novume’s fringe benefits available
to any other officer or executive of Novume. Mr. Rhulen has
been granted options to purchase 155,195 Novume Common Shares,
which shall begin vesting on the one-year anniversary of the
Firestorm Closing Date and continue vesting monthly over the
following two years, at an exercise price of $1.55 per
share.
Suzanne Loughlin Employment Agreement
The Loughlin
Employment Agreement provides that upon the Firestorm Closing Date
her employment agreement will become effective for an initial
five-year term as General Counsel and Chief Administrative Officer
of Novume Solutions, Inc. Her base salary will be $225,000 per
annum, and she will be eligible for a bonus as determined by
Novume’s compensation committee. Ms. Loughlin will also
be eligible to receive all such other benefits as are provided by
Novume to other management employees that are consistent with
Novume’s fringe benefits available to any other officer or
executive of Novume. Ms. Loughlin has been granted options to
purchase 155,195 Novume Common Shares, which shall begin vesting on
the one-year anniversary of the Firestorm Closing Date and continue
vesting monthly over the following two years, at an exercise price
of $1.55 per share.
James W. Satterfield Employment Agreement
The Satterfield
Employment Agreement provides that upon the Firestorm Closing Date
his employment agreement will become effective for an initial
five-year term as President and Chief Executive Officer of each of
the Firestorm Entities. His base salary will be $225,000 per annum,
and he will be eligible for a bonus as determined by Novume’s
compensation committee. Mr. Satterfield will also be eligible
to receive all such other benefits as are provided by Novume to
other management employees that are consistent with Novume’s
fringe benefits available to any other officer or executive of
Novume or its subsidiaries. Mr. Satterfield has been granted
options to purchase 96,997 Novume Common Shares, which shall begin
vesting on the one-year anniversary of the Firestorm Closing Date
and continue vesting monthly over the following two years, at an
exercise price of $1.55 per share, in connection with the
Acquisition.
The following
unaudited pro-forma combined financial information gives effect to
the acquisition of Firestorm and the merger with Brekford as if
they were consummated January 1, 2016. This unaudited
pro-forma financial information is presented for information
purposes only, and is not intended to present actual results that
would have been attained had the acquisition been completed as of
January 1, 2016 (the beginning of the earliest period
presented) or to project potential operating results as of any
future date or for any future periods.
11
|
For the three months ended September 30,
|
For the nine months ended September 30,
|
||
|
2017 (Restated)
|
2016
|
2017 (Restated)
|
2016
|
Revenues
|
$4,906,343
|
$3,345,473
|
$13,353,752
|
$12,194,573
|
Net
income (loss)
|
$(1,065,371)
|
$(394,760)
|
$(2,815,977)
|
$(591,347)
|
Basic
earnings (loss) per share
|
$(0.11)
|
$(0.04)
|
$(0.32)
|
$(0.08)
|
Diluted
earnings (loss) per share
|
$(0.11)
|
$(0.04)
|
$(0.32)
|
$(0.08)
|
|
|
|
|
|
Basic Number of Shares
|
11,756,560
|
9,713,956
|
10,920,866
|
7,016,373
|
Diluted Number of Shares
|
11,756,560
|
9,713,956
|
10,920,866
|
7,016,373
|
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restatement of previously issued fianncial
statements
We identified and
corrected an error in the accounting treatment related to the
accretion to redemption value on our Series A Preferred Stock as of
September 30, 2017. The Company had previously disclosed that
accretion would be recorded as of December 31, 2017. Based on the
Company’s revised internal analysis, we determined that the
accretion was material to our earnings per share calculations for
all quarters reported in fiscal year 2017 through September 30,
2017.
The Company
calculated year-to-date accretion of $115,731, $255,699 and
$400,616 for the three months ended March 31, 2017, six months
ended June 30, 2017 and nine months ended September 30, 2017,
respectively.
The adjustment had
disclosure impact on the unaudited condensed consolidated
statements of operations and comprehensive loss relating to
earnings (loss) per share disclosures and had no impact on cash
flows for the three and nine-months ended September 30,
2017.
The following table
illustrates the impact of the correction to the unaudited condensed
consolidated balance sheets and our unaudited consolidated
statement of shareholders’ equity:
|
As of September 30, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Series
A Cumulative Convertible Redeemable Preferred
Stock
|
$3,845,925
|
$400,616
|
$4,246,541
|
Additional
paid-in capital
|
$9,325,795
|
$(400,616)
|
$8,925,179
|
Total
Stockholders’ Equity
|
$6,731,826
|
$(400,616)
|
$6,331,210
|
|
As of June 30, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Series
A Cumulative Convertible Redeemable Preferred
Stock
|
$3,845,477
|
$255,699
|
$4,101,176
|
Additional
paid-in capital
|
$3,368,126
|
$(255,699)
|
$3,112,427
|
Total
Stockholders’ Equity
|
$1,677,439
|
$(255,699)
|
$1,421,740
|
|
As of March 31, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Series
A Cumulative Convertible Redeemable Preferred
Stock
|
$3,845,477
|
$115,731
|
$3,961,208
|
Additional
paid-in capital
|
$3,330,978
|
$(115,731)
|
$3,215,247
|
Total
Stockholders’ Equity
|
$2,286,406
|
$(115,731)
|
$2,170,675
|
12
The following table
illustrates the impact of the correction on our earnings per share
disclosures in our unaudited condensed consolidated statements of
operations:
|
For the three months ended September 30,
2017
|
For the nine months ended September 30,
2017
|
||||
|
As previously reported
|
Adjustment
|
Restated
|
As previously reported
|
Adjustment
|
Restated
|
Earnings
(loss) per share
|
$(0.07)
|
$(0.02)
|
$(0.09)
|
$(0.20)
|
$(0.03)
|
$(0.23)
|
|
For the six months ended June 30, 2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Earnings
(loss) per share
|
$(0.22)
|
$(0.05)
|
$(0.27)
|
|
For the three months ended March 31,
2017
|
||
|
As previously reported
|
Adjustment
|
Restated
|
Earnings
(loss) per share
|
$(0.12)
|
$(0.02)
|
$(0.14)
|
Principles of Consolidation
The consolidated
financial statements include the accounts of Novume, the parent
company, and its wholly-owned subsidiaries AOC Key Solutions, Inc.,
Brekford Traffic Safety Inc., Novume Media, Inc., Chantilly
Petroleum, LLC, Firestorm Solutions, LLC and Firestorm Franchising,
LLC.
The consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“GAAP”) and in accordance with the accounting
rules under Regulation S-X, as promulgated by the Securities and
Exchange Commission (“SEC”). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Cash Equivalents
Novume considers
all highly liquid debt instruments purchased with the maturity of
three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable
are customer obligations due under normal trade terms. The Company
performs continuing credit evaluations of its clients’
financial condition, and the Company generally does not require
collateral.
Management reviews
accounts receivable to determine if any receivables will
potentially be uncollectible. Factors considered in the
determination include, among other factors, number of days an
invoice is past due, client historical trends, available credit
ratings information, other financial data and the overall economic
environment. Collection agencies may also be utilized if management
so determines.
The Company records
an allowance for doubtful accounts based on specifically identified
amounts that are believed to be uncollectible. The Company also
considers recording as an additional allowance a certain percentage
of aged accounts receivable, based on historical experience and the
Company’s assessment of the general financial conditions
affecting its customer base. If actual collection experience
changes, revisions to the allowance may be required. After all
reasonable attempts to collect an account receivable have failed,
the amount of the receivable is written off against the allowance.
Based on the information available, the Company had an allowance
for doubtful accounts of $24,000 at September 30, 2017 and
determined that an allowance was not required at December 31,
2016.
Inventory
Inventory
principally consists of hardware and third-party packaged software
that is modified to conform to customer specifications and held
temporarily until the completion of a contract. Inventory is valued
at the lower of cost or market value. The cost is determined by the
lower of first-in, first-out (“FIFO”) method, while
market value is determined by replacement cost for raw materials
and parts and net realizable value for
work-in-process.
13
Property and Equipment
The cost of
furniture and fixtures, and office equipment is depreciated over
the useful lives of the related assets. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the
terms of the lease. Depreciation and amortization is recorded on
the straight-line basis.
The range of
estimated useful lives used for computing depreciation are as
follows:
Furniture and
fixtures
|
2 - 10 years
|
Office
equipment
|
2 - 5 years
|
Leasehold
improvements
|
3 -
10 years
|
Automobiles
|
3 - 5 years
|
Camera
systems
|
3
years
|
Depreciation and
amortization expense for the three months ended September 30, 2017
and 2016 was $353,982 and 9,833, respectively, and for the nine
months ended September 30, 2017 and 2016 was $404,143 and $39,498,
respectively.
Revenue Recognition
The Company
recognizes revenues for the provision of services when persuasive
evidence of an arrangement exists, services have been rendered or
delivery has occurred, the fee is fixed or determinable and the
collectability of the related revenue is reasonably assured. The
Company principally derives revenues from fees for services
generated on a project-by-project basis. Revenues for
time-and-materials contracts are recognized based on the number of
hours worked by the employees or consultants at an agreed-upon rate
per hour set forth in the Company’s standard rate sheet or as
written from time to time in the Company’s contracts or
purchase orders. Revenues related to firm-fixed-price contracts are
primarily recognized upon completion of the project as these
projects are typically short-term in nature. Revenue from the sale
of individual franchises is recognized when the contract is signed
and collectability is assured, unless the franchisee is required to
perform certain training before operations commence. The franchisor
has no obligation to the franchisee relating to facilitiess
development and the franchisee is considered operational at the
time the franchise agreement is signed or when required training is
completed, if applicable. Royalties from individual franchises are
earned based upon the terms in the franchising agreement which are
generally the greater of $1,000 or 8% of the franchisee’s
monthly gross sales.
For
automated traffic safety enforcement revenue, the Company
recognizes the revenue when the required efforts to collect from
citizens are completed and posted to the municipality’s
account. The respective municipality is then billed depending on
the terms of the respective contract, typically 15 days after the
preceding month while collections are reconciled. For contracts
where the Company receives a percentage of collected fines, revenue
is calculated based upon the posted payments from citizens
multiplied by the Company’s contractual percentage. For
contracts where the Company receives a specific fixed monthly fee
regardless of citations issued or collected, revenue is recorded
once the amount collected from citizens exceeds the monthly fee per
camera. Brekford’s fixed-fee contracts typically have a
revenue neutral provision whereby the municipality’s payment
to Brekford cannot exceed amounts collected from citizens within a
given month.
Advertising
The Company
expenses all non-direct-response advertising costs as incurred.
Such costs were not material for the three or nine months ended
September 30, 2017 and 2016.
Use of Estimates
Management uses
estimates and assumptions in preparing financial statements. Those
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual amounts may differ
from these estimates. On an on-going basis, the Company evaluates
its estimates, including those related to collectability of
accounts receivable, fair value of debt and equity instruments,
goodwill, intangible assets and income taxes. The Company
bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that
are not apparent from other sources. Actual results may differ from
those estimates under different assumptions or
conditions.
14
Income Taxes
Through
March 15, 2016, KSI elected to be taxed under the provisions
of Subchapter S of the Internal Revenue Code. Under those
provisions, KSI did not pay U.S. Federal corporate income taxes,
and in most instances state income tax, on its taxable income.
Instead, the KSI stockholders were liable for individual income
taxes on their respective shares of KSI’s net income. KSI
effectively revoked its S Corporation election upon the
March 15, 2016 merger with the KeyStone. Novume is currently
subject to corporate income taxes.
Deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company’s
evaluation as of September 30, 2017 revealed no uncertain tax
positions that would have a material impact on the consolidated
financial statements. The 2013 through 2015 tax years remain
subject to examination by the IRS and various states. Management
does not believe that any reasonably possible changes will occur
within the next twelve months that will have a material impact on
the consolidated financial statements.
Equity-Based Compensation
The Company
recognizes equity-based compensation based on the grant-date fair
value of the award on a straight-line basis over the requisite
service period, net of estimated forfeitures. Total equity-based
compensation expense included in selling, general and
administrative expenses in the accompanying consolidated statements
of operations for the three months ended September 30, 2017 and
2016 was $107,321 and $0, respectively, and for the nine months
ended September 30, 2017 and 2016 was $227,470 and $51,380,
respectively.
The Company
estimates the fair value of stock options using the Black-Scholes
option-pricing model. The use of the Black-Scholes option-pricing
model requires the use of subjective assumptions, including the
fair value and projected volatility of the underlying common stock
and the expected term of the award.
The fair value of
each option granted has been estimated as of the date of the grant
using the Black-Scholes option pricing model with the following
assumptions during the nine months ended September 30,
2017:
|
Nine months ended September 30, 2017
|
Risk-free
interest rate
|
1.00%
- 1.99%
|
Expected
term
|
.3
– 6 years
|
Volatility
|
70%
|
Dividend
yield
|
0%
|
Estimated
annual forfeiture rate at time of grant
|
0%
- 30%
|
Risk-Free Interest Rate – The yield on actively traded
non-inflation indexed U.S. Treasury notes with the same maturity as
the expected term of the underlying grants was used as the average
risk-free interest rate.
Expected Term – The expected term of
options granted was determined based on management’s
expectations of the options granted which are expected to remain
outstanding.
Expected Volatility – Because the
Company’s common stock has only been publicly traded since
late August 2017, there has not been a substantive share price
history to calculate volatility and, as such, the Company has
elected to use the calculated value method.
Dividend Yield – The Black-Scholes option
pricing model includes an expected dividend yield (which may be
0.00%) as an input. The Company has not issued common stock
dividends in the past nor does the Company expect to issue common
stock dividends in the future.
Forfeiture Rate – This is the estimated
percentage of equity grants that are expected to be forfeited or
cancelled on an annual basis before becoming fully vested. The
Company estimates the forfeiture rate based on past turnover data,
level of employee receiving the equity grant, and vesting terms,
and revises the rate if subsequent information indicates that the
actual number of instruments that will vest is likely to differ
from the estimate. The cumulative effect on current and prior
periods of a change in the estimated number of awards likely to
vest is recognized in compensation cost in the period of the
change.
15
Fair Value of Financial Instruments
The carrying
amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable and accounts payable
approximate fair value as of September 30, 2017 and December 31,
2016, because of the relatively short-term maturity of these
financial instruments. The carrying amount reported for long-term
debt approximates fair value as of September 30, 2017, given
management’s evaluation of the instrument’s current
rate compared to market rates of interest and other
factors.
The determination
of fair value is based upon the fair value framework established by
Accounting Standards Codification (“ASC”) Topic 820,
Fair Value Measurements and
Disclosures (“ASC 820”). Fair value is defined
as the exit price, or the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants as of the measurement date. ASC 820
also establishes a hierarchy for inputs used in measuring fair
value that maximizes the use of observable inputs and minimizes the
use of unobservable inputs by requiring that the most observable
inputs be used when available. Observable inputs are inputs market
participants would use in valuing the asset or liability and are
developed based on market data obtained from sources independent of
the Company. Unobservable inputs are inputs that reflect our
assumptions about the factors market participants would use in
valuing the asset or liability. The guidance establishes three
levels of inputs that may be used to measure fair
value:
Level 1—Observable inputs
that reflect quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2—Inputs other than
Level 1 that are observable or can be derived from observable
market data, such as quoted prices for similar assets or
liabilities in markets that are active or not active; or
model-based valuation techniques for which all significant input
are observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
Level 3—Unobservable inputs
that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
The fair value
hierarchy requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring
fair value. The fair value hierarchy requires an entity to maximize
the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. Assets and liabilities are
classified in their entirety based on the lowest level of input
that is significant to the fair value measurements. Changes in the
observability of valuation inputs may result in a reclassification
of levels for certain securities within the fair value
hierarchy.
