Attached files
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EX-23.6 - CONSENT OF RSM US LLP - Rekor Systems, Inc. | nvmm_ex23-6.htm |
EX-23.5 - CONSENT OF BD & COMPANY - Rekor Systems, Inc. | nvmm_ex23-5.htm |
EX-23.4 - CONSENT OF BD & COMPANY - Rekor Systems, Inc. | nvmm_ex23-4.htm |
EX-23.3 - CONSENT OF STEGMAN & COMPANY - Rekor Systems, Inc. | nvmm_ex23-3.htm |
EX-23.2 - CONSENT OF BD & COMPANY - Rekor Systems, Inc. | nvmm_ex23-2.htm |
EX-23.1 - CONSENT OF BD & COMPANY - Rekor Systems, Inc. | nvmm_ex23-1.htm |
As filed with the U.S. Securities and Exchange Commission on
January 25, 2018
Registration
No. 333-221789
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No.
2 to
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES
ACT OF 1933
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 Number)
|
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
(302)
658-7581
(Name, address, including zip code,
and telephone number, including area code, of agent for
service)
Copies to:
Thomas A.
Rose
Marcelle S.
Balcombe
Sichenzia Ross
Ference Kesner LLP
1185 Avenue of
the Americas, 37th Floor
New York, NY
10036
(212)
930-9700
|
Suzanne
Loughlin
General Counsel
and Chief Administrative Officer
Novume Solutions,
Inc.
14420 Albemarle
Point Place, Suite 200
Chantilly, VA
20151
(703)
953-3838
|
Ralph V. De
Martino
Cavas S.
Pavri
Schiff Hardin
LLP
901 K Street NW,
Suite 700
Washington, DC
20001
(202)
778-6400
|
Approximate date of commencement of proposed
sale to the public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being
registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended, or Securities Act, check the following
box. ☒
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering. ☐
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ☐
If this Form is a post-effective
amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration
statement for the same offering. ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule
12b-2 of the Securities Exchange Act of 1934, as
amended.
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 to Section 7(a)(2)(B) of
the Securities Act. ☐
CALCULATION
OF REGISTRATION FEE
Title of Each
Class of Securities to be
Registered
|
Proposed
Maximum
Aggregate
Offering Price (1)(2)
|
Amount of Registration Fee
(1)
|
Units consisting of
one share of common stock, $0.0001 par value and one warrant to
purchase one share of common stock (3)
|
$ 14,375,000
|
$ 1,789.69
|
Common stock,
$0.0001 par value included in the units (4)
|
-
|
-
|
Warrants to
purchase shares of common stock included in the units
(4)
|
-
|
-
|
Common stock,
$0.0001 par value per share underlying the warrants included in the
units (3)
|
$ 14,375,000
|
$ 1,789.69
|
Representatives'
warrants (4)
|
-
|
-
|
Common stock
underlying representatives' warrant (5)
|
$ 781,250
|
$ 97.27
|
Total
(6)
|
$29,531,250
|
$ 3,676.65
|
(1)
Estimated solely
for the purpose of calculating the amount of the registration fee
pursuant to Rule 457(o) under the Securities
Act.
(2)
Includes the
aggregate offering price of additional shares that the underwriters
have the option to purchase.
(3)
Includes shares of common stock which may be issued upon exercise
of an
option
granted to the underwriters to cover overallotments, if
any.
(4)
No registration fee
required pursuant to Rule 457(g) under the Securities Act of
1933, as amended.
(5)
Estimated solely for
the purposes of calculating the registration fee pursuant to
Rule 457(g) under the Securities Act of 1933, as amended. The
warrants are exercisable at a per share exercise price equal to 110
% of the public offering price.
(6)
Registration
fee previously paid.
The
Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment that specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act or
until the Registration Statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to
said Section 8(a), may
determine.
The information in this prospectus is not
complete and may be changed. We may not sell these securities until
the registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell
these securities, nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not
permitted.
PRELIMINARY
PROSPECTUS
|
SUBJECT TO
COMPLETION
|
DATED JANUARY 25,
2018
|
$12.5 million of
Units
We are offering $12.5
million of units in this offering, each consisting of
one share of our common stock and a warrant to
purchase one share of our common stock. We
are also offering the shares of our common stock that are issuable
from time to time upon exercise of the warrants contained in the
units. The units are being offered at a price of
$ per unit. The
units will not be issued or certificated. The shares of common
stock and warrants comprising the units are immediately separable
and will be issued separately. The
warrants will be exercisable immediately at an exercise price
per share of not less than the last
reported sales price of our common stock on the trading day
immediately preceeding the pricing of this offering and will
expire five
years from the date of issuance.
The final public offering price of each unit will be determined
through negotiation between us and the lead underwriters in this
offering and will
take into account the recent market price of our common stock, the
general condition of the securities market at the time of this
offering, the history of, and the prospects for, the industry in
which we compete, our past and present operations and our prospects
for future revenues. The
recent market price used throughout this prospectus may not be
indicative of the public offering price.
There is no established trading market for our securities.
Our common stock has traded since January 10, 2018 on the
Nasdaq Capital Market under the symbol “NVMM.”
Our Series A Preferred Stock and Unit Warrant are quoted on the
OTCQX under the trading symbols “NVMMP,” and
“NVMMW,” respectively. We have applied to
list the warrants sold in this offering on NASDAQ under the symbol
"NVMMZ." On January
24, 2018, the last reported sales price of our common
stock on the NASDAQ was $3.96
per share. The current sales
prices of our other securities quoted on the OTCQX may not be
indicative of the market prices on the Nasdaq Capital
Market.
Investing
in our securities involves a high degree of risk.
See “Risk
Factors”
beginning on page 13 of
this prospectus and elsewhere in this prospectus for a discussion
of information that should be considered in connection with an
investment in our securities. Neither the Securities and Exchange Commission
nor any other regulatory body has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
|
Per Unit
|
Total
|
Public offering price
(1)
|
$
|
$
|
Underwriting discount
(1) (2)
|
$
|
$
|
Proceeds, before
expenses, to us
|
$
|
$
|
(1)
The public offering
price is
$
per unit and
corresponds to an assumed public offering price of
$
for each share of common
stock and $
for each warrant
included in the unit.
(2)
We have agreed to reimburse the
underwriters for certain expenses and to issue to the underwriters
a unit purchase option to purchase 10% of the number of shares of
common stock and warrants to be issued and sold in this offering.
See “Underwriting” for a description of the
compensation payable to the underwriters.
We have granted the
underwriters an option, exercisable one or more times in whole or
in part, to purchase up to additional shares of common stock and/or
warrants to purchase up to an aggregate of shares of common stock
at an exercise price of $ per share, in
any combinations thereof, from us at the public offering price per
security, less the underwriting discounts and commissions, for 45
days after the date of this prospectus to cover over-allotments, if
any.
The underwriters expect to deliver
the units against payment in New York, New York on or
about
, 2018.
Benchmark
|
Northland Capital
Markets
|
|
|
|
Prospectus dated
, 2018 A Technology-Powered
Real Estate Broker
TABLE OF
CONTENTS
PROSPECTUS
SUMMARY
|
1
|
RISK
FACTORS
|
14
|
SPECIAL
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
28
|
USE OF
PROCEEDS
|
30
|
MARKET PRICE OF
OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
|
30
|
DIVIDEND
POLICY
|
30
|
CAPITALIZATION
|
31
|
DILUTION
|
32
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
34
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
36
|
UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
|
53
|
BUSINESS
|
60
|
MANAGEMENT,
DIRECTORS AND OFFICERS
|
67
|
COMPENSATION OF
NOVUME DIRECTORS
|
73
|
EXECUTIVE
COMPENSATION
|
74
|
NOVUME
SOLUTIONS, INC. 2017 EQUITY AWARD PLAN
|
78
|
LIMITATIONS ON
LIABILITY AND INDEMNIFICATION MATTERS
|
86
|
CERTAIN
RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
|
87
|
PRINCIPAL
STOCKHOLDERS
|
88
|
DESCRIPTION OF
CAPITAL STOCK
|
89
|
DESCRIPTION OF
SECURITIES WE ARE OFFERING
|
95
|
UNDERWRITING
|
96
|
LEGAL
MATTERS
|
101
|
EXPERTS
|
101
|
WHERE YOU CAN
FIND ADDITIONAL INFORMATION
|
101
|
INDEX TO
FINANCIAL STATEMENTS
|
F-1
|
EXHIBIT
INDEX
|
|
We have not authorized anyone to
provide any information or to make any representations other than
those contained in this prospectus or in any free writing
prospectuses we have prepared. We and the underwriters take no
responsibility for, and can provide no assurance as to the
reliability of, any other information that others may give you.
This prospectus is an offer to sell only the securities offered
hereby, but only under circumstances and in jurisdictions where it
is lawful to do so. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or of any sale of our
securities.
For investors outside of the United
States: Neither we nor the underwriters have done anything that
would permit this offering or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is
required, other than in the United States. You are required to
inform yourself about, and to observe any restrictions relating to,
this offering and the distribution of this prospectus outside of
the United States.
Unless otherwise indicated, information contained in this
prospectus concerning our industry and the markets in which we
operate, including our general expectations and market position,
market opportunity and market size, is based on information from
various sources, including independent industry publications. In
presenting this information, we have also made assumptions based on
such data and other similar sources, and on our knowledge of, and
our experience to date in, the markets for our services. This
information involves a number of assumptions and limitations, and
you are cautioned not to give undue weight to such estimates. We
believe that the information from these industry publications that
is included in this prospectus is reliable. The industry in which
we operate is subject to a high degree of uncertainty and risk due
to a variety of factors, including those described in "Risk
Factors."
These and other factors could cause results to differ materially
from those expressed in the estimates made by the independent
parties and by us.