Concentrations of Credit Risk
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents,
and accounts receivable. Concentrations of credit risk with respect
to accounts receivable are minimal due to the collection history
and due to the nature of the Company’s client base. The
Company limits its credit risk with respect to cash by maintaining
cash balances with high-quality financial institutions. At times,
the Company’s cash may exceed U.S. Federally insured limits,
and as of September 30, 2017 and December 31, 2016, the
Company had $3,762,265 and $2,788,587, respectively, of cash and
cash equivalents on deposit that exceeded the federally insured
limit.
Earnings per Share
Basic earnings per
share, or EPS, is computed using the weighted average number of
common shares outstanding during the period. Diluted EPS is
computed using the weighted average number of common and
potentially dilutive securities outstanding during the period,
except for periods of net loss for which no potentially dilutive
securities are included because their effect would be
anti-dilutive. Potentially dilutive securities consist of common
stock issuable upon exercise of stock options or warrants using the
treasury stock method. Potentially dilutive securities issuable
upon conversion of the Series A Preferred Stock are calculated
using the if-converted method.
The Company
calculates basic and diluted earnings per common share using the
two-class method. Under the two-class method, net earnings are
allocated to each class of common stock and participating security
as if all of the net earnings for the period had been distributed.
Participating securities consist of Series A Preferred Stock and
warrants that contain a nonforfeitable right to receive dividends
and therefore are considered to participate in undistributed
earnings with common stockholders.
16
Foreign
Currency Transactions
Brekford has
certain revenue and expense transactions with a functional currency
in Mexican pesos and the Company's reporting currency is the U.S.
dollar. Assets and liabilities are translated from the functional
currency to the reporting currency at the exchange rate in effect
at the balance sheet date and equity at the historical exchange
rates. Revenue and expenses are translated at rates in effect at
the time of the transactions. Any resulting translation gains and
losses are accumulated in a separate component of stockholders'
equity - other comprehensive income (loss). Realized foreign
currency transaction gains and losses are credited or charged
directly to operations.
Segment Reporting
The Financial
Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) Topic 280, Segment Reporting, requires that an
enterprise report selected information about operating segments in
its financial reports issued to its stockholders. Based on its
analysis of current operations, management has determined that the
Company has only one operating segment, which is Novume. Management
will continue to reevaluate its segment reporting as the Company
grows and matures. However, the chief operating decision-makers
currently use combined results to make operating and strategic
decisions, and, therefore, the Company believes its entire
operation is currently covered under a single segment.
Going Concern Assessment
Beginning with the
year ended December 31, 2016 and all annual and interim
periods thereafter, management will assess going concern
uncertainty in the Company’s consolidated financial
statements to determine there is sufficient cash on hand and
working capital, including available borrowings on loans, to
operate for a period of at least one year from the date the
consolidated financial statements are issued or available to be
issued, which is referred to as the “look-forward
period”, as defined in GAAP. As part of this assessment,
based on conditions that are known and reasonably knowable to
management, management will consider various scenarios, forecasts,
projections, estimates and will make certain key assumptions,
including the timing and nature of projected cash expenditures or
programs, its ability to delay or curtail expenditures or programs
and its ability to raise additional capital, if necessary, among
other factors. Based on this assessment, as necessary or
applicable, management makes certain assumptions around
implementing curtailments or delays in the nature and timing of
programs and expenditures to the extent it deems probable those
implementations can be achieved and management has the proper
authority to execute them within the look-forward period.
Management’s assessment determined the Company is a going
concern.
New
Accounting Pronouncements
Recently Issued Accounting Pronouncements
Not Yet Adopted
In
August 2017, the FASB issued new guidance related to accounting for
hedging activities. This guidance expands strategies that qualify
for hedge accounting, changes how many hedging relationships are
presented in the financial statements, and simplifies the
application of hedge accounting in certain situations. The standard
will be effective for us beginning July 1, 2019, with early
adoption permitted for any interim or annual period before the
effective date. Adoption of the standard will be applied using a
modified retrospective approach through a cumulative-effect
adjustment to retained earnings as of the effective date. The
Company is currently evaluating the impact of this standard on our
consolidated financial statements, including accounting policies,
processes, and systems.
In May 2017, the FASB issued Accounting Standards
Update (“ASU”) No. 2017-09, Compensation - Stock
Compensation: Scope of Modification Accounting, which provides guidance about which changes to
the terms or conditions of a share-based payment award require an
entity to apply modification accounting. An entity will account for
the effects of a modification unless the fair value of the modified
award is the same as the original award, the vesting conditions of
the modified award are the same as the original award and the
classification of the modified award as an equity instrument or
liability instrument is the same as the original award. The update
is effective for fiscal year 2019. The update is to be adopted
prospectively to an award modified on or after the adoption date.
Early adoption is permitted. The Company is currently evaluating
the effect of this update but does not believe it will have a
material impact on its financial statements and related
disclosures.
In January 2017, the FASB issued ASU No.
2017-04, Intangibles - Goodwill and
Other: Simplifying the Test for Goodwill Impairment.
To simplify the subsequent measurement
of goodwill, the update requires only a single-step quantitative
test to identify and measure impairment based on the excess of a
reporting unit's carrying amount over its fair value. A qualitative
assessment may still be completed first for an entity to determine
if a quantitative impairment test is necessary. The update is
effective for fiscal year 2021 and is to be adopted on a
prospective basis. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after
January 1, 2017.
17
In October 2016, the FASB issued ASU No.
2016-16, Income Taxes: Intra-Entity
Transfers of Assets Other Than Inventory, as part of its simplification initiatives. The
update requires that an entity recognize the income tax
consequences of an intra-entity transfer of an asset other than
inventory when the transfer occurs, rather than deferring the
recognition until the asset has been sold to an outside party as is
required under current GAAP. The update is effective for fiscal
year 2019. The new standard will require adoption on a modified
retrospective basis through a cumulative-effect adjustment to
retained earnings, and early adoption is permitted. The Company is
currently evaluating the effect that this update will have on its
financial statements and related disclosures.
In June 2016, the
FASB issued ASU 2016-13 Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments which requires the measurement and
recognition of expected credit losses for financial assets held at
amortized cost. ASU 2016-13 replaces the existing incurred loss
impairment model with an expected loss methodology, which will
result in more timely recognition of credit losses. ASU 2016-13 is
effective for annual reporting periods, and interim periods within
those years beginning after December 15, 2019. We are currently in
the process of evaluating the impact of the adoption of ASU 2016-13
on our consolidated financial statements.
In February 2016,
the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new
leases standard that amends various aspects of existing guidance
for leases and requires additional disclosures about leasing
arrangements. It will require companies to recognize lease assets
and lease liabilities by lessees for those leases classified as
operating leases under previous GAAP. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The ASU is
effective for annual periods beginning after December 15,
2018, including interim periods within those fiscal years; earlier
adoption is permitted. In the financial statements in which the ASU
is first applied, leases shall be measured and recognized at the
beginning of the earliest comparative period presented with an
adjustment to equity. Practical expedients are available for
election as a package and if applied consistently to all leases.
The Company is currently evaluating the impact of the adoption of
this guidance on its consolidated financial condition, results of
operations and cash flows.
In January 2016, the FASB, issued ASU
2016-01, Financial Instruments-Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities,
which amends the guidance in U.S. generally accepted accounting
principles on the classification and measurement of financial
instruments. Changes to the current guidance primarily affect the
accounting for equity investments, financial liabilities under the
fair value option, and the presentation and disclosure requirements
for financial instruments. In addition, the ASU clarifies guidance
related to the valuation allowance assessment when recognizing
deferred tax assets resulting from unrealized losses on
available-for-sale debt securities. The new standard is effective
for fiscal years and interim periods beginning after December 15,
2017, and are to be adopted by means of a cumulative-effect
adjustment to the balance sheet at the beginning of the first
reporting period in which the guidance is effective. Early adoption
is not permitted except for the provision to record fair value
changes for financial liabilities under the fair value option
resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the
impact of adopting this standard.
In May 2014, the
FASB issued ASU No. 2014-09, Revenue from Contracts with Customers,
as a new Topic, ASC Topic 606, which supersedes existing accounting
standards for revenue recognition and creates a single framework.
Additional updates to Topic 606 issued by the FASB in 2015 and 2016
include the following:
●
ASU
No. 2015-14, Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective
Date, which defers the effective date of the new guidance
such that the new provisions will now be required for fiscal years,
and interim periods within those years, beginning after
December 15, 2017.
●
ASU
No. 2016-08, Revenue from
Contracts with Customers (Topic 606): Principal versus Agent
Considerations, which clarifies the implementation guidance
on principal versus agent considerations (reporting revenue gross
versus net).
●
ASU
No. 2016-10, Revenue from
Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing, which clarifies the
implementation guidance on identifying performance obligations and
classifying licensing arrangements.
●
ASU
No. 2016-12, Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients, which clarifies the implementation
guidance in a number of other areas.
The underlying
principle is to use a five-step analysis of transactions to
recognize revenue when promised goods or services are transferred
to customers in an amount that reflects the consideration that is
expected to be received for those goods or services. The standard
permits the use of either a retrospective or modified retrospective
application. The Company is currently in the process of completing
its assessment of any significant contract and assessing the impact
the adoption of the new revenue standard will have on its
consolidated financial statements and related disclosures. The
standard update, as amended, will be effective for annual periods
beginning after December 15, 2017. The Company performed an
initial assessment of the impact of the ASU and is developing a
transition plan, including necessary changes to policies,
processes, and internal controls as well as system enhancements to
generate the information necessary for the new disclosures. The
project is on schedule for adoption on January 1, 2018 and the
Company will apply the modified retrospective method. The Company
expects revenue recognition across its portfolio of services to
remain largely unchanged. However, the Company expects to recognize
revenue earlier than it does under current guidance in a few areas,
including accounting for variable fees and for certain consulting
services, which will be recognized over time rather than at a point
in time. While the Company has not finalized its assessment of
the impact of the ASU, based on the analysis completed to date, the
Company does not currently anticipate that the ASU will have a
material impact on its Consolidated Financial
Statements.
18
There are currently
no other accounting standards that have been issued, but not yet
adopted, that will have a significant impact on the Company’s
consolidated financial position, results of operations or cash
flows upon adoption.
Recently Adopted
In January 2017,
the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying
the Definition of a Business. ASU 2017-01 provides guidance
to evaluate whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. If
substantially all of the fair value of the gross assets acquired
(or disposed of) is concentrated in a single asset or a group of
similar assets, the assets acquired (or disposed of) are not
considered a business. We adopted ASU 2017-01 as of January 1,
2017.
In March
2016, FASB issued ASU ASU 2016-09, Improvements to Employee Share-Based Payment
Accounting. The standard reduces complexity in several
aspects of the accounting for employee share-based compensation,
including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement
of cash flows. The ASU is effective for fiscal years beginning
after December 15, 2016, and interim periods within those
fiscal years, with early adoption permitted. The Company adopted
this standard and the impact of the adoption was not material to
the consolidated financial statements.
In November 2015,
the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred
Taxes. ASU 2015-17 is aimed at reducing complexity in
accounting standards. Currently, GAAP requires the deferred taxes
for each jurisdiction to be presented as a net current asset or
liability and net noncurrent asset or liability. This requires a
jurisdiction-by-jurisdiction analysis based on the classification
of the assets and liabilities to which the underlying temporary
differences relate, or, in the case of loss or credit
carryforwards, based on the period in which the attribute is
expected to be realized. Any valuation allowance is then required
to be allocated on a pro rata basis, by jurisdiction, between
current and noncurrent deferred tax assets. To simplify
presentation, the new guidance requires that all deferred tax
assets and liabilities, along with any related valuation allowance,
be classified as noncurrent on the balance sheet. As a result, each
jurisdiction will now only have one net noncurrent deferred tax
asset or liability. The guidance does not change the existing
requirement that only permits offsetting within a jurisdiction;
companies are still prohibited from offsetting deferred tax
liabilities from one jurisdiction against deferred tax assets of
another jurisdiction. The new guidance is effective in fiscal years
beginning after December 15, 2016, including interim periods
within those years, with early adoption permitted. The Company
early adopted and applied the new standard retrospectively to the
prior period presented in the consolidated balance sheets and it
did not have a material impact.
In April 2015, the
FASB issued ASU 2015-03, Interest – Imputation of Interest: Simplifying the
Presentation of Debt Issuance Costs. The update requires
that deferred debt issuance costs be reported as a reduction to
long-term debt (previously reported in other noncurrent assets).
The Company adopted ASU 2015-03 in 2016 and for all retrospective
periods, as required, and the impact of the adoption was not
material to the consolidated financial statements.
In August 2014, the
FASB issued ASU 2014-15, Presentation of Financial Statements –
Going Concern, which requires management to perform interim
and annual assessments of an entity’s ability to continue as
a going concern within one year of the date the financial
statements are issued and provides guidance on determining when and
how to disclose going concern uncertainties in the financial
statements. Certain disclosures will be required if conditions give
rise to substantial doubt about an entity’s ability to
continue as a going concern. This accounting standard update
applies to all entities and was effective for the annual period
ending after December 15, 2016, and for annual periods and
interim periods thereafter, with early adoption permitted. The
Company adopted this standard during fiscal year 2016.
The Company does
not believe that any recently issued accounting standards, in
addition to those referenced above, would have a material effect on
its consolidated financial statements.
NOTE
4 – INVESTMENT AT COST AND NOTES RECEIVABLE
On February 6,
2017, prior to the Brekford Merger, the Company entered into a
Contribution and Unit Purchase Agreement (the “CUP
Agreement”) with LB&B Associates Inc.
(“LB&B”) and Global Public Safety, LLC
(“GPS”), a 100%-owned subsidiary of
Brekford.
The closing for the
transaction set forth in the CUP Agreement occurred on February 28,
2017 (the “GPS Closing”) and on such date the Company
contributed substantially all of the assets and certain liabilities
related to its vehicle services business to GPS. On the GPS Closing, the Company sold units
representing 80.1% of the units of GPS to the LB&B for
$6,048,394, after certain purchase price adjustments of prepaid
expenses and unbilled customer deposits. $4,048,394 was paid in
cash, including a $250,000 deposit that was paid on February 6,
2017, and $2,000,000 was paid by LB&B issuing the Company a
promissory note receivable (the “GPS Promissory Note”).
After the GPS Closing, the Company continues to own 19.9% of the
units of GPS after the transaction. The Company is accounting for
this as an investment at cost.
The GPS Promissory Note is subordinated to the
LB&B’s senior lender and accrues interest at a rate of 3%
per annum. The maturity date of the GPS Promissory Note is March
31, 2022. The GPS Promissory Note is to be repaid as follows: (a)
$75,000 plus all accrued interest on each of September 30, 2017;
December 31, 2017; March 31, 2018, June 30, 2018 and September 30,
2018 (or, in the event any such date is not a business day, the
first business day after such date), (b) $100,000 plus all accrued
interest on each of December 31, 2018; March 31, 2019; June 30,
2019 and September 30, 2019 (or, in the event any such date is not
a business day, the first business day after such date) (c)
$125,000 plus all accrued interest on each of December 31, 2019;
March 31, 2020; June 30, 2020; September 30, 2020, December 31,
2020; March 31, 2021, June 31, 2021; September 30, 2021; and
December 31, 2021 (or, in the event any such date is not a business
day, the first business day after such date), and (d) $100,000 on
March 31, 2022. The GPS
Promissory Note is secured pursuant to the terms of a Pledge
Agreement (the “LB&B Pledge Agreement”) between the
Company and LB&B. Pursuant to the LB&B Pledge Agreement
LB&B, granted the Company a continuing second priority lien and
security interest in the LB&B’s units of GPS subject to
liens of the LB&B’s senior lender. The current portion of
notes receivable was $300,000 and zero as of September 30, 2017 and
December 31, 2016, respectively. The long-term portion of the notes
receivable was $1,649,000 and zero as of September 30, 2017 and
December 31, 2016, respectively.
19
NOTE
5 — SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental
disclosures of cash flow information for the nine months ended
September 30, 2017 and 2016 was as follows:
|
For the Nine Months Ended
|
|
|
September 30, 2017
|
September 30, 2016
|
Cash
paid for interest
|
$33,429
|
$29,083
|
Cash
paid for taxes
|
$-
|
$-
|
|
|
|
Warrants
issued in connection with note payable
|
$-
|
$58,520
|
Warrants
issued in connection with issuance of Series A Preferred
Stock
|
$67,491
|
$-
|
|
|
|
Business
Combinations:
|
|
|
Current
Assets
|
$1,044,893
|
$-
|
Property
and equipment, net
|
$268,398
|
$-
|
Intangible
assets
|
$2,498,737
|
$-
|
Goodwill
|
$1,960,328
|
$-
|
Other
non-current assets
|
$1,962,140
|
$-
|
Assumed
liabilities
|
$(1,258,905)
|
$-
|
Deferred
revenue
|
$(22,493)
|
$-
|
Other
non-current liabilities
|
$(16,584)
|
$-
|
Issuance
of common stock
|
$(7,055,179)
|
$-
|
Notes
payable
|
$(907,407)
|
$-
|
Dividends on the
Series A Preferred Stock totaling $5,286 were approved and declared
in 2016. On April 7, 2017, the Company paid cash dividends of
$75,694 to shareholders of record as of March 30, 2017. On
July 8, 2017, the Company paid cash dividends of $87,907 to
shareholders of record as of June 30, 2017. On September 30,
2017, the Company declared and accrued dividends of $87,907 payable
to shareholders of record as of September 30, 2017.
NOTE
6 — DEBT
Line of Credit
KSI was a party to
a business loan agreement (the “2015 Loan Agreement”)
with Sandy Spring Bank (“SSB”) dated as of
September 25, 2015. The primary credit facility was an
asset-based revolving line of credit up to $1,000,000 which was due
to mature on September 30, 2016. To secure its obligations
under the 2015 Loan Agreement, KSI had granted to SSB a security
interest in its accounts receivable. SSB was required to advance
funds to KSI up to the lesser of (1) $1,000,000 or
(2) eighty percent (80%) of the aggregate amount of all
of its accounts receivable aged 90-days or less which contained
selling terms and conditions acceptable to the SSB. KSI’s
obligations under the 2015 Loan Agreement were guaranteed by James
McCarthy, Chairman of the Board of KSI, and his wife. KSI did not
draw any funds from this credit facility in 2015. Pursuant to First
Amendment to Business Loan Agreement (Asset Based), dated
May 9, 2016, SSB had waived the restrictions in the 2015 Loan
Agreement on KSI’s ability to make dividends to the Company.
There was no outstanding balance on the 2015 Loan Agreement at
December 31, 2016.
20
On August 11,
2016, Novume entered into Loan and Security Agreement (the
“2016 Line of Credit”) with SSB that replaced the 2015
Loan Agreement. The 2016 Line of Credit is comprised of: 1) an
asset-based revolving line of credit up to $1,000,000 for
short-term working capital needs and general corporate purposes
which was due to mature on July 31, 2017, bears interest at
the Wall Street Journal Prime Rate, floating, plus 0.50% and is
secured by a first lien on all of Novume’s business assets;
and 2) an optional term loan of $100,000 which must be drawn by
July 31, 2017, which is for permanent working capital, bears
interest at the Wall Street Journal Prime Rate, floating, plus
0.75%, requires monthly payments of principal plus interest to
fully amortize the loan over four (4) years, is secured by a
first lien on all of Novume’s business assets,
cross-collateralized and cross-defaulted with the revolving line of
credit, and matures on February 15, 2019. The 2016 Line of
Credit did not require any personal guarantees.
The borrowing base
for the 2016 Line of Credit was up to the lesser of
(1) $1,000,000 or (2) eighty percent (80%) of the
aggregate amount of all of Novume’s eligible accounts
receivable as defined by SSB. The borrowing base for the $100,000
term loan was fully reserved under the borrowing base for the
revolving line of credit. The 2016 Line of Credit had periodic
reporting requirements, balance sheet and profitability covenants,
as well as affirmative and negative operational and ownership
covenants. Novume was in compliance with all 2016 Line of Credit
covenents at December 31, 2016. In August 2017, the Company
terminated the 2016 Line of Credit with SSB. As such, there was no
outstanding balance on the 2016 Line of Credit at September 30,
2017.
As of September 30,
2017 and December 31, 2016, Novume had no balances due,
respectively, for the 2016 Line of Credit and the 2015 Loan
Agreement and there are no amounts outstanding as of the date of
this Form 10-Q. When Novume replaced the 2015 Loan Agreement with
the 2016 Line of Credit on August 11, 2016, neither line of
credit had a balance due. The Company terminated its line of credit
in August 2017.
Long-Term Debt
On March 16,
2016, Novume entered into a Subordinated Note and Warrant Purchase
Agreement (the “Avon Road Note Purchase Agreement”)
pursuant to which Novume agreed to issue up to $1,000,000 in
subordinated debt and warrants to purchase up to 242,493 shares of
Novume’s common stock (“Avon Road Subordinated Note
Warrants”). The exercise price for the Avon Road Subordinated
Note Warrants is equal to $1.03 per share of common stock.
Subordinated notes with a face amount of $500,000 and Avon Road
Subordinated Note Warrants to purchase 121,247 shares of
Novume’s common stock have been issued pursuant to the Avon
Road Note Purchase Agreement to Avon Road Partners, L.P.
(“Avon Road”), an affiliate of Robert Berman,
Novume’s CEO and a member of Novume’s Board of
Directors. The Avon Road Subordinated Note Warrants have an
expiration date of March 16, 2019 and qualified for equity
accounting as the warrant did not fall within the scope of ASC
Topic 480, Distinguishing
Liabilities from Equity. The fair value was determined to be
$58,520 and is recorded as a debt discount and additional paid-in
capital in the accompanying consolidated balance sheet as of
December 31, 2016. The debt discount is being amortized as
interest expense on a straight-line basis, which approximates the
effective interest method, through the maturity date of the note
payable.
The note is
subordinated to the 2016 Line of Credit with SSB and any successor
financing facility. Simple interest accrues on the unpaid principal
of the note at a rate equal to the lower of (a) 9% per
annum, or (b) the highest rate permitted by applicable law.
Interest is payable monthly, and the note matures on March 16,
2019. The Company terminated the 2016 Loan Agreement in August
2017.
Pursuant to the
terms of the acquisition of the membership interests in the
Firestorm Entities, the Company issued $1,000,000 in the aggregate
in the form of four unsecured, subordinated promissory notes,
issued by Novume and payable over five years after the Firestorm
Closing Date, to all the Members of the Firestorm Entities. The
principal amount of the note payable to Lancer is $500,000. The
principal amount of the note payable to Mr. Rhulen is
$166,666.66. The principal amount of the notes payable to each of
Mr. Satterfield and Ms. Loughlin is $166,666.67. The
Firestorm Principal Notes are payable at an interest rate of 2% and
the Lancer Note is payable at an interest rate of 7%. The balance
of these notes payable as of September 30, 2017 was $919,753 to
reflect the amortized fair value of the notes issued due to the
difference in interest rates.
NOTE
7 — INCOME TAXES
The Company
accounts for income taxes in accordance with ASC Topic 740.
Deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets
and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to
reverse. A valuation allowance is established when necessary to
reduce deferred tax assets to the amount expected to be realized.
In determining the need for a valuation allowance, management
reviews both positive and negative evidence pursuant to the
requirements of ASC Topic 740, including current and historical
results of operations, future income projections and the overall
prospects of the Company’s business.
21
The benefit from
income taxes for the three and nine months ended September 30, 2017
consists of the following:
|
Three Months ended September 30, 2017
|
Nine Months ended September 30, 2017
|
Deferred:
|
|
|
Federal
|
$(168,767)
|
$(812,223)
|
State
|
(56,375)
|
(152,154)
|
Benefit
from income taxes
|
$(225,142)
|
$(964,377)
|
|
|
|
The components of
deferred income tax assets and liabilities are as follows at
September 30, 2017:
Deferred
tax assets:
|
|
Amortizable
start-up costs
|
$110,729
|
Amortizable
intangibles
|
81,034
|
Accrued
bonuses
|
53,998
|
Net
operating loss carryforward
|
1,166,042
|
|
1,411,803
|
Deferred
tax liabilities:
|
|
Permanent differences
|
(137,205)
|
Fixed
assets
|
(90,239)
|
Total
deferred tax assets, net
|
$1,184,359
|
The difference
between the income tax provision computed at the U.S. Federal
statutory rate and the actual tax benefit is accounted for as
follows for the three and nine months ended September 30,
2017:
|
Three Months ended September 30, 2017
|
Nine Months ended September 30, 2017
|
U.S.
statutory federal rate
|
34.00%
|
34.00%
|
(Decrease)
increase in taxes resulting from:
|
|
|
State
income tax rate, net of U.S. Federal benefit
|
3.97%
|
3.96%
|
Net
effect of permanent and temporary reconciling items
|
-4.44%
|
-4.44%
|
Effective
tax rate
|
33.53%
|
33.52%
|
The Company files income tax returns in the
United States and in various state and foreign jurisdictions. No
U.S. Federal, state or foreign income tax audits were in process as
of September 30, 2017.
As more fully
disclosed in Note 2, through March 15, 2016, KSI elected to be
taxed under the provisions of Subchapter S of the Internal Revenue
Code. Under those provisions, KSI did not pay federal corporate
income taxes, and in most instances state income tax, on its
taxable income. Thus, for the year ended December 31, 2016,
KSI did not have any provision for income taxes.
There was no
valuation allowance for deferred tax assets at September 30, 2017,
as management believes that the deferred tax assets will be
realized through future operations. At September 30, 2017, Novume
had net operating loss carryforwards of approximately
$2,658,947.
For the three and
nine months ended September 30, 2017 and 2016, Novume did not
record any interest or penalties related to unrecognized tax
benefits. It is the Company’s policy to record interest and
penalties related to unrecognized tax benefits as part of income
tax expense.
22
NOTE
8 — STOCKHOLDERS’ EQUITY
Common Stock
As of September 30,
2017 and December 31, 2016, the issued and outstanding common
shares of Novume were 13,933,784 and 5,000,000 (9.699,722 shares
post Brekford Merger), respectively.
As described in
more detail in Note 1, on March 15, 2016, the stockholders of
KSI formed KeyStone as a holding company with the same
proportionate ownership percentage as KSI. Pursuant to the Keystone
Merger Agreement, the stockholders exchanged 100% of the
outstanding common stock of KSI for 5,000,000 (9.699,720 post
merger split) shares newly issued KeyStone common stock,
representing 100% of the outstanding common stock. The formation of
KeyStone provided for 25,000,000 authorized shares of KeyStone
$.0001 par value common stock. As of December 31, 2016,
5,000,000 (9.699,720 post merger split) shares of KeyStone common
stock were issued and outstanding.
In January 2017,
the Company issued 488,094 (946,875 post Brekford Merger) shares of
Novume common stock as consideration as part of its acquisition of
Firestorm.
Upon completion of the
KeyStone and Brekford merger on August 28, 2017, consideration was
issued in accordance with the terms of the Brekford
Merger Agreement. Immediately upon
completion of the Brekford Merger, the pre-merger stockholders of
KSI owned approximately 80% of the issued and outstanding capital
stock of the Company on a fully-diluted basis, and the pre-merger
stockholders of Brekford owned approximately 20% of the issued and
outstanding capital stock of Novume on a fully-diluted
basis.
Series A Cumulative Convertible Redeemable Preferred
Stock
The Company is
authorized to issue 7,500,000 shares of Preferred Stock, of which
500,000 shares were initially designated as $.0001 par value
KeyStone Series A Cumulative Convertible Redeemable Preferred Stock
(the “Series A Preferred Stock”). The number of
designated shares of the Series A Preferred Stock was increased to
505,000 shares on March 20, 2017.
In November 2016, Novume commenced its Reg 1A
Offering (the “Reg 1A Offering”) of up to 3,000,000
Units. Each Unit, after the Brekford Merger, consisted of one share
of Series A Preferred Stock which is convertible to 1.94 shares of
Novume Common Stock and one Unit Warrant to purchase 0.48 shares of
the Novume Common Stock at an exercise price of $1.03 per share.
The Series A Preferred Stock holders are entitled to quarterly
dividends of 7.0% per annum per share.
The Series A
Preferred Stock holder has a put right to convert each share into
common stock at an initial conversion price and a specified price
which increases annually based on the passage of time beginning in
November 2019. The Series A Preferred Stock holder also has put
right after 60 months from the issuance date to redeem any or all
of the Series A Preferred Stock at a redemption price of
$15.00 per share plus any accrued but unpaid
dividends. Novume has a call right after 36 months from the
issuance date to redeem all of the Series A Preferred Stock at a
redemption price which increases annually based on the passage of
time beginning in November 2019. The Series A Preferred Stock
contains an automatic conversion feature based on a qualified
initial public offering in excess of $30,000,000 or a written
agreement by at least two-thirds of the Series A Preferred Stock
holders at an initial conversion price and a specified price which
increases annually based on the passage of time beginning in
November 2016. Based on the terms of the Series A Preferred Stock,
the Company concluded that the Series A Preferred Stock should be
classified as temporary equity in the accompanying consolidated
balance sheet as of September 30, 2017.
The Reg 1A Offering
Units were sold at $10 per Unit in minimum investment amounts of
$5,000. There were three closings related to the sales of the
Units. The gross proceeds, which the Company deemed to be fair
value, from the first closing on December 23, 2016 totaled
$3,015,700 with the issuance of 301,570 shares of Series A
Preferred Stock and 301,570 Unit Warrants. On January 23,
2017, the Company completed its second closing of the Reg 1A
Offering for the issuance of 119,757 shares of Series A Preferred
Stock and 119,757 Unit Warrants with the Company receiving
aggregate gross proceeds of $1,197,570.