Our
name, our logo, and our other trademarks or service marks appearing
in this prospectus are the property of Novume Solutions, Inc. and
its subsidiaries. Solely for convenience, trademarks and
trade names referred to in this prospectus, including logos,
artwork and other visual displays, may appear without the ® or
TM symbols, but such references are not intended to indicate, in
any way, that their respective owners will not assert, to the
fullest extent under applicable law, their rights thereto. We do
not intend our use or display of other companies' trade names or
trademarks to imply a relationship with, or endorsement or
sponsorship of us by, any other companies.
Industry Data
We use industry
and market data throughout this prospectus, which we have obtained
from market research, independent industry publications, or other
publicly available information. Although we believe that each such
source is reliable as of its respective date, the information
contained in such sources has not been independently verified.
While we are not aware of any misstatements regarding any industry
and market data presented herein, such data is subject to change
based on various factors, including those discussed under the
heading “Risk Factors” in this prospectus. We have not
commissioned, nor are we affiliated with, any of the independent
industry sources we cite.
|
PROSPECTUS
SUMMARY
This summary
highlights information presented in greater detail elsewhere in
this prospectus. This summary is not complete and does not contain
all the information you should consider before investing in our
securities. You should read the entire prospectus carefully before
making an investment decision, including the risks of investing in
our securities described under “Risk Factors,” our
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and our consolidated
financial statements and related notes included elsewhere in this
prospectus.
Unless otherwise noted or the
context indicates otherwise, as used in this prospectus, the terms
“Novume,” the “Company,” “we,”
“us,” and “our” refer to Novume Solutions,
Inc., a Delaware corporation, and its subsidiaries taken as a
whole.
Overview
We are a leading provider of support
services to the government contracting market. Generally speaking,
our clients are companies that serve the government.
We:
●
Capture business by
helping our clients to win government contracts.
●
Manage risk by being
prepared for, and responding to, disruptive events and creating
secure systems.
●
Run client back-end
services by providing accounting, HR, IT, and other managed
services.
●
Perform their
contract requirements by providing specialized staffing services,
primarily in the aerospace and aviation industry.
We support the government
contracting industry that:
●
Represented over $439 billion of U.S. federal
government spending in FY 2017 according to
USASpending.gov.
●
Has proven to be relatively recession
resistant.
●
According to the U.S. federal government’s
System for Award Management (“SAM”) database, as of
January 2, 2018 there are over 528,000 government contractors of
which over 52,000 are located in Washington, DC, Maryland and
Virginia, many of which are located in an area commonly known as
the “Beltway” which is in close proximity to our
headquarters.
We see the professional services
support industry in which we operate as:
●
Highly fragmented.
●
Comprised of numerous small- and medium-sized
businesses that are ripe for consolidation.
We believe these factors provide
tremendous growth opportunities for us.
Description of
Services
Government Contracting Support Solutions
Our solutions assist government
contractors with critical aspects of their business. Our services
include:
●
Outsourced accounting and finance
services
●
Managed information technology
solutions
●
Cloud hosting and security
|
|
1
|
●
Market intelligence and opportunity
identification
●
Capture and strategic advisory
●
Proposal strategy and development
●
Teaming support
●
Managed human capital services
Our services also help
commercially-focused firms gain entry into the government
contracting market. Since 1983, we have assisted clients in winning
over $160 billion of government contract awards.
Risk Mitigation and Crisis Management
We combine best practice consulting
with proven crisis management expertise, empowering clients to both
anticipate and evaluate risks and manage crises when they occur. We
assess, audit, develop, train and test strategies and programs
encompassing:
●
Predictive intelligence
●
Business continuity
●
Risk assessment
●
Crisis management and
communications
●
Emergency and cyber incident
response
●
Behavioral risk and threat
assessment
●
Workplace violence prevention
We are focused on prevention in
addition to planning and response initiatives. For example, our
behavioral risk and threat assessment program, BERTHA®, positions
organizations to prevent violence from occurring. This program
enables our clients to identify early warning signs that may be
exhibited by an individual long before they are on a path to
violence.
By educating others on emerging
threats and strategies to combat those threats, we increase
awareness of our initiatives through no-fee webinars, stress tests,
and social media and blog articles that include analyses by members
of our highly-credentialed expert council. We partner with industry
associations and aggregators to deliver meaningful risk mitigation
strategies and education. We also serve clients ranging from some
of the world’s largest global companies to main street
businesses, public and private and across all industry
sectors. We offer services to clients that enhance their ability to
manage risk and respond to adverse events, thereby minimizing
people, brand, reputation, financial, legal and regulatory
impacts.
Specialty Staffing
We provide the Department of Defense
and the aerospace and aviation industry with experienced
maintenance and modification specialists. We also provide quality
specialized contract personnel, temp-to-hire professionals, direct
hires, and temporary or seasonal hires to a diverse group of
companies nationally. Furthermore, we have been instrumental in
placing highly-skilled technical professionals in some of the
world’s most prestigious engineering firms and government
facilities for over 20 years. Some of the professionals that we
place in the aerospace industry include:
●
FAA Certified Airframe & Power Plant
Mechanics
●
Avionics and Embedded Software
Engineers,
●
FCC Certified Avionic Technicians
●
I.A. Licensed Aircraft Inspectors
●
Flight Test Engineers
●
Process/Repair Engineers
●
Simulation Engineers
|
|
2
|
Industry
We provide professional services
that offer scalable and compliant outsourced support to companies
that deliver services to government and commercial clients. The
industry in which we operate is fragmented with a large number of
small firms providing niche services.
A unique characteristic of the
government contracting industry is that many of these companies are
concentrated in the Beltway. According to USASpending.gov, the U.S.
federal government’s contract spending in Virginia, Maryland
and Washington, DC was in excess of $92 billion in FY 2017. This
represents 21% of the $436 billion of total federal government
contract spending in FY 2017.
While our immediate goal is to
improve our ability to serve this sector by pooling our
subsidiaries’ resources and client contacts, our ultimate
objective is to expand our ability to meet the unique needs of this
sector by assembling, through organic growth and strategic
acquisitions, a complementary suite of service and systems
providers with demonstrated ability to satisfy the need 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. Drawing on the insights and experience of our
combined leadership team, we expect to both increase our contact
with, and improve our understanding of, the needs of the
enterprises we serve. We would like to be recognized as the best
place to go for outsourced services when a government contractor
has to meet an unusual need.
Clients
To be a government contractor, a
company must be able to meet rigid standards, therefore, our
clients are typically well-established, financially-stable
businesses with a reputation for excellence and high standards and
a demonstrated ability to survive and prosper through innovation
and adaptation. The U.S. federal government spent an average of
over $450 billion each year from FY 2013 through 2017 for goods and
services, according to USASpending.gov, creating one of the largest
and most stable markets in the world, and there are thousands of
government contractors providing these goods and
services.
The U.S. federal government’s
SAM database includes over 528,000 government contractors as of
January 2, 2018.
Since
1983, we have served
thousands of these entities. In 2017, we
provided services to 14 of the Top 100 largest federal contractors
(based on their fiscal 2016 prime contracts in IT, systems
integration, professional services and telecommunications) as
identified by Washington Technology (https://washingtontechnology.com/toplists/top-100-lists/2017.aspx).
Marketing and
Sales
We strive to position ourselves as a
preferred, single-source provider of specialized professional
services to our clients. We obtain client engagements primarily
through business development efforts, cross-selling of our services
to existing clients, and maintaining client relationships, as well
as referrals from existing and former clients.
Our business development efforts
emphasize lead generation, industry group networking, and corporate
visibility. Most of our business development efforts are led by
members of our professional teams, who are also responsible for
managing projects. Our business development efforts are further
supported by personnel located at our corporate
headquarters.
As our service offerings become more
diverse, we anticipate increasing our cross-selling opportunities.
Our goals are to offer a broader range of services to existing
clients and to broaden our client base using our existing
value-added solutions.
|
|
3
|
Competition
We believe that the sectors in which
we operate are highly fragmented and characterized by many smaller
companies generally having fewer than ten employees. These
companies tend to focus their operations on local customers or
specialized niche activities. As a result, we compete with a large
number of smaller, more specialized companies that concentrate
their resources in particular areas of expertise. The extent of our
competition varies according to sectors and geographic
areas.
We believe we compete on the quality
of service, relevant experience, staffing capabilities, reputation,
geographic presence, stability, and price. Price differentiation
remains an important element in competitive tendering and is a
significant factor in bidding for contracts. The importance of the
foregoing factors varies widely based upon the nature, location,
and scale of our clients’ needs. We believe that certain
economies of scale can be realized by service providers that
establish a national presence and reputation for providing
high-quality and cost-effective services. Our ability to compete
successfully will depend upon the effectiveness of our marketing
efforts, the strength of our client relationships, our ability to
accurately estimate costs and bid for work, the quality of the work
we perform and our ability to hire and train qualified
personnel.
Competitive
Strengths
We believe we have the following
competitive strengths:
●
Experienced, talented, and
motivated professionals – We employ seasoned professionals with a broad
array of specialties, a strong customer service orientation and in
many cases, the required professional certifications and advanced
degrees. Our executive officers have an average of more than 30
years of operating and management experience and have been involved
in analyzing potential acquisition transactions. We place a high
priority on attracting, motivating and retaining top professionals
to serve our clients, and our compensation system emphasizes the
use of performance-based incentives, including opportunities for
stock ownership, to achieve this objective.
●
Niche
expertise – The services that we provide are
highly-specialized professional services that have high barriers to
entry. While we have a cadre of professionals with the requisite
skills, we also have access to numerous consultants who can provide
subject matter expertise for unique projects and who can supplement
our workforce based on client demand.
●
Industry-recognized quality
of service – We
believe that we have developed a strong reputation for quality
service based upon our industry-recognized depth of experience,
ability to attract and retain quality professionals, and expertise
across multiple service sectors.
●
Strong, long-term client
relationships – Our combination of niche market experience and
professionals with requisite expertise has enabled us to develop
strong relationships with our core clients. In the case of our
outsourced accounting and finance services group, historically, our
client retention has been over 90%. By serving our clients on a
long-term basis, we are able to gain a deep understanding of their
overall business needs as well as the unique technical requirements
of their projects. This increased understanding gives us the
opportunity to provide superior value to our clients by allowing us
to more fully assess and better manage the risks inherent in their
projects.
●
One-stop shop
– The combination of services we
offer allows our clients to focus on executing their contracts and
getting more work by not being encumbered with administrative
functions required when doing business with the
government.
Growth
Strategies
We intend to use the following
growth strategies as we seek to expand our market share in our
current areas of expertise and eventually position ourselves as a
preferred provider of comprehensive specialized professional
services to our clients:
|
|
4
|
●
Strategic
Acquisitions – We seek acquisitions that allow
us to expand or enhance our capabilities in our existing service
offerings. In analyzing new acquisitions, we pursue opportunities
that function as profitable stand-alone operations or are
complementary to our existing businesses. We believe that expanding
our business through strategic acquisitions will enable us to
exploit economies of scale in the areas of finance, human
resources, marketing, administration, information technology, and
legal, while also providing cross-selling opportunities among our
vertical service offerings.
●
Common Theme
– Most government contractors have
the need for the services that we provide. Our companies sell to
the same client pool allowing for one-stop-shop, cross selling
opportunities.
●
Geographic Expansion
– Parts of the country have substantial government presence
that allow for easy expansion of our footprint, such as the U.S.
Navy in San Diego and the U.S. Air Force in
Denver.
●
Business
Development – With additional resources
we intend to grow our business by investing in a larger sales force
and integrated client relationship management tools.
Risks
Our business and our ability to
execute our business strategy are subject to a number of risks of
which you should be aware before making an investment decision.
These risks are discussed more fully in the "Risk Factors" section
of this prospectus, and among these important risks are the
following:
●
We are currently not profitable and we may be
unable to become profitable on a quarterly or annual basis. If we
experience declining or flat revenues and fail to manage such
declines effectively, we may be unable to execute our business
plans and may experience future weaknesses in operating results.
Our business has significant working capital needs and if we are
unable to satisfy those needs from cash generated from our
operations or borrowings under our revolving credit facility, our
financial condition will be adversely affected.
●
The success of our business will depend, in
part, on the continued services of certain key personnel and our
ability to attract and retain qualified personnel.
●
Our strategy of growth through acquisitions
could harm our business.
●
Successful integration of
newly acquired target companies may place a significant burden on
our management and internal resources.
●
We are subject to business uncertainties and
contractual restrictions following the consummation of acquisitions
that could adversely affect our businesses.
●
Resources could be wasted in researching
acquisitions that are not completed, which could materially
adversely affect subsequent attempts to locate and acquire or merge
with another business.
●
We may be required to write-down certain assets
after completing our required annual evaluations, which may affect
our reported financial results. We may issue additional notes or
other debt securities, or otherwise incur substantial additional
debt, which may adversely affect our leverage and financial
condition and thus negatively impact the value of our
stockholders’ investment in the Company.
●
Improper disclosure of confidential and personal
data could result in liability and harm to our
reputation.
●
Our business could be negatively impacted by
cyber and other security threats or disruptions.
●
We are dependent upon technology services, and
if we experience damage, service interruptions or failures in our
computer and telecommunications systems, our customer and worker
relationships and our ability to attract new customers may be
adversely affected.
●
If we do not keep pace with rapid technological
changes and evolving industry standards, we will not be able to
remain competitive, and the demand for our services will likely
decline.
●
Technology improvements and disruptions could
diminish the need for our traditional services.
|
|
5
|
●
We operate in a highly-competitive industry with
low barriers to entry, and may be unable to compete successfully
against existing or new competitors.
●
Our business is subject to risks associated with
geographic market concentration.
●
A downturn of the U.S. or global economy could
result in our customers using fewer workforce solutions and
services or becoming unable to pay us for our services on a timely
basis or at all, which would materially adversely affect our
business.
●
We may be exposed to employment-related claims
and losses, including class action lawsuits, which could have a
material adverse effect on our business.
●
We are dependent on workers’ compensation
insurance coverage at commercially reasonable terms.
●
The spending cuts imposed
by the Budget Control Act of 2011 (“BCA”) could impact
our operating results and profit.
●
A delay in the completion of the budget process
of the U.S. government could delay procurement of our services and
have an adverse effect on our future revenue.
●
If our contractors and subcontractors fail to
satisfy their obligations to us or other parties, or if we are
unable to maintain these relationships, our revenue, profitability,
and growth prospects could be adversely affected.
●
Due to the competitive process to obtain
contracts and an increase in bid protests, we may be unable to
achieve or sustain revenue growth and profitability.
●
Our business is directly
tied to the success of our government contracting clients, which
are increasingly reliant on ID/IQ contracts. ID/IQ contracts are
not firm orders for services, and we may generate limited or no
revenue from these contracts which could adversely affect its
operating performance.
●
We incur increased costs as a result of
operating as a public company and our management is required to
devote substantial time to new compliance initiatives.
●
We have identified material weaknesses in our
internal control over financial reporting. If we fail to develop or
maintain an effective system of internal controls, we may not be
able to accurately report our financial results or prevent fraud.
As a result, current and potential stockholders could lose
confidence in our financial reporting, which would harm our
business and the trading price of our securities.
●
Our ability to use our net operating losses to
offset future taxable income may be subject to certain limitations,
which could subject our business to higher tax
liability.
●
We may need to raise additional capital in the
future, which may not be available on acceptable terms, or at
all.
Our
History
We are a Delaware corporation that
was formed in February 2017 to effectuate the mergers of, and
become a holding company for KeyStone Solutions, Inc.
(“KeyStone”) and Brekford Traffic Safety, Inc.
(“Brekford”). Novume services are provided
through six wholly owned subsidiaries: AOC Key Solutions, Inc.
(“AOC Key
Solutions”); Firestorm
Solutions, LLC and Firestorm Franchising, LLC (collectively
referred to as “Firestorm”); Global Technical Services,
Inc. and Global Contract Professionals, Inc. (collectively referred
to as “Global” or the “Global Entities”); and Novume Media, Inc.
(“Novume Media”).
We conduct core operations through
our primary operating subsidiaries:
●
Government Contracting
Support Solutions – AOC Key Solutions has been helping government
contractors to win business since 1983.
●
Risk Mitigation and Crisis
Management – Firestorm has been in business
since 2005.
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|
6
|
●
Specialty
Staffing – Global provides these services and has been
supplying personnel to the aerospace/aviation industry since
1989.
Recent Development
Acquisition of NeoSystems
On November 16, 2017, we entered
into an Agreement and Plan of Merger by and among us, NeoSystems
Holding, LLC, our wholly owned subsidiary, NeoSystems HoldCo, Inc.,
NeoSystems LLC, a wholly owned subsidiary of NeoSystems HoldCo
(“NeoSystems”), Robert W. Wilson, Jr., in his personal
capacity, Michael Tinsley, in his personal capacity and Michael
Tinsley, in his capacity as the representative of each shareholder
of NeoSystems that has not demanded and perfected appraisal rights
under the Virginia Stock Corporation Act. Pursuant to the merger
agreement, we will acquire NeoSystems through a forward
merger.
The consummation of the merger is
subject to customary closing conditions, including the consummation
of this offering, the subject of this prospectus.
A description of the terms of the
merger is included in this prospectus under "Acquisition of
NeoSystems."
Corporate
Information
Our principal executive offices are
located at 14420 Albemarle Point Place, Suite 200, Chantilly,
Virginia 20151 and our telephone number is (703) 953-3838. Our
website address is www.novume.com. The information on, or
accessible through, our website does not constitute a part of, and
is not incorporated into, this prospectus.
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|
7
|
The
Offering
|
|
|
|
Securities offered by
us
|
$12.5 million of
units, each consisting of
one share of our common stock and a warrant to
purchase one share of our common
stock.
|
|
|
|
|
|
|
Offering
price |
$
per unit.
|
|
|
|
|
|
|
Common stock to be outstanding after this
offering
|
shares (assuming none of the
warrants issued in this offering are
exercised)
|
|
|
|
|
|
|
Terms of warrants issued as part of a unit offered by us in this
offering
|
Each warrant will have
an exercise price per share of not
less than the last reported sale price of our common stock on the
trading day immediately preceding the pricing of this
offering, will be immediately
exercisable and will expire on the fifth anniversary
of the original issuance date.
We may call the warrants for redemption as
follows: (i) at a price of $0.01 for each warrant at any time while
the warrants are exercisable, so long as a registration statement
relating to the common stock issuable upon exercise of the warrants
is effective and current: (ii) upon not less than 30 days prior
written notice of redemption to each warrant holder; and (iii) if,
and only if, the reported last sale price of the common stock
equals or exceeds $
per share (175% of the public offering
price per unit in this offering) for the 20-trading-day
period ending on the third business day prior to the notice of
redemption to warrant holders. If the foregoing conditions are
satisfied and we call the warrants for redemption, each warrant
holder will then be entitled to exercise his or her warrant prior
to the date scheduled for redemption. However, there can be no
assurance that the price of the common stock will exceed the call
price or the warrant exercise price after the redemption call is
made.
This prospectus also relates to the offering of the shares of
common stock issuable upon exercise of the warrants.