On March 21,
2017, the Company completed its third and final closing of the Reg
1A Offering with the issuance of 81,000 shares of Series A
Preferred Stock and 81,000 Unit Warrants with the Company receiving
aggregate gross proceeds of $810,000.
The aggregate total
sold in the Reg 1A Offering through and including the third and
final closing was 502,327 Units, or 502,327 shares of Series A
Preferred Stock and 502,327 Unit Warrants, for total gross proceeds
to the Company of $5,023,270. The Reg 1A Offering is now
closed.
Novume
adjusts the value of the Series A Preferred Stock to
redemption value at the end of each reporting period.
The adjustment to the redemption value is recorded
through additional paid in captial.
As of September 30,
2017, 502,327 shares of Series A Preferred Stock were issued and
outstanding.
23
The Novume Series A
Preferred Stock is entitled to quarterly cash dividends of $0.175
(7% per annum) per share. On April 7, 2017, the Company paid
cash dividends of $75,694 to shareholders of record as of
March 30, 2017. On July 8, 2017, the Company paid cash
dividends of $87,907 to shareholders of record as of June 30,
2017. On September 30, 2017, the Company declared and accrued
dividends of $87,907 payable to shareholders of record as of
September 30, 2017.
The expiration date
of the Unit Warrants is seven years from the date of issuance. The
Unit Warrants are required to be measured at fair value at the time
of issuance and classified as equity. The Company determined that
under the Black-Scholes option pricing model, the fair value at the
date of issuance was $169,125. As of September 30, 2017, 502,327
Unit Warrants are outstanding.
NOTE
9 – WARRANT DERIVATIVE LIABILITY
On March 17,
2015, Brekford issued a Warrant (“Brekford Warrant”),
which permits the holder to purchase 56,000 shares of Common Stock
with an exercise price of $7.50 per share and a life of five
years.
The Brekford
Warrant exercise price is subject to anti-dilution adjustments that
allow for its reduction in the event the Company subsequently
issues equity securities, including shares of Common Stock or any
security convertible or exchangeable for shares of Common Stock,
for no consideration or for consideration less than $7.50 a share.
The Company accounted for the conversion option of the Brekford
Warrant in accordance with ASC Topic 815. Accordingly, the
conversion option is not considered to be solely indexed to the
Company’s own stock and, as such, is recorded as a liability.
The derivative liability associated with the Brekford Warrant has
been measured at fair value at September 30, 2017 and
December 31, 2016 using the Black Scholes option-pricing
model. The assumptions used in the Black-Scholes model are as
follows: (i) dividend yield of 0%; (ii) expected
volatility of 80.5-105.1%; (iii) weighted average
risk-free interest rate of 1.14-1.93%; (iv) expected life
of five years; and (v) estimated fair value of the Common
Stock of $0.10-$0.26 per share.
At September 30,
2017 and December 31, 2016, the outstanding fair value of the
derivative liability was $18,228 and $24,360,
respectively.
NOTE
10 – COMMON STOCK OPTION AGREEMENT
On March 16,
2016, two stockholders of the Company entered into an option
agreement with Avon Road (collectively, the “Avon Road
Parties”). Under the terms of this agreement Avon Road paid
the stockholders $10,000 each (a total of $20,000) for the right to
purchase, on a simultaneous and pro-rata basis, up to 4,318,856
shares of Novume’s common stock owned by those two
shareholders at $0.52 per share, which was determined to be the
fair value. The option agreement had a two-year term which expires
on March 16, 2018. On September 7, 2017, the Avon Road Parties
entered into an amended and restated option agreement which
extended the right to exercise the option up to and including March
21, 2019.
NOTE
11 – COMMITMENTS
Operating Leases
KSI leases office
space in Chantilly, Virginia under the terms of a ten-year lease
expiring October 31, 2019. The lease contains one five-year
renewal option. The lease terms include an annual increase in base
rent and expenses of 2.75%. KSI also leases office space in New
Orleans, Louisiana under the terms of a three-year lease expiring
May 31, 2018.
Firestorm leases
office space in Roswell, Georgia under the terms of a lease
expiring on October 31, 2017.
Brekford leases
office space from Global Public Safety on a month-to-month basis.
Brekford also leases space under an operating lease expiring on
December 31, 2017.
Rent expense for
the three months ended September 30, 2017 and 2016 was $193,985 and
$178,946 , respectively, and for the nine months ended September
30, 2017 and 2016 was $575,181 and $533,168, respectively and is
included in selling, general and administrative
expenses.
24
As of September 30,
2017, the future obligations over the primary terms of
Novume’s long-term leases expiring through 2020 are as
follows:
2017
|
$188,854
|
2018
|
697,153
|
2019
|
624,024
|
2020
|
64,475
|
Total
|
$1,574,506
|
The Company is the
lessor in an agreement to sublease office space in Chantilly,
Virginia with an initial term of two years with eight one-year
options to renew the sublease through October 31, 2019. The
lease provides for an annual increase in base rent and expenses of
2.90%. The initial term ended October 31, 2011 and the
subtenant exercised the renewal options through 2015. On
April 7, 2015, the lease was amended to sublease more space to
the subtenant and change the rental calculation.
Rent income for the
three months ended September 30, 2017 and 2016 was $46,957 and
$45,634, respectively, and for the nine months ended September 30,
2017 and 2016 was $140,871 and $136,901, respectively, and is
included in other income in the accompanying consolidated
statements of operations.
NOTE
12 – EQUITY INCENTIVE PLAN
In August 2017, the
Company approved and adopted the 2017 Equity Award Plan (the
“2017 Plan”) which replaced the 2016 Equity Award Plan
(the “2016 Plan”). The 2017 Plan permits the granting
of stock options, stock appreciation rights, restricted and
unrestricted stock awards, phantom stock, performance awards and
other stock-based awards for the purpose of attracting and
retaining quality employees, directors and consultants. Maximum
awards available under the 2017 Plan were initially set at
3,000,000 shares. To date, only stock options have been issued
under the 2016 Plan and the 2017 Plan.
Stock Options
Stock options
granted under the 2017 Plan may be either incentive stock options
(“ISOs”) or non-qualified stock options
(“NSOs”). ISOs may be granted to employees and NSOs may
be granted to employees, directors, or consultants. Stock options
are granted at exercise prices as determined by the Board of
Directors. The vesting period is generally three to four years with
a contractual term of 10 years.
The 2017 Plan is
administered by the Administrator, which is currently the Board of
Directors of the Company. The Administrator has the exclusive
authority, subject to the terms and conditions set forth in the
2017 Award Plan, to determine all matters relating to awards under
the 2017 Plan, including the selection of individuals to be granted
an award, the type of award, the number of shares of Novume common
stock subject to an award, and all terms, conditions, restrictions
and limitations, if any, including, without limitation, vesting,
acceleration of vesting, exercisability, termination, substitution,
cancellation, forfeiture, or repurchase of an award and the terms
of any instrument that evidences the award.
Novume has also
designed the 2017 Plan to include a number of provisions that
Novume’s management believes promote best practices by
reinforcing the alignment of equity compensation arrangements for
nonemployee directors, officers, employees, consultants and
stockholders’ interests. These provisions include, but are
not limited to, the following:
No Discounted Awards. Awards that have
an exercise price cannot be granted with an exercise price less
than the fair market value on the grant date.
No Repricing Without Stockholder
Approval. Novume cannot, without stockholder approval,
reduce the exercise price of an award (except for adjustments in
connection with a Novume recapitalization), and at any time when
the exercise price of an award is above the market value of Novume
common stock, Novume cannot, without stockholder approval, cancel
and re-grant or exchange such award for cash, other awards or a new
award at a lower (or no) exercise price.
No Evergreen Provision. There is no
evergreen feature under which the shares of common stock authorized
for issuance under the 2017 Plan can be automatically
replenished.
No Automatic Grants. The 2017 Plan does
not provide for “reload” or other automatic grants to
recipients.
No Transferability. Awards generally
may not be transferred, except by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order,
unless approved by the Administrator.
25
No Tax Gross-Ups. The 2017 Plan does
not provide for any tax gross-ups.
No Liberal Change-in-Control
Definition. The change-in-control definition contained in
the 2017 Plan is not a “liberal” definition that would
be activated on mere stockholder approval of a
transaction.
“Double-trigger” Change in Control
Vesting. If awards granted under the 2017 Plan are assumed
by a successor in connection with a change in control of Novume,
such awards will not automatically vest and pay out solely as a
result of the change in control, unless otherwise expressly set
forth in an award agreement.
No Dividends on Unearned Performance
Awards. The 2017 Plan prohibits the current payment of
dividends or dividend equivalent rights on unearned
performance-based awards.
Limitation on Amendments. No
amendments to the 2017 Plan may be made without stockholder
approval if any such amendment would materially increase the number
of shares reserved or the per-participant award limitations under
the 2017 Plan, diminish the prohibitions on repricing stock options
or stock appreciation rights, or otherwise constitute a material
change requiring stockholder approval under applicable laws,
policies or regulations or the applicable listing or other
requirements of the principal exchange on which Novume’s
shares are traded.
Clawbacks. Awards based on the
satisfaction of financial metrics that are subsequently reversed,
due to a financial statement restatement or reclassification, are
subject to forfeiture.
When making an
award under the 2017 Plan, the Administrator may designate the
award as “qualified performance-based compensation,”
which means that performance criteria must be satisfied in order
for an employee to be paid the award. Qualified performance-based
compensation may be made in the form of restricted common stock,
restricted stock units, common stock options, performance shares,
performance units or other stock equivalents. The 2017 Plan
includes the performance criteria the Administrator has adopted,
subject to stockholder approval, for a “qualified
performance-based compensation” award.
A summary of stock
option activity under the Company’s 2016 Plan and 2017 Plan
for the nine months ended September 30, 2017 is as
follows:
|
|
|
Weighted
|
|
|
Number
|
Weighted
|
Average
|
|
|
of
Share
|
Average
|
Remaining
|
Aggregate
|
|
Subject
to
|
Exercise
|
Contractual
|
Intrinsic
|
|
Option
|
Price
|
Term
|
Value
|
Balance
at December 31, 2016
|
58,499
|
$1.68
|
9.29
|
|
Granted
|
1,161,313
|
1.56
|
9.30
|
|
Exercised
|
-
|
-
|
-
|
|
Canceled
|
-
|
-
|
-
|
|
Balance
at September 30, 2017
|
1,219,812
|
$1.56
|
9.26
|
$430,190
|
|
|
|
|
|
Exercisable
at September 30, 2017
|
262,645
|
$1.57
|
8.72
|
$102,397
|
|
|
|
|
|
Vested
and expected to vest at September 30, 2017
|
1,131,991
|
$1.56
|
9.26
|
$399,140
|
Stock compensation
expense for the three months ended September 30, 2017 and 2016 was
$107,321 and $0, respectively, and for the nine months ended
September 30, 2017 and 2016 was $227,470 and zero, respectively,
and is included in selling, general and administrative expenses in
the accompanying consolidated statements of
operations.
The intrinsic value
of the stock options granted during the nine months ended September
30, 2017 was $400,543. No stock options were granted or outstanding
prior to 2016. The total fair value of shares that became vested
after grant during the nine months ended September 30, 2017 was
$72,750.
As of September 30,
2017, there was $527,347 of unrecognized stock compensation expense
related to unvested stock options granted under the 2016 Plan that
will be recognized over a weighted average period of 2.58
years.
26
NOTE
13 – EMPLOYEE BENEFIT PLAN
KSI has a defined
contribution savings plan under Section 401(k) of the Internal
Revenue Code (the “Code”) (the “401(k)
Plan”) which was amended on January 1, 2013, as required by
the Code. Pursuant to the amended 401(k) Plan, KSI will make
nondiscretionary “safe harbor” matching contributions
of 100% of the participant’s salary deferrals up to 3%, and
50% of the next 2%, of a participant’s compensation for all
participants. The amount of contributions recorded by Novume during
the three months ended September 30, 2017 and 2016 were $25,122 and
$31,955, respectively, and during the nine months ended September
30, 2017 and 2016 were $60,875 and $69,387,
respectively.
NOTE
14 – INVENTORY
As
of September 30, 2017 and December 31, 2016, inventory consisted
entirely of raw materials of $169,232 and $0,
respectively.
NOTE
15 – EARNINGS (LOSS) PER SHARE
The following table
provides information relating to the calculation of earnings (loss)
per common share:
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||
|
2017
(Restated)
|
2016
|
2017
(Restated)
|
2016
|
Basic and diluted
(loss) earnings per share
|
|
|
|
|
Net (loss) earnings
from continuing operations
|
$(791,360)
|
$(55,542)
|
$(1,913,460)
|
$420,208
|
Less:
preferred stock accretion
|
(144,916)
|
-
|
(400,616)
|
-
|
Less: preferred
stock dividends
|
(87,907)
|
-
|
(251,508)
|
-
|
Net income (loss)
attributable to shareholders
|
(1,024,183)
|
(55,542)
|
(2,565,584)
|
420,208
|
Weighted average
common shares outstanding - basic
|
11,756,560
|
9,713,956
|
10,920,866
|
7,016,373
|
Basic (loss)
earnings per share
|
$ (0.09)
|
$(0.01)
|
$ (0.23)
|
$0.06
|
|
|
|
|
|
Weighted average
common shares outstanding - diluted
|
11,756,560
|
9,713,956
|
10,920,866
|
7,123,160
|
Diluted (loss)
earnings per share
|
$ (0.09)
|
$(0.01)
|
$ (0.23)
|
$0.06
|
|
|
|
|
|
Common stock
equivalents excluded due to anti-dilutive effect
|
2,105,295
|
121,247
|
1,960,282
|
-
|
For the three
months ended September 30, 2017, the following potentially dilutive
securities were excluded from diluted loss per share as the Company
had a net loss: 1,052,122 common stock equivalents related to the
outstanding warrants, 974,487 common stock equivalents related to
the Series A Preferred Stock and 78,686 related to outstanding
options. In addition, 10,000 options were excluded from the diluted
loss per share calculations as the exercise price of these shares
exceeded the per share value of the common stock. For the three
months ended September 30, 2016, the following potentially dilutive
securities were excluded from diluted loss per share as the Company
had a net loss: 121,247 common stock equivalents related to the
outstanding warrants. A total of 4,167 options were excluded from
the diluted loss per share calculations during the three months
ended September 30, 2016 as the exercise price of these shares
exceeded the per share value of the common stock.
For the nine months
ended September 30, 2017, the following potentially dilutive
securities were excluded from diluted loss per share as the Company
had a net loss: 967,845 common stock equivalents related to the
outstanding warrants, 917,931 common stock equivalents related to
the Series A Preferred Stock and 74,506 related to outstanding
options. In addition, 15,707 options were excluded from the diluted
loss per share calculations as the exercise price of these shares
exceeded the per share value of the common stock. A total of 11,923
options were excluded from the diluted loss per share calculations
during the nine months ended September 30, 2016 as the exercise
price of these shares exceeded the per share value of the common
stock.