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|
|
|
|
|
|
Overallotment option
|
We
have granted the underwriters an option, exercisable one or more
times in whole or in part, to purchase up to additional shares of
common stock and/or warrants to purchase up to an aggregate of
shares of common stock at an exercise price of $
per share, in any combinations thereof, from us at the public
offering price per security, less the underwriting discounts and
commissions, for 45 days after the date of this prospectus to cover
over-allotments, if any.
|
|
|
|
|
|
|
Use of proceeds
|
We estimate that the net proceeds of
this
offering will be approximately
$
million,
assuming a public offering price of $
per unit or
approximately
$
million if the underwriters exercise their overallotment option in
full, and after deducting the estimated underwriting discount and
estimated offering expenses. We intend to use the net proceeds that
we receive from this offering for purchase consideration for
NeoSystems, the terms of which acquisition are described in this
Prospectus under "Acquisition of
NeoSystems", working capital and other general corporate
purposes, including technology and development and marketing
activities, general and administrative matters and capital
expenditures. We may also use a portion of the net proceeds to
invest in or acquire third-party businesses, products, services,
technologies, or other assets. However, we do not currently have
any definitive or preliminary plans with respect to the use of
proceeds for such purposes. See “Use of
Proceeds.”
|
|
|
|
|
|
|
Risk factors
|
You should read the “Risk
Factors” section of this prospectus beginning on page 13 for
a discussion of factors to consider carefully before deciding to
invest in shares of our common stock.
|
|
|
|
|
|
|
Nasdaq Capital Market
symbol for our common stock
|
“NVMM”
|
|
|
|
|
|
|
Proposed Nasdaq Capital Market
symbol
|
“NVMMZ”
for the warrants
|
|
8
|
The number of shares of our common
stock to be outstanding after this offering is based on
14,496,697 shares of our common stock outstanding as of
January 14, 2018,
and excludes:
●
1,695,375 shares of our
common stock issuable upon the exercise of options outstanding as
of January 24,
2018 with a weighted-average exercise price of $2.19
per share;
●
1,304,625 shares of our
common stock reserved for future issuance under our stock-based
compensation plans, the Novume Solutions 2017 Equity Incentive
Plan, as of January
24,
2018;
●
811,514 shares issuable upon the
conversion of our Series A Cumulative Convertible Redeemable
Preferred Stock (the “Series A Preferred Stock”)
outstanding as of
January 24,
2018;
●
481,722 shares issuable upon the
conversion of our Series B Cumulative Convertible Preferred Stock
(the “Series B Preferred Stock”) outstanding as
of January
24, 2018;
●
243,655 shares issuable upon the
exercise of Unit Warrants for common stock outstanding as of
January 24,
2018; and
●
820,586 shares issuable upon the
exercise of warrants for common stock outstanding as of
January 24,
2018.
Except as otherwise indicated, all
information in this prospectus assumes:
●
no conversion of the Series A Preferred Stock or
Series B Preferred Stock;
●
no exercise of outstanding options;
●
no exercise of outstanding Unit
Warrants;
●
no exercise of outstanding
warrants;
●
no exercise of the underwriters’ option to
purchase additional units;
●
no exercise of the representatives' unit
purchase option; and
●
no exercise by the purchaser of the warrants
included in the units offered.
Summary
Consolidated Financial Data
The following tables summarize our
consolidated financial data. We have derived the following
consolidated statements of operations data for the years ended
December 31, 2015 and 2016, from our audited consolidated
financial statements included elsewhere in this prospectus. We have
derived the following summary consolidated statements of operations
data for the three and nine months ended September 30, 2016 and
2017 and our summary consolidated balance sheet data as of
September 30, 2017 from our unaudited interim consolidated
financial statements included elsewhere in this prospectus. Our
unaudited interim consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting
principles on the same basis as our audited annual consolidated
financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal, recurring adjustments, that
are necessary for the fair presentation of our consolidated
financial position as of September 30, 2017 and our consolidated
results of operations for the three and nine months ended September
30, 2016 and 2017. Our historical results are not necessarily
indicative of the results that may be expected for any future
period, and the results for the three and nine months ended
September 30, 2017 are not necessarily indicative of the results to
be expected for the full year or any other period. The following
summary consolidated financial data should be read in conjunction
with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements, the accompanying notes and other financial
information included elsewhere in this prospectus.
|
|
9
|
Year Ended December
31,
|
Three Months ended
September 30,
|
Nine Months ended
September 30,
|
|||
|
2015
|
2016
|
2016
|
2017
|
2016
|
2017
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
Revenue
|
$9,661,795
|
$12,128,406
|
$2,405,529
|
$4,421,574
|
$9,582,874
|
$11,131,825
|
Cost of
revenue
|
5,496,722
|
6,959,514
|
1,334,436
|
2,457,806
|
5,496,588
|
6,017,982
|
Gross
profit
|
4,165,073
|
5,168,892
|
1,071,093
|
1,963,768
|
4,086,286
|
5,113,843
|
Selling,
general and administrative expenses
|
3,795,678
|
5,262,768
|
1,151,514
|
2,997,566
|
3,624,005
|
8,036,339
|
Income
(loss) from operations
|
369,395
|
(93,876)
|
(80,421)
|
(1,033,798)
|
462,281
|
(2,922,496)
|
Other
(expense) income, net
|
-
|
(165,079)
|
(15,656)
|
17,296
|
(28,693)
|
44,659
|
Income
(loss) before taxes
|
369,395
|
(258,955)
|
(96,077)
|
(1,016,502)
|
433,588
|
(2,877,837)
|
Income tax
benefit (expense
|
-
|
219,971
|
40,535
|
225,142
|
(13,380)
|
964,377
|
Net income
(loss) from continuing operations
|
$369,395
|
$(38,984)
|
$(55,542)
|
$(791,360)
|
$420,208
|
$(1,913,460)
|
Net (loss)
income per share attributable to common stock - basic
|
$269.63
|
$(0.01)
|
$(0.01)
|
$ (0.09)
|
$0.06
|
$ (0.23)
|
Net (loss)
income per share attributable to common stock -
diluted
|
$269.63
|
$(0.01)
|
$(0.01)
|
$ (0.09)
|
$0.06
|
$ (0.23)
|
Weighted
average shares used to compute net (loss) income per share
attributable to common stock - basic
|
1,370
|
3,958,619
|
9,713,956
|
11,756,560
|
7,016,373
|
10,920,866
|
Weighted
average shares used to compute net (loss) income per share
attributable to common stock - diluted
|
1,370
|
3,958,619
|
9,713,956
|
11,756,560
|
7,123,160
|
10,920,866
|
Pro forma
net (loss) income per share attributable to common stock - basic
(unaudited)
|
$ 0.12
|
$ (0.01)
|
$ (0.00)
|
$ (0.07)
|
$ 0.04
|
$ (0.18)
|
Pro forma net (loss) income per
share attributable to common stock - diluted
(unaudited)
|
$ 0.12
|
$ (0.01)
|
$ (0.00)
|
$ (0.07)
|
$ 0.04
|
$ (0.18)
|
Pro forma
weighted average shares used to compute net (loss) income per share
attributable to common stock - basic (unaudited)
|
3,157,936
|
7,115,185
|
12,870,522
|
14,913,123
|
10,172,939
|
14,077,432
|
Pro forma weighted average shares
used to compute net (loss) income per share attributable to common
stock - diluted (unaudited)
|
3,157,936
|
7,115,185
|
12,870,522
|
14,913,126
|
10,279,726
|
14,077,432
|
STOCK
BASED COMPENSATION DISCLOSURE:
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
Three
Months ended September,
|
Nine
Months ended September,
|
|||
|
2015
|
2016
|
2016
|
2017
|
2016
|
2017
|
General and
administrative
|
$-
|
$26,844
|
$-
|
$107,321
|
$-
|
$227,470
|
Total
|
$-
|
$26,844
|
$-
|
$107,321
|
$-
|
$227,470
|
|
|
|
|
|
|
|
10
|
As of September 30,
2017
|
||
|
Actual
|
Pro Forma (1)
|
Pro Forma - Adjusted (2)
(3)
|
CONSOLIDATED
BALANCE SHEET DATA:
|
|
|
|
Cash, cash
equivalents and short-term investments
|
$3,762,265
|
$(2,534,760)
|
$ 8,148,240
|
Series A cumulative convertible
redeemable preferred stock, $0.0001 par value, 505,000 shares
authorized, 502,327 shares issued and outstanding,
actual
|
$ 4,246,541
|
$ 4,246,541
|
$ 4,246,541
|
Stockholders' equity
(deficit):
|
|
|
|
Preferred
stock, $0.0001 par value, 7,500,000 authorized, 505,000 shares
designated, no shares issued and outstanding, pro forma and pro
forma as adjusted
|
$-
|
$-
|
$ -
|
Series
B cumulative convertible preferred stock, par value $0.0001 per
share, 240,861 shares authorized, issued and outstanding, pro
forma
|
-
|
2,408,610
|
2,408,610
|
Common
stock, $0.0001 par value, 25,000,000 shares authorized, 13,933,784
shares issued and outstanding as of September 30, 2017, pro forma
as adjusted
|
1,394
|
1,651
|
1,967
|
Additional
paid-in capital
|
8,925,179
|
21,103,794
|
31,786,478
|
Accumulated
deficit
|
(2,595,363)
|
(2,600,160)
|
(2,600,160)
|
Total
stockholders' equity (deficit)
|
$ 6,331,210
|
$ 20,913,895
|
$ 31,596,895
|
Total
capitalization
|
$10,577,751
|
$25,160,436
|
$ 35,843,436
|
(1)
This pro forma column reflects the
impact of the acquisitions of Global which occurred on October 1,
2017 as well as the planned acquisition of
NeoSystems. This pro forma
reflects the impact of the merger with Global, including the
elimination of Global's equity of $874,883 and the related
allocation to excess of purchase price over net assets acquired.
Consideration paid as part of this merger include (a) $750,000 in
cash, (b) 375,000 shares of Novume common stock and (c) 240,861
shares of Series B Preferred Stock. In addition, we paid $365,037
to satisfy in full all of the outstanding debt of the Global
Entities at closing and paid $175,000 to reduce the balance on
Global’s line of credit. For more detailed
information, see the unaudited pro forma condensed combined
financial statements on page 52. The Company does not assume the automatic
conversion of the Series A Preferred Stock or Series B Preferred
Stock prior to or at the closing of this offering. The Series A
Preferred Stock would convert only if the public offering occurs
and, among other criteria, results in aggregate cash proceeds to us
of not less than $30,000,000 (net of underwriting discounts and
commissions). There is no automatic conversion feature for the
Series B Preferred Stock.
(2)
The pro forma as adjusted column
gives effect to (a) the pro forma adjustments set forth above
in (1) and (b) the sale and issuance by us of
3,156,566 shares of our common stock in this offering,
based upon an assumed combined public offering price of
$3.96 per
unit, which is the last reported sale price of our common stock on
the Nasdaq Capital Market on
January 24,
2018, after deducting the estimated underwriting discount and
estimated offering
expenses.
(3)
The assumed combined public offering price of
$3.96 per unit is the last
reported sale price of common stock on the Nasdaq Capital
Market
on January 24,
2018. Each $1.00 increase (decrease) in such offering price
would, after deducting the estimated underwriting discount,
increase (decrease) our cash, cash equivalents and short-term
investments, working capital, total assets, and total
stockholders’ equity by approximately $2.9
million, assuming that the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same.
Similarly, each increase (decrease) of one million shares in the
number of shares offered by us would, after deducting the estimated
underwriting discount, increase (decrease) our cash, cash
equivalents, and short-term investments, working capital, total
assets, and total stockholders’ equity by approximately
$3.6
million, assuming such public offering price remains the
same.
|
11
|
UNAUDITED PRO FORMA SUMMARY
CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma
summary combined financial statements are based on the historical
financial statements of Novume, Global and NeoSystems after giving
effect to our recent acquisition of Global and the anticipated
acquisition of NeoSystems,
and the assumptions and adjustments
described in the accompanying notes to these unaudited pro forma
condensed combined financial statements.
We acquired all
the outstanding shares of the Global Entities on October 1, 2017.
Consideration paid as part of the Global acquisition included: (a)
$750,000 in cash, (b) 375,000 shares of our common stock and (c)
240,861 shares of our Series B Preferred Stock. In addition to the
consideration paid, we paid $365,037 to satisfy in full all of the
outstanding debt of the Global Entities at closing, except for
certain intercompany debt and ordinary course debt, and amounts due
under (a) the Wells Fargo Credit Facilities, which remained in
effect following the consummation of the acquisition. In connection
with the Wells Fargo Credit Facilities, we delivered to Wells Fargo
Bank, National Association, general continuing guaranties dated
September 29, 2017 and effective upon the closing of the
acquisition, and we paid $175,000 in the aggregate to reduce the
current borrowed amounts under the Wells Fargo Credit Facilities as
of the closing date.
On
November 16, 2017, we entered into a merger agreement with
NeoSystems pursuant to which we will acquire NeoSystems in a
forward merger. The consideration for the merger consists of: (a)
$5 million in cash and (b) an amount of shares of the
Company’s common stock equal to $10 million (determined by dividing such
amount by the price per share to the public of such shares of
common stock sold by the Company in the first
Qualifying Offering as defined below) minus
$1,982,514, which represents the
aggregate dollar value of the spread of the options of NeoSystems
that will be assumed by Novume at closing (collectively, the
“Merger
Consideration”). A “Qualifying Offering” is
defined as a firm commitment underwritten public offering of the
Company for an aggregate price to the public of at least $10
million, which results in the Company’s successful listing of
common stock on the Nasdaq Stock Market or the New York Stock
Exchange. As additional consideration for the merger in addition to
the Merger Consideration, at closing we will (a) assume each
NeoSystem option outstanding immediately prior to closing that is
held by an optionholder that continues in the employment, or
service as a consultant or director, of NeoSystems; (b) assume the
obligations of NeoSystems with respect to certain of its debt
facilities, including outstanding principal totaling, in the
aggregate, $4.95 million; and (c) redeem all of the shares of
NeoSystems Holdco Preferred Stock at closing for up to an amount of
$2.25 million.
These pro forma condensed combined
financial statements also give effect to the acquisitions of
Firestorm and Brekford which occurred prior to September 30,
2017.
The unaudited pro forma summary
combined balance sheet of Novume, Global and NeoSystems as of
September 30, 2017 is presented as if the Global and anticipated
NeoSystems acquisitions had occurred on September 30, 2017. The
unaudited pro forma summary combined statement of operations of
Novume, Global, NeoSystems, Firestorm and Brekford for the nine
months ended September 30, 2017 is presented as if the all of the
acquisitions had taken place on January 1, 2017. The unaudited pro
forma summary combined balance sheet of Novume, Global, NeoSystems,
Firestorm and Brekford as of December 31, 2016 is presented as if
the Global and anticipated NeoSystems acquisitions had occurred on
December 31, 2016. The unaudited pro forma summary combined
statement of operations of Novume, Global, NeoSystems, Firestorm
and Brekford for the fiscal year ended December 31, 2016 is
presented as if the acquisitions and planned acquisitions had taken
place on January 1, 2016.
The unaudited pro forma condensed
combined financial information does not purport to represent what
our results of operations would have been if the acquisition of
Global and anticipated acquisition of NeoSystems had occurred on
January 1, 2016 or January 1, 2017 or what such results will be for
any future periods or what the consolidated balance sheet would
have been if the acquisition had occurred on September 30, 2017 or
December 31, 2016. The actual results in the periods following the
acquisitions may differ significantly from that reflected in the
unaudited pro forma condensed combined financial information for a
number of reasons including, but not limited to, differences
between the assumptions used to prepare the unaudited pro forma
condensed combined financial information and the actual amounts and
the completion of a final valuation of the acquisitions. In
addition, no adjustments have been made for non-recurring
integration plans or operational efficiencies that may have been
achieved if the acquisitions had occurred on January 1, 2017 or
January 1, 2016.
These unaudited pro forma summary
combined financial statements should be read in conjunction with
(i) the historical consolidated financial statements and notes
for Novume for the nine months ended September 30, 2017;
(ii) the historical audited financial statements and notes of
NeoSystems included below and (iii) the unaudited pro forma
condensed combined financial statements and notes on page 52 of
this prospectus.
|
|
12
|
Novume
including Global
|
Novume
including
Global and NeoSystems
|
Novume
including
Global
|
Novume
including
Global and NeoSystems
|
|
Nine
Months ended
September 30,
2017
|
Nine
Months ended
September 30,
2017
|
Year
ended
December
31, 2016
|
Year
ended
December
31, 2016
|
Pro
Forma Statement of Operations Data:
|
|
|
|
|
Revenue
|
$31,824,716
|
$55,208,371
|
$40,247,097
|
$70,068,301
|
Cost of
revenue
|
23,404,904
|
31,969,193
|
30,155,208
|
41,814,554
|
Gross profit
|
8,419,813
|
23,239,179
|
10,091,889
|
28,253,747
|
Salaries and related
expenses
|
1,237,539
|
1,237,539
|
1,645,073
|
1,645,073
|
Selling, general and
administrative expenses
|
10,749,500
|
25,008,602
|
10,599,073
|
30,855,324
|
Total operating
expenses
|
11,987,039
|
26,246,141
|
12,244,146
|
32,500,397
|
Loss from
operations
|
(3,567,227)
|
(3,006,963)
|
(2,152,257)
|
(4,246,650)
|
Other expense,
net
|
(78,838)
|
(65,113)
|
(203,247)
|
628,398
|
Interest expense,
net
|
(314,750)
|
(991,303)
|
(827,402)
|
(2,056,881)
|
Loss from continuing
operations before provision from income taxes
|
(3,960,815)
|
(4,063,379)
|
(3,182,906)
|
(5,675,133)
|
Provision for Income
Taxes
|
899,784
|
940,809
|
450,871
|
1,836,123
|
Net income (loss) from
continuing operations
|
$(3,061,031)
|
$(3,122,570)
|
$(2,732,035)
|
$(3,839,010)
|
|
|
Novume
including
Global
|
Novume including Global and
NeoSystems
|
Novume
including
Global
|
Novume
including Global and
NeoSystems
|
|
As of September 30,
2017
|
As of September 30,
2017
|
As of December 31,
2016
|
As of December 31,
2016
|
Pro Forma Balance
Sheet Data:
|
|
|
|
|
Total
assets
|
$22,435,210
|
$45,262,505
|
$24,315,688
|
$46,492,910
|
Total
liabilities and mezzanine debt
|
$ 13,133,899
|
$ 24,348,610
|
$10,749,894
|
$21,314,532
|
Total
stockholders' equity
|
$ 9,301,311
|
$ 20,913,895
|
$13,565,794
|
$25,178,378
|
|
|
|
|
|
13
An investment in
our securities involves a high degree of risk. You should carefully
consider the risks and uncertainties described below, together with
all of the other information in this prospectus, including
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and related notes, before deciding to invest
in our securities. Our business, operating results, financial
condition, or prospects could be materially and adversely affected
by any of these risks and uncertainties. If any of these risks
occurs, the trading price of our common stock could decline and you
might lose all or part of your investment. Our business, operating
results, financial performance, or prospects could also be harmed
by risks and uncertainties not currently known to us or that we
currently do not believe are material.
Risks Relating to
Our Corporate Structure and Business
We are currently not profitable and we may be unable to become
profitable on a quarterly or annual basis.
For the nine months ended
September 30, 2017, we had a loss from continuing operations
before taxes of $2,877,837. We cannot assure you that we will be
profitable in the future. Our ability to become profitable in
future periods could be impacted by budgetary constraints,
government and political agendas, economic instability and other
items that are not in our control. We cannot assure you that our
financial performance will sustain a sufficient level to completely
support operations. A significant portion of our expenses are fixed
in advance. As such, we generally are unable to reduce our expenses
significantly in the short-term to compensate for any unexpected
delay or decrease in anticipated revenues or increases in planned
investments. As a result, we may continue to experience operating
losses and net losses in the future, which would make it difficult
to fund operations and achieve our business plan, and could cause
the market price of our common stock to decline.