(Loss) Earnings Per Share under Two –
Class Method
The Series A
Preferred Stock has the non-forfeitable right to participate on an
as converted basis at the conversion rate then in effect in any
common stock dividends declared and, as such, is considered a
participating security. The Series A Preferred Stock is
included in the computation of basic and diluted loss per share
pursuant to the two-class method. Holders of the Series A Preferred
Stock do not participate in undistributed net losses because they
are not contractually obligated to do so.
The computation of
diluted (loss) earnings per share attributable to common
stockholders reflects the potential dilution that could occur if
securities or other contracts to issue shares of common stock that
are dilutive were exercised or converted into shares of common
stock (or resulted in the issuance of shares of common stock) and
would then share in our earnings. During the periods in which we
record a loss attributable to common stockholders, securities would
not be dilutive to net loss per share and conversion into shares of
common stock is assumed not to occur.
27
The following table
provides a reconciliation of net (loss) to preferred shareholders
and common stockholders for purposes of computing net (loss) per
share for the three and nine months ended September 30, 2017. There
were no outstanding participating securities during the three and
nine months ended September 30, 2016.
|
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
||
|
2017
(Restated)
|
2016
|
2017
(Restated)
|
2016
|
Numerator:
|
|
|
|
|
Net (loss) earnings
from continuing operations
|
$(791,360)
|
$(55,542)
|
$(1,913,460)
|
$420,208
|
Less
: preferred stock accretion
|
(144,916)
|
-
|
(400,616)
|
-
|
Less: preferred
stock dividends
|
(87,907)
|
-
|
(251,508)
|
-
|
Net income (loss)
attributable to shareholders
|
$ (1,024,183)
|
$(55,542)
|
$ (2,565,584)
|
$420,208
|
|
|
|
|
|
Denominator
(basic):
|
|
|
|
|
Weighted average
common shares outstanding
|
11,756,560
|
9,713,956
|
10,920,866
|
7,016,373
|
Participating
securities - Series A preferred stock
|
974,487
|
-
|
917,931
|
-
|
Weighted average
shares outstanding
|
12,731,047
|
9,713,956
|
11,838,797
|
7,016,373
|
|
|
|
|
|
Loss per common
share - basic under two-class method
|
$ (0.08)
|
$(0.01)
|
$ (0.22)
|
$0.06
|
|
|
|
|
|
Denominator
(diluted):
|
|
|
|
|
Weighted average
common shares outstanding
|
11,756,560
|
9,713,956
|
10,920,866
|
7,123,160
|
Participating
securities - Series A preferred stock (1)
|
974,487
|
-
|
917,931
|
-
|
Weighted average
shares outstanding
|
12,731,047
|
9,713,956
|
11,838,797
|
7,123,160
|
|
|
|
|
|
Loss per common
share - basic under two-class method
|
$ (0.08)
|
$(0.01)
|
$ (0.22)
|
$0.06
|
(1)
As these shares are
participating securities that participate in earnings, but do not
participate in losses based on their contractual rights and
obligations, this calculation demonstrates that there is no
allocation of the loss to these securities.
NOTE
16 – SUBSEQUENT EVENTS
Acquisition of Global
Technical Services, Inc and Global Contract Professionals,
Inc.
On October 1, 2017
(the “Global Closing Date”), the Company completed its
acquisition of Global Technical Services, Inc. (“GTS”)
and Global Contract Professionals, Inc. (“GCP) (collectively,
the “Global Entities”) (the “Global
Merger”). Consideration (“Global Merger
Consideration”) paid as part of the Global Merger included:
(a) $750,000 in cash, (b) 375,000 shares of Novume common stock and
(c) 240,861 shares of Novume Series B Cumulative Convertible
Preferred Stock (the “Novume Series B Preferred
Stock”). In addition to the Global Merger Consideration,
Novume paid $365,037 to satisfy in full all of the outstanding debt
of GTS and GCP at closing, except for certain intercompany debt and
ordinary course debt, and amounts due under (a) the Secured Account
Purchase Agreement dated August 22, 2012 by and between GTS
and Wells Fargo Bank, National
Association (the “GTS Wells Fargo Credit
Facility”) and (b) the
Secured Account Purchase Agreement dated August 22, 2012 by
and between GCP and Wells Fargo Bank, National Association (the
“GCP Wells Fargo Credit
Facility” and together
with the GTS Wells Fargo Credit Facility, the
“Wells Fargo Credit
Facilities”), which will
remain in effect following the consummation of the Global Merger.
In connection with the Wells Fargo Credit Facilities, Novume has
delivered to Wells Fargo Bank, National Association, general
continuing guaranties dated September 29, 2017 and effective upon
the Global Closing Date of the Global Merger (the
“Wells Fargo Guaranty
Agreements”),
guaranteeing the obligations of GTS and GCP (as defined in the
Wells Fargo Guaranty Agreements) under the Wells Fargo Credit
Facilities, and paid $175,000 in the aggregate to reduce the
current borrowed amounts under the Wells Fargo Credit Facilities as
of the Global Closing Date.
Issuance of Series B Cumulative Convertible Preferred
Stock
As part of the
Global Merger, the Company created 240,861 shares of $.0001 par
value Novume Series B Cumulative Convertible Preferred Stock (the
“Series B Preferred Stock”). All Series B Preferred
Stock was issued at a price of $10 per share as part of the
acquisition of the Global Merger. The Series B Preferred Stock is
entitled to quarterly cash dividends of 1.121% (4.484% per annum)
per share. The Series B Preferred Stock has a conversion price of
$5 per share. Each Series B Preferred Stock has an automatic
conversion feature based on the share price of Novume.
28
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Certain statements in Management’s Discussion and Analysis or
MD&A, other than purely historical information, including
estimates, projections, statements relating to our business plans,
objectives and expected operating results, and the assumptions upon
which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities
Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These forward-looking statements
generally are identified by the words “believe,”
“project,” “expect,”
“anticipate,” “estimate,”
“intend,” “strategy,” “plan,”
“may,” “should,” “will,”
“would,” “will be,” “will
continue,” “will likely result,” and similar
expressions. Historical results may not indicate future
performance. Our forward-looking statements reflect our current
views about future events, are based on assumptions and are subject
to known and unknown risks and uncertainties that could cause
actual results to differ materially from those contemplated by
these statements. Factors that may cause differences between actual
results and those contemplated by forward-looking statements
include, but are not limited to, those discussed in “Risk
Factors” in in the S-4 registration statement file with the
SEC on August 2, 2017. We undertake no obligation to publicly
update or revise any forward-looking statements, including any
changes that might result from any facts, events or circumstances
after the date hereof that may bear upon forward-looking
statements. Furthermore, we cannot guarantee future results,
events, levels of activity, performance or
achievements.
This MD&A is intended to assist in understanding and assessing
the trends and significant changes in our results of operations and
financial condition. As used in this MD&A, the words,
“we,” “our” and “us” refer to
Novume Inc. and its consolidated subsidiaries. This MD&A should
be read in conjunction with our condensed consolidated financial
statements and related notes included in this report, as well as
the consolidated financial statements and MD&A of our Annual
Report. The following overview provides a summary of the sections
included in our MD&A:
●
Executive
Summary — a general description of our business and
key highlights of the nine months ended September 30,
2017.
●
Results of Operations — an
analysis of our results of operations in our condensed consolidated
financial statements.
●
Liquidity
and Capital Resources — an analysis of cash flows,
sources and uses of cash, commitments and contingencies,
seasonality in the results of our operations and quantitative and
qualitative disclosures about market risk.
Executive
Summary
Our
Company
Novume Solutions,
Inc. (the “Company” or “Novume”) was formed
in February 2017 and began operations upon the merger of KeyStone
Solutions, Inc. (“KeyStone”) and Brekford Traffic
Safety, Inc. (“Brekford”) in August 2017. For narrative
purposes, Company and Novume references include the Brekford,
KeyStone and Firestorm entities. KeyStone was formed in March 2016 as
a holding company for its wholly-owned subsidiary AOC Key
Solutions, Inc. (“KSI”). KSI provides consulting and
technical support services to assist clients seeking U.S. Federal
government contracts in the technology, telecommunications,
defense, and aerospace industries. On January 25, 2017, Novume
(KeyStone) acquired Firestorm, a nationally recognized leader in
crisis management, crisis communications, emergency response, and
business continuity, including workplace violence prevention,
cyber-breach response, communicable illness/pandemic planning,
predictive intelligence, and other emergency, crisis and disaster
preparedness initiatives. Firestorm is headquartered in Roswell,
Georgia. Brekford, headquartered in
Hanover, Maryland, is a leading public safety technology service
provider of fully integrated automated traffic safety enforcement
(“ATSE”) solutions, including speed, red light, and
distracted driving cameras.
Novume is
headquartered in Chantilly, Virginia and as of December 31, 2016
had a satellite office in New Orleans, Louisiana. As of
December 31, 2016, Novume had 29 employees and access to
approximately 350 consultants. Through the acquisition of
Firestorm, the Company added a satellite office in Roswell,
Georgia. Through the merger with Brekford, Novume added an office
in Hanover, Maryland. As of September 30, 2017, Novume had 77
employees and access to approximately 400 consultants.
As an effort to
create specific awareness about Novume in the GovCon industry,
Novume through its recently-formed subsididary Novume Media
developed a television show called The Bridge -- a weekly 30-minute
program featuring panel discussions and interviews with leaders
from the government, business, academia and associations. The show
premiered on April 2, 2017 in the Washington, DC
market.
In selective
situations, Novume will also seek to serve as a partner or
incubator for emerging businesses, like Brekford’s automated
traffic safety enforcement business, where an understanding of
government contracting procedures and contacts with other seasoned
providers of government services or products can be critical to
success.
General
The information
provided in this discussion and analysis of Novume’s
financial condition and results of operations covers the three and
nine months ended September 30, 2017 and 2016. During fiscal year
2017, the Company completed the acquisition of Firestorm (described
below) and the Brekford Merger (described below). As of the date of
hereof, Novume has not completed the detailed valuation study
necessary to arrive at the required final estimates of the fair
value of the Brekford assets to be acquired and the liabilities to
be assumed and the related allocations of purchase price. It has
not identified all adjustments necessary to conform Novume’s
and Brekford’s accounting policies to Novume’s
accounting policies. As of the date of
hereof, Novume has completed the detailed valuation study necessary
to arrive at the required final estimates of the fair value of the
Firestorm assets acquired and
the liabilities assumed and the related allocations of purchase
price. Any increases or decreases in the fair value of assets
acquired and liabilities assumed upon completion of the final
valuations will result in adjustments to the Novume’s
consolidated balance sheet and/or statements of operations, which
will include operations of Novume, KSI, Firestorm, Brekford and
Novume Media.
29
In connection with
the audit of its consolidated financial statements for the years
ended December 31, 2016 and 2015, Novume’s management
concluded that it had material weaknesses in its internal controls
because Novume does not currently have adequately designed internal
controls to ensure the timely preparation and review of the
accounting for certain complex, non-routine transactions by those
with appropriate technical expertise, which was necessary to
provide reasonable assurance that the Company’s consolidated
financial statements and related disclosures would be prepared in
accordance with generally accepted accounting principles in the
United States of America (“GAAP”). In addition, Novume
did not have adequately designed and documented financial close and
management review controls to properly detect and prevent certain
accounting errors and omitted disclosures in the footnotes to the
consolidated financial statements. As defined in the Standards of
the Public Company Accounting Oversight Board, a material weakness
is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s
annual or interim consolidated financial statements will not be
prevented or detected on a timely basis. Novume’s management
is developing a plan to remediate the material weaknesses although
there can be no assurance that such plans, when enacted, will be
successful.
While Novume has no
direct current business operations, its significant assets as of
September 30, 2017 are its cash and equity interest in its
principal operating subsidiaries, KSI, Brekford and Firestorm.
Thus, the financial information in this section for periods prior
to March 15, 2016 is for KSI prior to the recapitalization
into KeyStone. The financial information in this section for all
periods subsequent to March 15, 2016 and prior to the January
25, 2017 acquisition of Firestorm is prepared on a consolidated
basis for KeyStone and KSI. The financial information for periods
subsequent to January 25, 2017 is prepared on a consolidated basis
for KeyStone, KSI and Firestorm. For periods subsequent to the
Brekford Merger on August 28, 2017, the financial information is
prepared on a consolidated basis for Novume, KSI, Brekford and
Firestorm.
Historically, the
primary focus of our businesses has been on the federal government
contracting and aerospace industries. We provide consulting,
technical support, staffing and systems that help our clients
exploit opportunities and meet challenges more efficiently and
effectively than they can by relying on in-house resources alone.
Our clients are typically well-established, financially-stable
businesses. According to USASpending.gov, between fiscal years 2013
and 2017, the federal government in the United States spent an
average of over $450 billion annually for goods and
services, creating one of the largest and most stable markets in
the world, and there are thousands of government contractors
providing these goods and services. These contractors range from
small privately-owned lifestyle companies to the Fortune 100.
Through the years, Novume’s subsidiaries have served
thousands of these entities, including 87 of the Top 100 federal
contractors.
A unique
characteristic of the industry is that many of these companies are
concentrated in a geographic territory that stretches from Southern
Maryland to Northern Virginia, wrapping the nation’s Capital
in what is known as the Beltway. Because of the geographic
concentration of these clients, there is also a large, but
fragmented, concentration of service providers for these companies.
Although the businesses that provide resources to the government
contracting sector are diverse and highly fragmented, their clients
have many common needs resulting from the basic qualifications and
standard requirements inherent in the government procurement
process. Novume believes that there is a unique opportunity for
consolidation in this sector. While our immediate goal is to
improve our ability to serve this sector by pooling our existing
subsidiaries’ resources and client contacts, our ultimate
objective is to expand our ability to meet its unique needs by
assembling, through organic growth and strategic acquisitions, a
complimentary suite of service and systems providers with
demonstrated ability to satisfy the needs of this sector for high
value talent and support services. In addition to the benefits of
shared costs and pooled resources, we expect to benefit from the
increased client involvement that targeted expansion of our market
segments can provide. We would like Novume to be recognized as the
best place to go for outside help when a company has to meet an
unusual need, whether it involves an unusual opportunity or an
unusual threat.
Novume intends to
fund organic growth and add both vertical and horizontal
capabilities by acquiring service providers through a
market-focused and disciplined strategy. Novume’s efforts to
identify prospective target businesses will look for opportunities
where the combination of resources will be additive to the existing
capabilities of the Company and will not be limited to any
geographic region or any particular sector of the support or
services industries. A primary consideration will be to improve the
level of support Novume and its subsidiaries provides to its
existing customers as well as carefully considered expansions of
the customer base.
Novume is an
established provider of outsourced services to the GovCon market
that generates revenues from fees and reimbursable expenses for
professional services primarily billed on an hourly rate,
time-and-materials basis. Clients are typically invoiced on a
monthly basis, with revenue recognized as the services are
provided. In a few cases, a fixed-fee engagement for our services
may be entered into. Fixed-fee engagements can be invoiced once for
the entire job, or there could be several “progress”
invoices for accomplishing various phases or reaching contractual
milestones. Time-and-materials contracts represent a majority of
our client engagements and do not provide us with a high degree of
predictability of future period performance.