If we experience declining or flat revenues and fail to manage such
declines effectively, we may be unable to execute our business
plans and may experience future weaknesses in operating
results.
In order to achieve future growth,
we will need to continue to add additional qualified personnel, and
invest in additional research and development and sales and
marketing activities, which could lead to increases in our expenses
and future declines in operating results. In addition, our future
expansion is expected to place a significant strain on our
managerial, administrative, operational, financial and other
resources. If we are unable to manage these activities or any
revenue declines successfully, our business, financial condition
and results of operations could be adversely affected.
Our business has significant working capital needs and if we are
unable to satisfy those needs from cash generated from our
operations or borrowings under our revolving credit facility, our
financial condition will be adversely affected.
We require significant amounts of
working capital to operate our business. If we experience a
significant and sustained drop in operating profits, or if there
are unanticipated reductions in cash inflows or increases in cash
outlays, we may be subject to cash shortfalls. If such a shortfall
were to occur for even a brief period of time, it could have a
significant adverse effect on our business. In particular, we use
working capital to pay expenses relating to our employees and
temporary workers and to satisfy our workers’ compensation
liabilities. Generally, we pay our workers on a biweekly basis
while we generally receive payments from our customers 30 to
60 days after billing. As a result, we must maintain
sufficient cash availability to pay employees and independent
contractors and fund related payroll liabilities prior to receiving
payment from customers.
We have derived working capital for
our operations through cash generated by our operating activities
and borrowings under our revolving credit facility. We believe that
our current sources of capital are adequate to meet our working
capital needs. However, our available sources of capital are
limited. If our working capital needs increase in the future, we
may be forced to seek additional sources of capital, which may not
be available on commercially reasonable terms.
14
The amount we are entitled to borrow
under our revolving credit facility is calculated monthly based on
the aggregate value of certain eligible trade accounts receivable
generated from our operations, which are affected by financial,
business, economic and other factors, as well as by the daily
timing of cash collections and cash outflows. The aggregate value
of our eligible accounts receivable may not be adequate to allow
for borrowings for other corporate purposes, such as capital
expenditures or growth opportunities, which could reduce our
ability to react to changes in the market or industry
conditions.
Our revolving credit facility
includes various financial and other covenants with which the
Company has to comply in order to maintain borrowing availability
and avoid penalties, including minimum debt service coverage ratio,
and minimum current ratio and maximum leverage ratio.
Any future failure to comply with
the covenants which may occur under our revolving credit facility
could result in an event of default which, if not cured or waived,
could trigger prepayment obligations. There can be no assurance
that any future lender will waive defaults that may occur in the
future. If we were forced to refinance our revolving credit
facility, there can be no assurance that such refinancing would be
available or that such refinancing would not have a material
adverse effect on our business and financial condition. Even if
such refinancing were available, the terms could be less favorable
and our results of operations and financial condition could be
adversely affected by increased costs and interest
rates.
The success of our business will depend, in part, on the continued
services of certain key personnel and our ability to attract and
retain qualified personnel.
The success of our business will
depend, in part, on the continued services of certain members of
our management. In particular, the loss of the services of any of
Robert A. Berman as Chief Executive Officer and our director, Harry
Rhulen as President, Suzanne Loughlin as Chief Administrative
Officer and General Counsel and Carl Kumpf as Chief Financial
Officer could have a material adverse effect on our business,
results of operations, and financial condition. Our inability to
attract and retain qualified personnel could significantly disrupt
our business.
In addition, as
a solutions provider that provides engineers, certified technicians
and other professionals, our business is labor intensive and,
therefore, our ability to attract, retain, and expand our senior
management, sales personnel, and professional and technical staff
is an important factor in determining our future success. The
market for qualified engineers, certified technicians, and other
professionals is competitive and we may not be able to attract and
retain such professionals. It may also be difficult to attract and
retain qualified individuals in the timeframe demanded by our
clients. Furthermore, some of our contracts may require us to
employ only individuals who have particular government security
clearance levels. Our failure to attract and retain key individuals
could impair our ability to provide services to our clients and
conduct our business effectively.
Our strategy of growth through acquisitions could harm our
business.
It is our
intent to continue to grow through strategic acquisitions.
Investigation
of target businesses, and negotiations and financial arrangements
to acquire them, require significant management efforts and involve
substantial costs for accountants, attorneys and others.
Successful integration of newly acquired target companies may place
a significant burden on our management and internal resources,
and may require
the implementation of additional internal controls and management
and financial systems. The diversion of management’s
attention and any difficulties encountered in the transition and
integration processes could harm our business, financial condition
and operating results. In addition, we may be unable to execute our
acquisition strategy as planned, resulting in under-utilized
resources and a failure to achieve anticipated growth. Our
operating results and financial condition will be adversely
affected if we are unable to achieve, or achieve on a timely basis,
cost savings or revenue opportunities from any future acquisitions,
or incur unforeseen costs and expenses or experience unexpected
operating difficulties from the integration of acquired
businesses.
15
We may fail to realize the anticipated benefits of acquisitions
which we consummate.
We acquired
Global in October 2017, and in November 2017, we entered into a
merger agreement to acquire NeoSystems. Upon closing, we have
undertaken in the case of Global, and will undertake in the case of
NeoSystems, to integrate the operations of the acquired companies
that previously operated independently. There can be no assurance
that we will not encounter significant difficulties in integrating
the respective operations of Global and NeoSystems.
The
difficulties of integrating the acquisitions may include, among
others:
●
unanticipated issues in integration of
information, communications, and other systems;
●
unanticipated
incompatibility of logistics, marketing, and administration
methods;
●
integrating the business cultures of both
companies;
●
preserving important strategic client
relationships;
●
consolidating corporate and administrative
infrastructures and eliminating duplicative operations;
and
●
coordinating geographically separate
organizations.
The achievement
of the benefits expected from integration of the acquired companies
may require us to incur significant costs. The incurrence of any
such costs, as well as any unexpected costs or delays, in
connection with such integration, could have a material adverse
effect on our business, operating results or financial
condition.
We are subject to business uncertainties following the consummation
of acquisitions that could adversely affect our
business.
Uncertainty about the effect of
acquisitions on employees and customers may have an adverse effect
on our company. These uncertainties may impair our ability to
attract, retain and motivate key personnel for a period of time
after acquisitions, and could cause customers, suppliers and others
that deal with us to seek to change existing business relationships
with us. Employee retention may be particularly challenging, as
employees may experience uncertainty about their future roles with
the Company. If, despite our retention efforts, key employees
depart because of issues relating to the uncertainty and difficulty
of integration or a desire not to remain with us, as the case may
be, our business could be seriously harmed.
Resources could be wasted in researching acquisitions that are not
completed, which could materially adversely affect subsequent
attempts to locate and acquire or merge with another
business.
We anticipate that the investigation
of each specific target business and the negotiation, drafting and
execution of relevant agreements, disclosure documents and other
instruments will require substantial management time and attention
and substantial costs for accountants, attorneys and others. If we
decide not to complete a potential business combination, the costs
incurred up to that point for the proposed transaction likely would
not be recoverable. Furthermore, if we reach an agreement relating
to a specific target business, we may fail to complete a potential
business combination for any number of reasons including those
beyond our control. Any such event will result in a loss to us of
the related costs incurred which could materially adversely affect
subsequent attempts to locate and acquire or merge with another
business.
We may be required to write-down certain assets after completing
our required annual evaluations, which may affect our reported
financial results.
The
initial determination of the fair value of assets we acquire upon
consummation of an acquisition is based upon a
valuation. We are required to
analyze the carrying value of our acquired intangibles and goodwill
on an annual basis going forward. After we complete the detailed annual evaluation
of the carrying value of the these intangible assets, we may
be required to make adjustments to our consolidated balance sheet
and/or statement of operations. Any adjustments will affect our
reported financial results.
We may issue additional notes or other debt securities, or
otherwise incur substantial additional debt which may adversely
affect our leverage and financial condition and thus negatively
impact the value of our stockholders’ investment in the
Company.
The anticipated cash needs of our
business could change significantly as we pursue and complete
business acquisitions, if our business plans change, if economic
conditions change from those currently prevailing or from those now
anticipated, or if other unexpected circumstances arise that may
have a material effect on the cash flow or profitability of our
business. As of September 30, 2017, we had $1,500,000 of notes
payable. With the acquisition of Global on October 1, 2017, we
assumed approximately $3,413,247 outstanding on a line of credit.
With the anticipated acquisition of NeoSystems, we will assume
approximately $2,976,427 of notes payable. If we require additional
capital resources to grow our business, either internally or
through acquisition, we may need to seek to secure additional debt
financing. We may not be able to obtain financing arrangements on
acceptable terms or in amounts sufficient to meet our needs in the
future.
16
The incurrence of debt could have a
variety of negative effects, including:
●
default and foreclosure on our assets if our
operating revenues are insufficient to repay our debt
obligations;
●
acceleration of our obligations to repay the
indebtedness even if we make all principal and interest payments
when due if we breach certain covenants that require the
maintenance of certain financial ratios or reserves without a
waiver or renegotiation of that covenant;
●
our immediate payment of all principal and
accrued interest, if any, if the debt security is payable on
demand;
●
our inability to obtain necessary additional
financing if the debt security contains covenants restricting our
ability to obtain such financing while the debt security is
outstanding;
●
increased vulnerability to adverse changes in
general economic, industry and competitive conditions and adverse
changes in government regulation; and
●
limitations on our ability to borrow additional
amounts for expenses, capital expenditures, acquisitions, debt
service requirements, execution of our strategy and other purposes
and other disadvantages compared to our competitors who have less
debt.
Improper disclosure of confidential and personal data could result
in liability and harm to our reputation.
We store and processes increasingly
large amounts of confidential information concerning our customers
and vendors, as well as confidential information on behalf of our
customers and must ensure that such storage and processing is
compliant with our contractual obligations and all applicable
national and local privacy laws, rules, and regulations. These
laws, rules, and regulations can vary significantly from country to
country, with many being more onerous than those in the U.S. The
risk of failing to comply with these laws, rules, and regulations
increases as we continue to expand globally and become subject to
an increasing number of foreign laws, rules, and regulations.
Moreover, we must ensure that all of our vendors who have access to
such information also have the appropriate privacy policies,
procedures and protections in place. Although we take appropriate
measures to protect such information, the continued occurrence of
high-profile data breaches provides evidence of an external
environment increasingly hostile to information security. If our
security measures are breached as a result of third-party action,
employee or subcontractor error, malfeasance or otherwise, and, as
a result, someone obtains unauthorized access to customer data, our
reputation may be damaged, our business may suffer and we could
incur significant liability. Techniques used to obtain unauthorized
access or to sabotage systems change frequently and are growing
increasingly sophisticated. As a result, we may be unable to
anticipate these techniques or to implement adequate preventative
measures.
This environment demands that we
continuously improve our design and coordination of security
controls throughout the Company. Despite these efforts, it is
possible that our security controls over data, training, and other
practices we follow may not prevent the improper disclosure of
personally identifiable or other confidential
information.
If an
actual or perceived breach of our security occurs, we could be
liable under laws and regulations that protect personal or other
confidential data resulting in increases costs or loss of revenues
and the market perception of our services could be
harmed.
Our business could be negatively impacted by cyber and other
security threats or disruptions.
We face various cyber and other
security threats, including attempts to gain unauthorized access to
sensitive information and networks; insider threats; threats to the
security of our facilities and infrastructure; and threats from
terrorist acts or other acts of aggression. Cyber threats are
constant and evolving and include, but are not limited to, computer
viruses malicious software, destructive malware, attacks by
computer hackers attempts to gain unauthorized access to data,
disruption or denial of service attacks, and other electronic
security breaches that could lead to disruptions in mission
critical systems, unauthorized release or loss of confidential,
personal or otherwise protected information (ours or that of our
employees, customers or subcontractors), and corruption of data,
networks or systems. In addition, we could be impacted by cyber
threats or other disruptions or vulnerabilities found in products
we use or in our partners’ or customers’ systems that
are used in connection with our business. Our clients and
subcontractors face similar threats and/or they may not be able to
detect or deter them, or effectively to mitigate resulting losses.
These threats could damage our reputation as well as our
subcontractor’s ability to perform and could affect our
client’s ability to pay.
Although we utilize various
procedures and controls to monitor and mitigate the risk of these
threats to us, our clients and our partners, there can be no
assurance that these procedures and controls will be sufficient.
The impact of these factors is difficult to predict, but one or
more of them could result in the loss of information or
capabilities, harm to individuals or property, damage to our
reputation and /or require remedial actions or lead to loss of
business, regulatory actions potential liability and financial
loss, any one of which could have a material adverse effect on our
financial position, results of operations and/or cash
flows.
17
We are dependent upon technology services, and if we experience
damage, service interruptions or failures in our computer and
telecommunications systems, our customer and worker relationships
and our ability to attract new customers may be adversely
affected.
Our business could be interrupted by
damage to or disruption of our computer, telecommunications
equipment, or software systems. Our customers’ businesses may
be adversely affected by any system or equipment failure we
experience. As a result of any of the foregoing, our relationships
with our customers may be impaired, we may lose customers, our
ability to attract new customers may be adversely affected and we
could be exposed to contractual liability. Precautions in place to
protect us from, or minimize the effect of, such events may not be
adequate.
In addition, the failure or
disruption of mail, communications and/or utilities could cause an
interruption or suspension of our operations or otherwise harm our
business. Our property and business interruption insurance may be
inadequate to compensate us for all losses that may occur as a
result of any system or operational failure or disruption and, as a
result, revenue, profits and operating results could be adversely
affected.
If we do not keep pace with rapid technological changes and
evolving industry standards, we will not be able to remain
competitive, and the demand for our services will likely
decline.
The markets in which we operate are
in general characterized by the following factors:
●
changes due to rapid technological
advances;
●
additional qualification requirements related to
technological challenges; and
●
evolving industry standards and changes in the
regulatory and legislative environment.
Our future success will depend upon
our ability to anticipate and adapt to changes in technology and
industry standards, and to effectively develop, introduce, market
and gain broad acceptance of new product and service enhancements
incorporating the latest technological advancements.
Technology improvements and disruptions could diminish the need for
our traditional services.
Based on recent
technological developments, the market for outsourced services may
diminish. Some companies are beginning to use the Internet to
advertise for different services, including experts for sale,
anonymous authors to complete certain proposal sections for an
“introductory fee,” and even buying entire proposals
on-line, sometimes from overseas vendors at extremely low prices.
If the use of unknown and unproven companies advertising
traditional consulting services significantly increases, it may
diminish the demand for some of our services, which may adversely
affect our revenues, results of operations and financial
condition.
We operate in a highly-competitive industry with low barriers to
entry, and may be unable to compete successfully against existing
or new competitors.
Our business is highly-competitive,
and we compete with companies that may have greater name
recognition and financial resources, as well as many independent
sole-proprietors who sell themselves as outsourced resources. We
also compete with providers of outsourcing services, systems
integrators, computer systems consultants and other providers of
services. We expect that the level of competition will remain high,
which could limit our ability to maintain or increase our market
share or profitability.
The needs of our clients change and
evolve regularly. Accordingly, our success depends on our ability
to develop services and solutions that address these changing needs
of our clients, and to provide people and technology needed to
deliver these services and solutions. In order to compete
effectively in our markets, we must target our potential customers
carefully, continue to improve our efficiencies and the scope and
quality of our services, and rely on our service quality,
innovation, and client relations to provide services on a
cost-effective basis to our clients. Our competitors may be able to
provide clients with different or greater capabilities or
technologies or better contract terms than we can provide,
including technical qualifications, past contract experience,
geographic presence, price and the availability of qualified
professional personnel.
18
In addition, heightened competition
among our existing competitors, especially on a price basis, or by
new entrants into the market, could create additional competitive
pressures that may reduce our margins and adversely affect our
business. If our competitive advantages are not compelling or
sustainable, then we are unlikely to increase or sustain profits
and our stock price could decline.
Our business is subject to risks associated with geographic market
concentration.
The geographic concentration of
revenue greater than 10% of our pro forma consolidated revenue in
fiscal years 2016 and 2015 was generated in the following
areas:
State
|
2016
|
2015
|
Texas
|
36.4%
|
31.9%
|
Virginia
|
34.8%
|
26.0%
|
Georgia
|
7.2%
|
17.1%
|
Consequently, weakness in economic
conditions in these regions could have a material adverse effect on
our financial position and results of future
operations.
A downturn of the U.S. or global economy could result in our
customers using fewer workforce solutions and services or becoming
unable to pay us for our services on a timely basis or at all,
which would materially adversely affect our business.
Because demand for our solutions and
services are sensitive to changes in the level of economic
activity, our business may suffer during economic downturns. During
periods of weak economic growth or economic contraction, the demand
for outsourced services could decline. When demand drops, our
operating profit could be impacted unfavorably as we experience a
deleveraging of our selling and administrative expense base because
expenses may not decline as quickly as revenues. In periods of
decline, we can only reduce selling and administrative expenses to
a certain level without negatively impacting the long-term
potential of our business. Additionally, during economic downturns
companies may slow the rate at which they pay their vendors, or
they may become unable to pay their obligations. If our customers
become unable to pay amounts owed to us, or pay us more slowly,
then our cash flow and profitability may suffer
significantly.
We may be exposed to employment-related claims and losses,
including class action lawsuits, which could have a material
adverse effect on our business.
We typically place or assign
personnel in the workplaces of other businesses. The risks of these
activities include possible claims relating to:
●
discrimination and harassment;
●
wrongful termination or denial of
employment;
●
violations of employment rights related to
employment screening or privacy issues;
●
classification of temporary
workers;
●
assignment of illegal aliens;
●
violations of wage and hour
requirements;
●
retroactive entitlement to temporary worker
benefits;
●
errors and omissions by our independent
contractors or temporary workers;
19
●
misuse of customer proprietary
information;
●
misappropriation of funds;
●
damage to customer facilities due to negligence;
and
●
criminal activity.
We may incur fines and other losses
or negative publicity with respect to these claims. In addition,
these claims may give rise to litigation, which could be
time-consuming and expensive. New employment and labor laws and
regulations may be proposed or adopted that may increase the
potential exposure of employers to employment-related claims and
litigation. There can be no assurance that the corporate policies
we have in place to help reduce our exposure to these risks will be
effective or that we will not experience losses as a result of
these risks. There can also be no assurance that the insurance
policies we have purchased to insure against certain risks will be
adequate or that insurance coverage will remain available on
commercially reasonable terms or be sufficient in amount or scope
of coverage.
We are dependent on workers’ compensation insurance coverage
at commercially reasonable terms.
We provide workers’
compensation insurance for our employees and temporary workers and
are contractually obligated to collateralize our workers’
compensation obligations under our workers’ compensation
program through irrevocable letters of credit, surety bonds or
cash. A significant portion of our workers’ compensation
program renews annually on January 1 of each year, and as part of
the renewal, could be subject to an increase in collateral. In
addition, collateral requirements can be significant and place
pressure on our liquidity and working capital capacity. Further, we
cannot be certain we will be able to obtain appropriate types or
levels of insurance in the future or that adequate replacement
policies will be available on commercially reasonable terms.