Novume’s
financial results are impacted principally by the:
1)
demand by clients
for Novume’s services;
2)
the degree to which
full-time staff can be kept occupied in revenue-generating
activities;
3)
success of the
sales team in generating client engagements; and
4)
number of business
days in each quarter.
30
The number of
business days on which revenue is generated by our staff and
consultants is affected by the number of vacation days taken, as
well as the number of holidays in each quarter. There are typically
fewer business work days available in the fourth quarter of the
year, which can impact revenues during that period. The staff
utilization rate can also be affected by seasonal variations in the
demand for services from clients. Since earnings may be affected by
these seasonal variations, results for any quarter are not
necessarily indicative of the results that may be achieved for a
full fiscal year.
Unexpected changes
in the demand for our services can result in significant variations
in revenues, and present a challenge to optimal hiring, staffing
and use of consultants. The volume of work performed can vary from
period to period.
While we anticipate
an increasing demand for Novume’s services in 2017 based upon
an expected increase in the volume of federal government spending
and as our clients elect to outsource their bid and proposal
activities, it is still not clear how government spending will be
impacted in 2018 and beyond. The federal government fiscal year
starts on October 1 and ends on September 30. Thus, the
bulk of our revenues for 2017 should be based on budget
authorizations made in 2016, however, the new administration does
have some discretion to delay spending on programs previously
authorized and will establish the budgets for the new fiscal year
beginning October 1, 2017.
Although the new administration has
expressed a desire to reduce the federal government bureaucracy, we
cannot assume that this will reduce the demand for Novume’s
services. A short-term result of a program to reduce bureaucracy
may be to increase privatization initiatives. Moreover, the new
administration’s emphasis on renewing the nation’s
infrastructure, which appears to enjoy broad-based support, may
result in a significant long-term increase in federal
procurements.
Thus, while changes
and adjustments can undoubtedly be anticipated, Novume believes the
overall outlook for the GovCon sector remains promising. This is in
part due to the changing nature of the contracting process. The
volume and frequency of requests for proposals has been increasing
during recent years as outdated and ill-conceived programs have
been eliminated in favor of higher priority programs. Moreover, Low
Price Technically Acceptable (LPTA) contracts have increasingly
fallen into disfavor as the true long-term costs of these contracts
have become apparent, and a more rigorous approach to government
contracting has gained favor.
Brekford
Acquisition
On August 28, 2017,
the mergers by and among Novume, KeyStone, Brekford, Brekford
Merger Sub, Inc. ("Brekford Merger Sub"),
and KeyStone Merger Sub, LLC ("KeyStone Merger Sub"),
were
consummated (the “Brekford Merger”) as a result of a
merger agreement (the “Brekford Merger Agreement”). As
a result, Brekford became a wholly-owned subsidiary of the Novume,
and Brekford Merger Sub ceased to exist. KeyStone Merger Sub also
became a wholly-owned subsidiary of the Novume, and KeyStone
Solutions, Inc. ceased to exist. When KeyStone Merger Sub filed its
certificate of merger with the Secretary of State of the State of
Delaware, it immediately effectuated a name-change to KeyStone
Solutions, LLC, the name by which it is now
known.
31
Upon completion of the Brekford Merger, the merger consideration
was issued in accordance with the terms of the Merger Agreement.
Immediately upon completion of the Brekford Merger, the pre-merger
stockholders of KeyStone owned approximately 80% of the issued and
outstanding capital stock of the Novume on a fully-diluted basis,
and the pre-merger stockholders of Brekford owned approximately 20%
of the issued and outstanding capital stock of the Novume on a
fully-diluted basis.
Firestorm
Acquisition
Pursuant to the
terms of the Membership Interest Purchase Agreement (the
“MIPA”), by and among Novume, each of the Firestorm
Entities, each of the Members of the Firestorm Entities (described
below), and a newly-created acquisition subsidiary of Novume,
Firestorm Holdings, LLC, a Delaware limited liability company
(“Firestorm Holdings”), Novume acquired all of the
membership interests in each of the Firestorm Entities for the
following consideration:
●
$500,000 in cash in
the aggregate paid by Novume as of the Firestorm Closing Date to
the three principals (Harry W. Rhulen, Suzanne Loughlin, and James
W. Satterfield, collectively the “Firestorm
Principals”) of Firestorm. Of that aggregate amount $250,000
was paid to Mr. Satterfield, and $125,000 was paid to each of
Mr. Rhulen and Ms. Loughlin;
●
$1,000,000 in the
aggregate in the form of four unsecured, subordinated promissory
notes issued by Novume payable over five years after the Firestorm
Closing Date, to all the Members of the Firestorm Entities
(consisting of the Firestorm Principals and Lancer Financial Group,
Inc. (“Lancer”)). The principal amount of the note
payable to Lancer is $500,000 (the “Lancer Note”). The
principal amount of the note payable to Mr. Rhulen is
$166,666.66. The principal amount of the notes payable to each of
Mr. Satterfield and Ms. Loughlin is $166,666.67. (The
notes payable to Mr. Rhulen, Ms. Loughlin and
Mr. Satterfield are individually referred to herein as a
“Firestorm Principal Note” and collectively, as the
“Firestorm Principal Notes”). The Firestorm Principal
Notes are payable at an interest rate of 2% and the Lancer Note is
payable at an interest rate of 7%. $907,407 was recorded to notes
payable to reflect the net fair value of the notes issued due to
the difference in interest rates. The Lancer Note also has a capped
subordination of $7,000,000, subject to the consent of
Lancer;
●
Each of the
Firestorm Principals was issued 162,698 shares of the common stock,
par value $0.0001 per share, of Novume (“Novume Common
Shares”), for an aggregate issuance of
946,875(946,875 post
Brekford Merger) Novume Common Shares;
●
Each of the
Firestorm Principals received warrants to purchase 105,209 Novume
Common Shares, exercisable over a period of five years after the
Firestorm Closing Date, at an exercise price of $2.58 per share;
and
●
Each of the
Firestorm Principals received warrants to purchase 105,209 Novume
Common Shares, exercisable over a period of five years after the
Firestorm Closing Date, at an exercise price of $3.60 per
share.
32
Results
of Operations – Comparison of the Three and Nine Months Ended
September 30, 2017 and 2016
The unaudited
results for the periods shown below should be reviewed in
conjunction with Novume’s unaudited consolidated financial
statements and notes as of and for the three and nine months ended
September 30, 2017 and 2016, respectively, included elsewhere
in this Form 10-Q. Consolidated operating results for the three and
nine months ended September 30, 2017 include Firestorm operations
for the period from January 25, 2017 through September 30, 2017 and
Brekford operations for the period from August 28, 2017 through
September 30, 2017.
Novume
Solutions, Inc. Consolidated Statements of Operations
for
the Three and Nine Months Ended September 30, 2017 and 2016
(Unaudited)
|
Three Months ended September 30,
|
Nine Months ended September 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
REVENUE
|
$4,421,574
|
$2,405,529
|
$11,131,825
|
$9,582,874
|
Cost
of revenue
|
2,457,806
|
1,334,436
|
6,017,982
|
5,496,588
|
Gross
Profit
|
1,963,768
|
1,071,093
|
5,113,843
|
4,086,286
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
Selling,
general, and administrative expenses
|
2,997,566
|
1,151,514
|
8,036,339
|
3,624,005
|
Income
(loss) from operations
|
(1,033,798)
|
(80,421)
|
(2,922,496)
|
462,281
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
Interest
expense
|
(33,720)
|
(15,656)
|
(97,624)
|
(28,693)
|
Other
Income
|
51,016
|
-
|
142,283
|
-
|
Total
other income
|
17,296
|
(15,656)
|
44,659
|
(28,693)
|
Income
(loss) before taxes
|
(1,016,502)
|
(96,077)
|
(2,877,837)
|
433,588
|
Income
tax benefit (expense)
|
225,142
|
40,535
|
964,377
|
(13,380)
|
Net
(loss) income
|
$(791,360)
|
$(55,542)
|
$(1,913,460)
|
$420,208
|
Comparison of the Three Months Ended September 30, 2017 and
2016
Revenue
Consolidated
revenue for the three months ended September 30, 2016 is mostly
attributable to the Novume’s wholly-owned subsidiary, KSI.
Consolidated revenue for the three months ended September 30, 2017
includes revenue from Firestorm, and from Brekford after the August
28, 2017 Brekford Merger. Revenue increased by $2,016,045, or
83.8%, to $4,421,574 for the three months ended September 30, 2017
compared to $2,405,529 in the comparable period in 2016. Revenue
attributable to Firestorm was $466,580 for the three months ended
September 30, 2017. Revenue attributable to Brekford was $224,783
for the period from August 28, 2017 through September 30, 2017. The
$1,324,682 increase in revenue attributable to legacy Novume was
due to an increase in the number and dollar volume of contracts in
KSI.
Cost of Revenue
Total cost of
revenue for the three months ended September 30, 2017 increased by
$1,123,370, or 84.2%, to $2,457,806 compared to $1,334,436 in the
comparable period in 2016. Cost of revenue attributable to
Firestorm was $183,803 for the three months ended September 30,
2017. Cost of revenue attributable to Brekford was $88,963 for the
period from August 28, 2017 through September 30, 2017. The
$850,604 increase in the cost of revenue of the legacy Novume was
mostly attributable to revenue increase for KSI noted
above.
33
Gross Profit
Gross profit for
the three months ended September 30, 2017 increased by $892,675, or
83.3%, to $1,963,768 compared to $1,071,093 for the comparable
period in 2016. Gross profit attributable to Firestorm was $282,776
for the three months ended September 30, 2017. Gross profit
attributable to Brekford was $135,820 for the period from August
28, 2017 through September 30, 2017. The $474,079 increase in the
gross profit of the legacy Novume was mostly attributable to the
increased revenue offset by the use of consultants and non-billable
expenses.
The gross profit
margin was 44.4% for the three months ended September 30, 2017
compared to 44.5% in the comparable period in 2016. Excluding the
gross profit margin for Firestorm and Brekford, the gross profit
margin for legacy Novume for the three months ended September 30,
2017 and 2016 was 41.4% and 44.5%, respectively. The decrease in
margin was the result of the increase use of consultants, which are
more expensive than employees, and increased non-billable expenses
for KSI.
Operating Costs and Expenses
Operating costs and
expenses for the three months ended September 30, 2017 increased by
$1,846,052, or 160.3%, to $ 2,997,566 compared to $1,151,514 in the
comparable period in 2016. Operating cost and expenses attributable
to Firestorm was $646,995 for the three months ended September 30,
2017. Operating costs and expenses attributable to Brekford was
$173,466 for the three months ended September 30, 2017.
The
Company also launched a new television show in the second quarter
which increased operating costs and expenses by approximately
$192,200. The increase of $833,341 in operating costs and expenses
of legacy Novume was primarily due to an increase in holding
company salaries, professional and legal services related to
organization and financial structuring, ramp up of operations and
expenses related to initiating and maintaining compliance with
applicable listing rules and SEC requirements that were not
incurred during the three months ended September 30, 2016. As
percentage of revenue, Novume operating costs and expenses for the
three months ended September 30, 2017 increased to 67.8% of revenue
compared to 47.9% in the comparable period in 2016 due to the items
noted above.
Novume anticipates
that its general and administrative expenses will continue to
increase, however at a lower rate, in future periods. These
increases will include costs related to hiring of personnel and
fees to outside consultants, lawyers and accountants as well as
expenses related to maintaining compliance with applicable listing
rules and SEC requirements, insurance, and investor relations
activities.
Other Income (Expense)
Other income for
the three months ended September 30, 2017 was $ 17,296 compared to
other expense of ($15,656) in the comparable period in 2016. This
change was related primarily to rental income.
Income Taxes
KSI initially
elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, KSI did not pay
federal corporate income tax, and in most instances state income
tax, on its taxable income. KSI revoked its S Corporation election
upon the March 15, 2016 merger with KeyStone, and Novume and
is now subject to corporate income taxes. Firestorm is a
single-member LLC with KeyStone as the sole member.
The benefit from
income tax for the three months ended September 30, 2017 was
$225,142 and is primarily related to the recognition of a deferred
tax benefit. There was $40,535 of benefit from income tax recorded
for the three months ended September 30, 2016.
Net Loss
Net loss for the
three months ended September 30, 2017 was $791,360 compared to net
loss of $55,542 for the comparable period in 2016. The net loss
margin was 17.9% for the three months ended September 30, 2017
compared to a net loss margin of 2.3% for the comparable period in
2016, due to the factors noted above.
34
Comparison of the Nine Months Ended September 30, 2017 and
2016
Revenue
Consolidated
revenue for the nine months ended September 30, includes revenue
from Firestorm after the January 25, 2017 acquisition by the
Company and from Brekford after the August 28, 2017 Brekford
Merger. Revenue increased by $1,548,951, or 16.2%, to $11,131,825
for the nine months ended September 30, 2017, compared to
$9,582,874 in the comparable period in 2016. Revenue attributable
to Firestorm was $1,248,334 for the period from January 25, 2017
through September 30, 2017. Revenue attributable to Brekford was
$224,783 for the period from August 28, 2017 through September 30,
2017. The $75,834 increase in revenue attributable to legacy Novume
was due to a small increase in the number and dollar volume of
contracts in KSI.
Cost of Revenue
Total cost of
revenue for the nine months ended September 30, 2017 increased by
$521,394, or 84.2%, to $6,017,982 compared to $ 5,496,588 in the
comparable period in 2016. Cost of revenue attributable to
Firestorm was $412,714 for the period from January 25, 2017 through
September 30, 2017. Cost of revenue attributable to Brekford was
$88,963 for the period from August 28, 2017 through September 30,
2017. The $19,717 increase in the cost of revenue of the legacy
Novume was mostly attributable to increased revenue for KSI noted
above.
Gross Profit
Gross profit for
the nine months ended September 30, 2017 increased by $1,027,557,
or 83.3%, to $5,113,843 compared to $ 4,086,286 for the comparable
period in 2016. Gross profit attributable to Firestorm was $835,619
for the period from January 25, 2017 through September 30, 2017.
Gross profit attributable to Brekford was $135,820 for the period
from August 28, 2017 through September 30, 2017. The $56,118
increase in the gross profit of the legacy Novume was generally
consistent with the increased revenue and costs of revenues at KSI
noted above.
The gross profit
margin was 45.9% for the nine months ended September 30, compared
to 42.6% in the comparable period in 2016. Excluding the gross
profit margin for Firestorm and Brekford, the gross profit margin
for legacy Novume for the nine months ended September 30, and 2016
was relatively consistent at 42.9% and 42.6%,
respectively.
Operating Costs and Expenses
Operating costs and
expenses for the nine months ended September 30, increased by
$4,412,334, or 121.8%, to $8,036,339 compared to $3,624,005 in the
comparable period in 2016. Operating cost and expenses attributable
to Firestorm was $1,161,075 for the period from January 25, 2017
through September 30, 2017. Operating cost and expenses
attributable to Brekford was $173,466 for the period from August
28, 2017 through September 30, 2017. The Company also launched a
new television show in the second quarter which increased operating
costs and expenses by approximately $465,533. This television show
airs locally in the Washington DC market. The increase of
$2,612,260 operating costs and expenses of legacy Novume was
primarily due to an increase in holding company salaries,
professional and legal services, ramp up of operations and expenses
related to maintaining compliance with applicable listing rules and
SEC requirements that were lower during the nine months ended
September 30, 2016 because the Company was formed in mid-March 2016
and spending increased during the nine months ended September 30,
2017. As percentage of revenue, Novume operating costs and expenses
for the nine months ended September 30, increased to 72.2% compared
to 37.8% in the comparable period in 2016.
Novume anticipates
that its general and administrative expenses will continue to
increase, however at a lower pace, in future periods. These
increases will include costs related to hiring of personnel and
fees to outside consultants, lawyers and accountants as well as
expenses related to maintaining compliance with applicable listing
rules and SEC requirements, insurance, and investor relations
activities.
Other Income (Expense)
Other income for
the nine months ended September 30, was $44,659 compared to other
expense of $(28,693) in the comparable period in 2016. This change
was related primarily to rental income.
Income Taxes
KSI initially
elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, KSI did not pay
federal corporate income tax, and in most instances state income
tax, on its taxable income. KSI revoked its S Corporation election
upon the March 15, 2016 merger with KeyStone and Novume and is
now subject to corporate income taxes. Firestorm is a single-member
LLC with KeyStone as the sole member.
The benefit from
income tax for the nine months ended September 30, was $964,377 and
is primarily comprised of a deferred tax benefit. There was $13,380
of income tax expense recorded for the nine months ended September
30, 2016.
35
Net (Loss) Income
Net loss for the
nine months ended September 30, 2017, was $(1,913,460) compared to
net income of $420,208 for the comparable period in 2016. The net
loss margin was 17.2% for the nine months ended September 30, 2017,
compared to a net income margin of 4.4% for the comparable period
in 2016.
Cash Flow
Novume expects to
finance its operations over the next twelve months from the date of
this Form 10-Q primarily through existing cash flow and from the
net proceeds of the Reg 1A Offering, supplemented as necessary by
funds available through access to credit and through access to
additional capital. The Reg 1A Offering is further described below
in the Novume management discussion under Liquidity and Capital
Resources.
The net cash flows
from operating, investing and financing activities for the periods
below were as follows:
|
Nine Months ended September 30,
|
|
|
2017
|
2016
|
Net
cash provided by (used for):
|
|
|
Operating
activities
|
$(2,204,152)
|
$559,535
|
Investing
activities
|
(52,985)
|
(35,377)
|
Financing
activities
|
3,230,815
|
(333,991)
|
Net
increase (decrease) in cash and cash equivalents:
|
$973,678
|
$190,167
|
Cash (Used for) Provided by Operating Activities
For the nine months
ended September 30, 2017, net cash used for operating activities
was $(2,204,152). Cash was used primarily to fund our operations
and working capital needs. Novume also incurred non-cash expenses
including depreciation and amortization, bad debt expense, deferred
taxes, deferred rent, share-based compensation, warrant expense and
financing related costs.
For the nine months
ended September 30, 2016, net cash provided by operating activities
was $559,535. Cash was provided primarily by net income, increases
in accounts payable and accrued expenses, offset by increases in
accounts receivable and other assets. The Company also incurred
non-cash expenses including depreciation and
amortization.
Cash (Used for) Investing Activities
For the nine months
ended September 30, 2017, net cash used for investing activities of
($52,985) related to the purchase of computer hardware and
equipment.
For the nine months
ended September 30, 2016, net cash used for investing activities of
($35,377) related to the purchase of computer hardware and
equipment.
Cash Provided by (Used for) Financing Activities
For the nine months
ended September 30, 2017, net cash provided by financing activities
of $3,230,815 related to the net proceeds from the issuance of
preferred stock and cash acquired by the acquisition of Brekford,
offset by the acquisition of Firestorm, net of cash acquired, and
the payment of Series A Preferred Stock dividends.
For the nine months
ended September 30, 2016, net cash used for financing activities of
$(333,991) related to proceeds from a note payable offset by KSI
stockholders’ distributions.
Non-Cash Financing Activities
In March 2016, the
KSI’s stockholders exchanged 100% of their outstanding shares
of common stock in KSI for proportionate shares of KeyStone’s
outstanding common stock and $1,192,844 of undistributed earnings
were contributed to KeyStone.
In January 2017,
KeyStone acquired Firestorm as described above. The non-cash
consideration for this acquisition included notes payable of
$907,407 and the issuance of 946,875 shares of Novume common stock
valued at $1,203,986.
In August 2017, the
Company merged with Brekford as described above. The non-cash
consideration for the Brekford Merger included the issuance of
3,287,187 shares of Novume common stock valued at
$5,851,193.
36
Lease
Obligations
The Company leases
office space in Chantilly, Virginia under the terms of a ten-year
lease expiring October 31, 2019. The lease contains one
five-year renewal option. The lease terms include an annual
increase in base rent and expenses of 2.75%. The Company also
leases office space in New Orleans, Louisiana under a three-year
lease expiring May 31, 2018, and in Roswell, Georgia under a
lease expiring October 31, 2017. In addition, the Company leases
office space from Global Public Safety on a month-to-month basis
and it leases space under an operating lease expiring on December
31, 2017.
Rent expense for
the three months ended September 30, 2017 and 2016 was $193,985 and
$178,946, respectively and for the nine months ended September 30,
and 2016 was $575,181 and $533,168, respectively.
As of September 30,
2017, the future obligations over the primary terms of the
long-term leases expiring between 2017 and 2020 are as
follows:
2017
|
$188,854
|
2018
|
697,153
|
2019
|
624,024
|
2020
|
64,475
|
Total
|
$1,574,506
|
The Company is the
lessor in an agreement to sublease office space in Chantilly,
Virginia with an initial term of two years with eight one-year
options to renew the lease through October 31, 2019. The lease
provides for an annual increase in base rent and expenses of 2.90%.
The initial term ended October 31, 2011 and the Company
exercised the renewal options through 2014. On April 7, 2015,
the lease was amended to sublease more space to the subtenant and
change the rental calculation. Rent income for the three months
ended September 30, 2017 and 2016 was $46,957 and $45,634,
respectively, and for the nine months ended September 30, and 2016
was $140,871 and $136,901, respectively.
Liquidity
and Capital Resources
The Company has
funded its operations primarily through cash from operating
activities of KSI, Firestorm, the $500,000 Avon Note (see below)
and the Reg 1A offering. As of September 30, 2017, Novume had
unrestricted cash and cash equivalents of $3,762,265 and working
capital of $4,423,001, as compared to unrestricted cash and cash
equivalents $2,788,587 and working capital of $3,714,958 as of
December 31, 2016.
Operating assets
and liabilities consist primarily of receivables from billed and
unbilled services, accounts payable, accrued expenses, and accrued
payroll and related benefits. The volume of billings and timing of
collections and payments affect these account
balances.
In the Fall of
2016, the Company commenced its Reg 1A Offering of up to 3,000,000
Units. At the initial closing of the Reg 1A Offering, on
December 23, 2016, the Company sold 301,570 Units and received
aggregate gross proceeds of $3,015,700. At the second closing of
the Reg 1A Offering, on January 23, 2017, the Company sold
119,757 Units and received aggregate gross proceeds of $1,197,570.
At the third and final closing of the Reg 1A Offering, on March 21,
2017, the Company sold 81,000 Units and received aggregate gross
proceeds of $810,000. As reported by KeyStone in its Current Report
on Form I-U, as filed with the SEC on March 22, 2017, the Reg
1A Offering is now closed, effective as of the third
closing.
Following the
Brekford Merger, all outstanding shares of KeyStone Series A
Preferred Stock were exchanged for the right to receive one share
of Novume Series A Preferred Stock. Novume Series A Preferred Stock
will be entitled to quarterly dividends in the amount of $0.175 (7%
per annum) per share, being an identical per annum percentage per
share dividend as received by holders of KeyStone Preferred Stock
prior to the Brekford Merger. We anticipate that Novume will pay
the quarterly cash dividends through cash flow from Novume,
potential business growth from other acquired entities and access
to additional credit or capital. The quarterly dividend payments
are due within five (5) business days following the end of a
quarter. On April 7, 2017, Novume paid cash dividends of
$75,695 to holders of record of Novume Series A Preferred Stock as
of March 30, 2017. On July 8, 2017, the Company paid cash
dividends of $87,907 to shareholders of record as of June 30,
2017. On September 30, 2017, the Company declared and accrued
dividends of $87,907 payable to shareholders of record as of
September 30, 2017.
37
KSI was a party to
a business loan agreement (the “2015 Loan Agreement”)
with Sandy Spring Bank (“SSB”) dated as of
September 25, 2015. The primary credit facility was an asset
based revolving line of credit up to $1,000,000 which was due to
mature on September 30, 2016. To secure its obligations under
the 2015 Loan Agreement, KSI had granted to SSB a security interest
in its accounts receivable. SSB was required to advance funds to
KSI up to the lesser of (1) $1,000,000 or (2) eighty
percent (80%) of the aggregate amount of all of its accounts
receivable aged 90-days or less which contained selling terms and
conditions acceptable to SSB. KSI’s obligations under the
2015 Loan Agreement were guaranteed by James McCarthy, the Chairman
of Novume (and former chairman of KSI), and his wife. KSI did not
draw any funds from this credit facility in 2015. Pursuant to First
Amendment to Business Loan Agreement (Asset Based), dated
May 9, 2016, SSB had waived the restrictions in the 2015 Loan
Agreement on KSI’s ability to make dividends to the Company.
There was no outstanding balance on the 2015 Loan Agreement at
December 31, 2016.
On August 11,
2016, Novume entered into a Loan and Security Agreement (the
“2016 Line of Credit”) with SSB that replaced the 2015
Loan Agreement. The 2016 Line of Credit was comprised of: 1) an
asset-based revolving line of credit up to $1,000,000 for
short-term working capital needs and general corporate purposes
which is due to mature on July 31, 2017, bore interest at the
Wall Street Journal Prime Rate, floating, plus 0.50% and wass
secured by a first lien on all of Novume’s business assets;
and 2) an optional term loan of $100,000 which must be drawn by
July 31, 2017, was for permanent working capital, bore
interest at the Wall Street Journal Prime Rate, floating, plus
0.75%, requires monthly payments of principal plus interest to
fully amortize the loan over four (4) years and was secured by
a first lien on all of Novume’s business assets,
cross-collateralized and cross-defaulted with the revolving line of
credit. The 2016 Line of Credit had a final maturity date of
February 15, 2019 and did not require any personal
guarantees.
The borrowing base
for the 2016 Line of Credit was up to the lesser of
(1) $1,000,000 or (2) eighty percent (80%) of the
aggregate amount of all of Novume’s eligible accounts
receivable as defined by SSB. The borrowing base for the $100,000
term loan was fully reserved under the borrowing base for the
revolving line of credit. The 2016 Line of Credit hadd periodic
reporting requirements and balance sheet covenants, as well as
affirmative and negative operational and ownership covenants.
Novume was in compliance with all 2016 Line of Credit covenents at
December 31, 2016. In August 2017, the Company terminated the
2016 Line of Credit with SSB. As such, there was no outstanding
balance on the 2016 Line of Credit at September 30,
2017.
As of September 30,
2017 and 2016, Novume had no balances due, respectively, for the
2016 Line of Credit and the 2015 Loan Agreement. When Novume
replaced the 2015 Loan Agreement with the 2016 Line of Credit on
August 11, 2016, neither line of credit had a balance due. The
Company terminated the 2016 Line of Credit in August 2017 and
consequently there are no amounts outstanding as of the date of
this Report on Form 10-Q.
On March 16,
2016, Novume entered into a Subordinated Note and Warrant Purchase
Agreement (the “Avon Road Note Purchase Agreement”)
pursuant to which Novume agreed to issue up to $1,000,000 in
subordinated debt and warrants to purchase up to 242,493 shares of
Novume’s common stock (“Avon Road Subordinated Note
Warrants”). The exercise price for the Avon Road Subordinated
Note Warrants is equal to $1.03 per share of common stock.
Subordinated notes with a face amount of $500,000 and Avon Road
Subordinated Note Warrants to purchase 121,247 shares of
Novume’s common stock have been issued pursuant to the Avon
Road Note Purchase Agreement to Avon Road Partners, L.P.
(“Avon Road”), an affiliate of Robert Berman,
Novume’s CEO and a member of Novume’s Board of
Directors. The Avon Road Subordinated Note Warrants has an
expiration date of March 16, 2019 and qualified for equity
accounting as the warrant did not fall within the scope of ASC
Topic 480, Distinguishing
Liabilities from Equity. The fair value was determined to be
$58,520 and was recorded as a debt discount and additional paid-in
capital in the accompanying consolidated balance sheet as of
December 31, 2016. The debt discount is being amortized as
interest expense on a straight-line basis, which approximates the
effective interest method, through the maturity date of the note
payable. The balance as of September 30, 2017 for the debt
discount was $42,711.
The note is
subordinated to the 2016 Line of Credit with SSB and any successor
financing facility. Simple interest accrues on the unpaid principal
of the note at a rate equal to the lower of (a) 9% per
annum, or (b) the highest rate permitted by applicable law.
Interest is payable monthly, and the note matures on March 16,
2019. The Company terminated the 2016 Loan Agreement in August
2017.
Pursuant to the
terms of the acquisition of the membership interests in the
Firestorm Entities, the Company issued $1,000,000 in the aggregate
in the form of four unsecured, subordinated promissory notes,
issued by Novume and payable over five years after the Firestorm
Closing Date, to all the Members of the Firestorm Entities. The
principal amount of the note payable to Lancer is $500,000. The
principal amount of the note payable to Mr. Rhulen is
$166,666.66. The principal amount of the notes payable to each of
Mr. Satterfield and Ms. Loughlin is $166,666.67. The
Firestorm Principal Notes are payable at an interest rate of 2% and
the Lancer Note is payable at an interest rate of 7%. The balance
of these notes payable as of September 30, 2017 was $919,753 to
reflect the amortized fair value of the notes issued due to the
difference in interest rates.
As of September 30,
2017, Novume did not have any material commitments for capital
expenditures.
Off-Balance
Sheet Arrangements, Contractual Obligations and
Commitments
As of the date of
this Form 10-Q, Novume did not have any off-balance sheet
arrangements that have had or are reasonably likely to have a
material effect on our financial condition, revenues or expenses,
results of operations, liquidity, capital resources or capital
expenditures.
38
Critical
Accounting Policies and Estimates
The discussion and
analysis of Novume’s financial condition and results of
operations is based upon Novume’s consolidated financial
statements which have been prepared in accordance with
“GAAP”. The preparation of these consolidated financial
statements requires the management of Novume to make estimates and
judgments that affect the reported amounts in our consolidated
financial statements.
Novume believes the
application of accounting policies, and the estimates inherently
required therein, are reasonable. These accounting policies and
estimates are periodically reevaluated, and adjustments are made
when facts and circumstances dictate a change. Novume bases its
estimates on historical experience and on various other assumptions
that management of Novume believes to be reasonable under the
circumstances, the results of which form management’s basis
for making judgments about the carrying values of assets and
liabilities that may not be readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions, or if management made different
judgments or utilized different estimates.
Novume’s
accounting policies are further described in its historical audited
consolidated financial statements and the accompanying notes
included in this Report on Form 10-Q. Novume has identified the
following critical accounting policies:
Revenue Recognition
Novume recognizes
its revenues for the provision of services when persuasive evidence
of an arrangement exists, services have been rendered or delivery
has occurred, the fee is fixed or determinable, and the
collectability of the related revenue is reasonably assured. Novume
principally derives revenues from fees for services generated on a
project by project basis. Revenues for time-and-materials contracts
are recognized based on the number of hours worked by our employees
or consultants at an agreed upon rate per hour set forth in our
standard rate sheet or as written from time to time in our
contracts or purchase orders. These costs are recognized in the
period in which services are performed.
Revenues related to
firm-fixed-price contracts are recognized upon completion of the
project as these projects are typically short-term in
nature.
The agreements
entered into in connection with a project, whether on a
time-and-materials basis or firm-fixed-price basis, typically allow
our clients to terminate early due to breach or for convenience
with 30-days’ notice. In the event of termination, the client
is contractually required to pay for all time, materials and
expenses incurred by us through the effective date of the
termination.
For
automated traffic safety enforcement revenue, the Company
recognizes the revenue when the required collection efforts, from
citizens, are completed and posted to the municipality’s
account. The respective municipality is then billed depending on
the terms of the respective contract, typically 15 days after the
preceding month while collections are reconciled. For contracts
where the Company receives a percentage of collected fines, revenue
is calculated based upon the posted payments from citizens
multiplied by the Company’s contractual percentage. For
contracts where Company receives a specific fixed monthly fee
regardless of citations issued or collected, revenue is recorded
once the amount collected from citizens exceeds the monthly fee per
camera. The Company’s fixed fee contracts typically have a
revenue neutral provision whereby the municipality’s payment
to Brekford cannot exceed amounts collected from citizens within a
given month.
Accounts Receivable
Accounts receivable
are customer obligations due under normal trade terms. Novume
performs continuing credit evaluations of its clients’
financial condition, and Novume generally does not require
collateral.
Management reviews
accounts receivable to determine if any receivables will
potentially be uncollectible. Factors considered in the
determination include, among other factors, number of days an
invoice is past due, client historical trends, available credit
ratings information, other financial data and the overall economic
environment. Collection agencies may also be utilized if management
so determines.
Novume records an
allowance for doubtful accounts based on specifically identified
amounts that are believed to be uncollectible. Novume also records
as an additional allowance a certain percentage of aged accounts
receivable, based on historical experience and Novume’s
assessment of the general financial conditions affecting its
customer base. If actual collection experience changes, revisions
to the allowance may be required. After all reasonable attempts to
collect an account receivable have failed, the amount of the
receivable is written off against the allowance. The balance in the
allowance for doubtful accounts was $24,000 and $0 as of September
30, 2017 and 2016, respectively. Based on the information
available, Novume determined that no allowance for doubtful
accounts was necessary as of December 31, 2016 and 2015. However,
actual write-offs might exceed the recorded allowance.
39
Income Taxes
Through
March 15, 2016, KSI had elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under
those provisions, KSI did not pay U.S. federal corporate income
taxes, and in most instances state income tax, on its taxable
income. Instead, the stockholders of KSI were liable for individual
income taxes on their respective shares of KSI’s net income.
KSI effectively revoked its S Corporation election upon the
March 15, 2016 merger with Novume. As a result, Novume is now
subject to corporate income taxes. Firestorm is a single-member LLC
with Novume as the sole member.
Deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Novume’s
evaluation as of September 30, 2017 and December 31, 2016
revealed no uncertain tax positions that would have a material
impact on the financial statements. The 2013 through 2015 tax years
remain subject to examination by the IRS. Management of Novume does
not believe that any reasonably possible changes will occur within
the next twelve months that will have a material impact on the
financial statements.
New
Accounting Pronouncements
Recently Issued Accounting Pronouncements
Not Yet Adopted
In
August 2017, the Financial Accounting Standards Board
(“FASB”) issued new guidance related to accounting for
hedging activities. This guidance expands strategies that qualify
for hedge accounting, changes how many hedging relationships are
presented in the financial statements, and simplifies the
application of hedge accounting in certain situations. The standard
will be effective for us beginning July 1, 2019, with early
adoption permitted for any interim or annual period before the
effective date. Adoption of the standard will be applied using a
modified retrospective approach through a cumulative-effect
adjustment to retained earnings as of the effective date. The
Company is currently evaluating the impact of this standard on our
consolidated financial statements, including accounting policies,
processes, and systems.
In May 2017, the FASB issued Accounting Standards
Update (“ASU”) No. 2017-09, Compensation - Stock
Compensation: Scope of Modification Accounting, which provides guidance about which changes to
the terms or conditions of a share-based payment award require an
entity to apply modification accounting. An entity will account for
the effects of a modification unless the fair value of the modified
award is the same as the original award, the vesting conditions of
the modified award are the same as the original award and the
classification of the modified award as an equity instrument or
liability instrument is the same as the original award. The update
is effective for fiscal year 2019. The update is to be adopted
prospectively to an award modified on or after the adoption date.
Early adoption is permitted. The Company is currently evaluating
the effect of this update but does not believe it will have a
material impact on its financial statements and related
disclosures.
In January 2017, the FASB issued ASU No.
2017-04, Intangibles - Goodwill and
Other: Simplifying the Test for Goodwill
Impairment. To simplify the
subsequent measurement of goodwill, the update requires only a
single-step quantitative test to identify and measure impairment
based on the excess of a reporting unit's carrying amount over its
fair value. A qualitative assessment may still be completed first
for an entity to determine if a quantitative impairment test is
necessary. The update is effective for fiscal year 2021 and is to
be adopted on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017.
In October 2016, the FASB issued ASU No.
2016-16, Income Taxes: Intra-Entity
Transfers of Assets Other Than Inventory, as part of its simplification initiatives. The
update requires that an entity recognize the income tax
consequences of an intra-entity transfer of an asset other than
inventory when the transfer occurs, rather than deferring the
recognition until the asset has been sold to an outside party as is
required under current GAAP. The update is effective for fiscal
year 2019. The new standard will require adoption on a modified
retrospective basis through a cumulative-effect adjustment to
retained earnings, and early adoption is permitted. The Company is
currently evaluating the effect that this update will have on its
financial statements and related disclosures.
40
In June 2016, the
FASB issued ASU 2016-13 Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments which requires the measurement and
recognition of expected credit losses for financial assets held at
amortized cost. ASU 2016-13 replaces the existing incurred loss
impairment model with an expected loss methodology, which will
result in more timely recognition of credit losses. ASU 2016-13 is
effective for annual reporting periods, and interim periods within
those years beginning after December 15, 2019. We are currently in
the process of evaluating the impact of the adoption of ASU 2016-13
on our consolidated financial statements.
In February 2016,
the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new
leases standard that amends various aspects of existing guidance
for leases and requires additional disclosures about leasing
arrangements. It will require companies to recognize lease assets
and lease liabilities by lessees for those leases classified as
operating leases under previous GAAP. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The ASU is
effective for annual periods beginning after December 15,
2018, including interim periods within those fiscal years; earlier
adoption is permitted. In the financial statements in which the ASU
is first applied, leases shall be measured and recognized at the
beginning of the earliest comparative period presented with an
adjustment to equity. Practical expedients are available for
election as a package and if applied consistently to all leases.
The Company is currently evaluating the impact of the adoption of
this guidance on its consolidated financial condition, results of
operations and cash flows.
In May 2014, the
FASB issued ASU No. 2014-09, Revenue from Contracts with Customers,
as a new Topic, Accounting Standards Codification ( "ASC") Topic 606, which
supersedes existing accounting standards for revenue recognition
and creates a single framework. Additional updates to Topic 606
issued by the FASB in 2015 and 2016 include the
following:
●
ASU
No. 2015-14, Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective
Date, which defers the effective date of the new guidance
such that the new provisions will now be required for fiscal years,
and interim periods within those years, beginning after
December 15, 2017.
●
ASU
No. 2016-08, Revenue from
Contracts with Customers (Topic 606): Principal versus Agent
Considerations, which clarifies the implementation guidance
on principal versus agent considerations (reporting revenue gross
versus net).
●
ASU
No. 2016-10, Revenue from
Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing, which clarifies the
implementation guidance on identifying performance obligations and
classifying licensing arrangements.
●
ASU
No. 2016-12, Revenue from
Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients, which clarifies the implementation
guidance in a number of other areas.
The underlying
principle is to use a five-step analysis of transactions to
recognize revenue when promised goods or services are transferred
to customers in an amount that reflects the consideration that is
expected to be received for those goods or services. The standard
permits the use of either a retrospective or modified retrospective
application. The Company is currently in the process of completing
its assessment of any significant contract and assessing the impact
the adoption of the new revenue standard will have on its
consolidated financial statements and related disclosures. The
standard update, as amended, will be effective for annual periods
beginning after December 15, 2017. The Company performed an
initial assessment of the impact of the ASU and is developing a
transition plan, including necessary changes to policies,
processes, and internal controls as well as system enhancements to
generate the information necessary for the new disclosures. The
project is on schedule for adoption on January 1, 2018 and the
Company will apply the modified retrospective method. The Company
expects revenue recognition across its portfolio of services to
remain largely unchanged. However, the Company expects to recognize
revenue earlier than it does under current guidance in a few areas,
including accounting for variable fees and for certain consulting
services, which will be recognized over time rather than at a point
in time. While the Company has not finalized its assessment of
the impact of the ASU, based on the analysis completed to date, the
Company does not currently anticipate that the ASU will have a
material impact on its Consolidated Financial
Statements.
There are currently
no other accounting standards that have been issued but not yet
adopted that will have a significant impact on Novume’s
consolidated financial position, results of operations or cash
flows upon adoption.
Recently Adopted
In January 2017,
the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying
the Definition of a Business. ASU 2017-01 provides guidance
to evaluate whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. If
substantially all of the fair value of the gross assets acquired
(or disposed of) is concentrated in a single asset or a group of
similar assets, the assets acquired (or disposed of) are not
considered a business. We adopted ASU 2017-01 as of January 1,
2017.
In March
2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment
Accounting. The standard reduces complexity in several
aspects of the accounting for employee share-based compensation,
including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement
of cash flows. The ASU is effective for fiscal years beginning
after December 15, 2016, and interim periods within those
fiscal years, with early adoption permitted. The Company adopted
this standard and the impact of the adoption was not material to
the consolidated financial statements.
41
In November 2015,
the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred
Taxes. ASU 2015-17 is aimed at reducing complexity in
accounting standards. Currently, GAAP requires the deferred taxes
for each jurisdiction to be presented as a net current asset or
liability and net noncurrent asset or liability. This requires a
jurisdiction-by-jurisdiction analysis based on the classification
of the assets and liabilities to which the underlying temporary
differences relate, or, in the case of loss or credit
carryforwards, based on the period in which the attribute is
expected to be realized. Any valuation allowance is then required
to be allocated on a pro rata basis, by jurisdiction, between
current and noncurrent deferred tax assets. To simplify
presentation, the new guidance requires that all deferred tax
assets and liabilities, along with any related valuation allowance,
be classified as noncurrent on the balance sheet. As a result, each
jurisdiction will now only have one net noncurrent deferred tax
asset or liability. The guidance does not change the existing
requirement that only permits offsetting within a jurisdiction;
companies are still prohibited from offsetting deferred tax
liabilities from one jurisdiction against deferred tax assets of
another jurisdiction. The new guidance is effective in fiscal years
beginning after December 15, 2016, including interim periods
within those years, with early adoption permitted. KeyStone early
adopted and applied the new standard retrospectively to the prior
period presented in the accompanying consolidated balance sheets
and it did not have a material impact.
In April 2015, the
FASB issued ASU 2015-03, Interest
– Imputation of Interest: Simplifying the Presentation of
Debt Issuance Costs. The update requires that deferred debt
issuance costs be reported as a reduction to long-term debt
(previously reported in other noncurrent assets). The Company
adopted ASU 2015-03 in 2016 and for all retrospective periods, as
required, and the impact of the adoption was not material to our
consolidated financial statements.
In August 2014, the
FASB issued ASU 2014-15, Presentation of Financial Statements –
Going Concern, which requires management to perform interim
and annual assessments of an entity’s ability to continue as
a going concern within one year of the date the financial
statements are issued and provides guidance on determining when and
how to disclose going concern uncertainties in the financial
statements. Certain disclosures will be required if conditions give
rise to substantial doubt about an entity’s ability to
continue as a going concern. This accounting standard update
applies to all entities and was effective for the annual period
ending after December 15, 2016, and for annual periods and
interim periods thereafter, with early adoption permitted. The
Company adopted this standard during fiscal year 2016 and it did
not have a material impact on the consolidated results of
operations, financial position or cash flows.
In March
2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment
Accounting. The standard reduces complexity in several
aspects of the accounting for employee share-based compensation,
including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement
of cash flows. The ASU is effective for fiscal years beginning
after December 15, 2016, and interim periods within those
fiscal years, with early adoption permitted. The Company adopted
this standard and the impact of the adoption was not material to
the consolidated financial statements.
The Company does
not believe that any recently issued accounting standards, in
addition to those referenced above, would have a material effect on
its consolidated financial statements.
Item 3. Quantitative
and Qualitative Disclosures About Market Risk.
Not
applicable.
Item 4. Controls
and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain
disclosure controls and procedures (as defined in
Rule 13a-15(f) of the Exchange Act) that are designed to
ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in
evaluating the cost benefit relationship of possible controls and
procedures.
42
We carried out an
evaluation, required by paragraph (b) of Rule 13a-15 or
Rule 15d-15 under the Exchange Act, under the supervision and
with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in
Rule 13a-15(e) or Rule 15d-15(e) of the
Exchange Act) as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this review, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective as of September
30, 2017. The Company is in the process of executing a plan to
address this lack of effectiveness.
Changes to Internal Control over Financial Reporting
There have been no
changes in our internal controls over financial reporting during
our most recent fiscal quarter that have materially affected, or
are reasonably likely to materially affect, our internal controls
over financial reporting.
Part II.
Other Information
Item 1. Legal
Proceedings.
None.
Item 1A. Risk
Factors.
There have been no
material changes to the risk factors disclosed in “Risk
Factors” in our S-4 as filed with the SEC on August 2,
2017.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults
Upon Senior Securities.
None.
Item 4. Mine
Safety Disclosures.
Not
applicable.
Item 5. Other
Information.
None.
Item 6. Exhibits
(a) Exhibits.
Number
|
|
Description
|
|
|
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||
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||
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43
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
Novume Solutions,
Inc.
|
|
|
|
|
|
/s/ Carl
Kumpf
|
|
Name:
|
Carl
Kumpf
|
|
Title:
|
Chief Financial
Officer, Principal Accounting Officer
|
|
|
and Authorized
Signatory
|
Date: January
25, 2018
44