Depending on future changes in collateral requirements, we could be
required to seek additional sources of capital in the future, which
may not be available on commercially reasonable terms, or at all.
The loss of our workers’ compensation insurance coverage
would prevent us from doing business in the majority of our
markets
The spending cuts imposed by the Budget Control Act of 2011
(“BCA”) could impact our operating results and
profit.
The U.S.
government continues to focus on developing and implementing
spending, tax, and other initiatives to stimulate the economy,
create jobs, and reduce the deficit. One of these initiatives, the
BCA, imposed constraints around U.S. government spending. In an
attempt to balance decisions regarding defense, homeland security,
and other federal spending priorities, the BCA imposed spending
caps that contain approximately $487 billion in reductions to
the Department of Defense base budgets over a seven-year period (to
2021). Additionally, the BCA triggered an automatic sequestration
process, effective March 1, 2013, that would have reduced
planned defense spending by an additional $500 billion over a
nine-year period that began in the U.S. government’s 2013
fiscal year.
On
November 2, 2015, President Obama signed into law the
Bipartisan Budget Act of 2015 (“BBA 2015”). BBA 2015
raises the limit on the U.S. government’s debt until March
2017 and raises the sequester caps imposed by the BCA by
$80 billion, split equally between defense and non-defense
spending over the next two years ($50 billion in the U.S.
government’s 2016 fiscal year and $30 billion in the
U.S. government’s 2017 fiscal year). On December 18,
2015, the President signed into law the Consolidated Appropriations
Act of 2016, funding the government through September 30, 2016
and on February 9, 2016, the President submitted a budget
proposal for the U.S. government’s 2017 fiscal year,
consistent with BBA 2015 funding levels. BBA 2015 includes
discretionary funding for Department of Defense of approximately
$580 billion in the U.S. government’s 2016 fiscal year
and $583 billion in the U.S. government’s 2017 fiscal
year. This funding includes a base budget for the Department of
Defense of approximately $521 billion in the U.S.
government’s 2016 fiscal year and $524 billion in the
U.S. government’s 2017 fiscal year. BBA 2015 also provides
approximately $59 billion for Department of Defense Overseas
Contingency Operations (OCO) spending in each of the U.S.
government’s 2016 and 2017 fiscal years.
20
The Bipartisan
Budget Act of 2013 (“BBA 2013”) passed by Congress in
December 2013 alleviated some budget cuts that would have otherwise
been instituted through sequestration in the U.S.
government’s 2014 and 2015 fiscal years. While BBA 2013 and
BBA 2015 (collectively, the “Bipartisan Budget Acts”),
taken together, increased discretionary spending limits through the
U.S. government’s 2017 fiscal year, the Bipartisan Budget
Acts retained sequestration cuts for the U.S. government’s
2018 through 2021 fiscal years, including the across-the-board
spending reduction methodology provided for in the BCA. As a
result, there remains uncertainty regarding how, or if,
sequestration cuts will be applied in the U.S. government’s
2018 fiscal year and beyond. Department of Defense and other
agencies may have significantly less flexibility in how to apply
budget cuts in future years. While the defense budget sustained the
largest single reductions under the BCA, other civil agencies and
programs have also been impacted by significant spending
reductions. In light of the BCA and deficit reduction pressures,
and the upcoming change in administrations, it is likely that
discretionary spending by the U.S. government will remain
constrained for a number of years. Additionally, if an annual
appropriations bill is not enacted for the U.S. government’s
2018 fiscal year or beyond, the U.S. government may operate under a
continuing resolution, abating RFP processes and restricting new
contract or program starts Government slowdowns, or even shutdowns,
could arise. The new administration has signaled an intent to
increase U.S. government defense, homeland security and
infrastructure spending and to decrease spending in other areas
such as housing, foreign assistance and environmental programs,
although, there is no guarantee these changes will take place. We
anticipate there will continue to be significant debate within the
U.S. government over spending throughout the budget appropriations
process for the U.S. government’s 2018 fiscal year and
beyond. The outcome of these debates and the volume of RFPs issued
by the U.S. government could have long-term impacts for our
industry and our company, including that we may not have sufficient
resources to handle any increase in demand for
services.
Since we
generate significant revenues from clients that bid on contracts
with U.S. government agencies, our operating results could be
adversely affected by spending caps or changes in the budgetary
priorities of the U.S. government, as well as by delays in RFP
processes, program starts or the award of contracts or task orders
under contracts.
A delay in the completion of the budget process of the U.S.
government could delay procurement of our services and have an
adverse effect on our future revenue.
When the U.S.
government does not complete its budget process before its fiscal
year-end on September 30 in any year, government operations
are typically funded by means of a continuing resolution. Under a
continuing resolution, the government essentially authorizes
agencies of the U.S. government to continue to operate and fund
programs at the prior year end but does not authorize new spending
initiatives. When the U.S. government operates under a continuing
resolution, government agencies may delay the procurement of
services, which could reduce our future revenue.
If our contractors and subcontractors fail to satisfy their
obligations to us or other parties, or if we are unable to maintain
these relationships, our revenue, profitability, and growth
prospects could be adversely affected.
We depend on contractors and
subcontractors in conducting our business. There is a risk that we
may have disputes with our contractors or subcontractors arising
from, among other things, the quality and timeliness of work
performed by the contractor or subcontractor, client concerns about
the contractor or subcontractor, or our failure to extend existing
task orders or issue new task orders under a contract or
subcontract. In addition, if any of our subcontractors fail to
perform the agreed-upon services, go out of business, or fail to
perform on a project, then our ability to fulfill our obligations
as a prime contractor may be jeopardized and we may be
contractually responsible for the work performed by those
contractors or subcontractors. Historically, our relationship with
our contractors and subcontractors have been good, and we have not
experienced any material failure of performance by our contractors
and subcontractors. However, there can be no assurance that such
experience will continue and the absence of
qualified subcontractors with which we have
a satisfactory relationship could adversely affect the quality of
our service and our ability to perform under some of our
contracts.
We also rely on
relationships with other contractors when we act as their
subcontractor or joint venture partner. Our future revenue and
growth prospects could be adversely affected if other contractors
eliminate or reduce their subcontracts or teaming arrangement
relationships with us or if a government agency terminates or
reduces these other contractors’ programs, does not award
them new contracts, or refuses to pay under a
contract.
21
Due to the competitive process to obtain contracts and an increase
in bid protests, we may be unable to achieve or sustain revenue
growth and profitability.
We expect that some of the business that we seek in the foreseeable
future will be under service agreements awarded to our clients
through a competitive bidding process, including Indefinite
Delivery/Indefinite Quantity (“ID/IQ”) contracts. The
U.S. government has increasingly relied on contracts that are
subject to a competitive bidding process, which has resulted in
greater competition and increased pricing pressure. As a result,
there is a tendency for it to place emphasis on low price over
technical merit when selecting contractors. This in turn can result
in the U.S. government contracts market attracting extremely
low-priced competitors who expect consulting products and services
to be priced accordingly. Government contractors may decide that
they can prepare their bid responses with internal resources and
not engage outside organizations to assist this
process.
The competitive bidding process involves substantial costs and a
number of risks, including significant cost and managerial time to
prepare bids and proposals for contracts that may not be awarded to
our clients, and therefore puts our reputation at risk and may
affect our future contracts with these clients, or that may be
awarded but for which we customers do not receive meaningful task
orders which might make them less likely to bid for additional task
orders. For support contracts awarded to us, we also face the risk
of inaccurately estimating the resources and costs that will be
required to fulfill these engagements, which also could impact our
reputation and the likelihood of getting additional engagements for
capture and proposal support.
Our business is directly tied to the success of our government
contracting clients, which are increasingly reliant on ID/IQ
contracts. ID/IQ contracts are not firm orders for services, and we
may generate limited or no revenue from these contracts which could
adversely affect its operating performance.
ID/IQ contracts are typically awarded to multiple contractors, and
the award of an ID/IQ contract does not represent a firm order for
services. Generally, under an ID/IQ contract, the government is not
obligated to order a minimum of services or supplies from its
contractor, irrespective of the total estimated contract value. In
effect, an ID/IQ award acts as a “license,” permitting
a government contractor to bid on task orders issued under the
ID/IQ contract, but not guaranteeing the award of individual task
orders. Following an award under a multi-award ID/IQ program, the
customer develops requirements for task orders that are
competitively bid against all of the contract awardees. However,
many contracts also permit the U.S. government to direct work to a
specific contractor. Our clients may not win new task orders under
these contracts for various reasons, including price, past
performance and responsiveness, among others. We support our
government contractor clients both when they compete to get the
umbrella ID/IQ contract and subsequently when we help the winners
of those contracts compete for individual tasks. The proposals for
both of these stages can be relatively brief and require quick
turn-arounds, thus potentially reducing some opportunities to be
awarded significant turn-key engagements. While it is possible that
the increased importance of winning the umbrella ID/IQ contract
will prompt clients to hire outside firms to prepare their
proposals, it is also likely that government contractors will
decide to prepare ID/IQ proposals without the assistance from
outside experts.
We incur substantial costs as a result of operating as a public
company and our management is required to devote substantial time
to new compliance initiatives.
As a
public company, we incur significant legal, accounting, and other
expenses. In addition, the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, and rules subsequently implemented by the
United States Securities and Exchange Commission, or SEC, and The
NASDAQ Stock Market, or NASDAQ, have imposed various requirements
on public companies, including establishing and maintaining
effective disclosure and financial controls and corporate
governance practices. We may need to hire additional personnel, and
our existing management team will need to devote a substantial
amount of time to these compliance requirements. Moreover, these
rules and regulations will increase our legal and financial
compliance costs and will make some activities more time-consuming
and costly.
22
Pursuant
to Section 404 of the Sarbanes-Oxley Act, we are required to
furnish a report by our management on our internal control over
financial reporting. To achieve compliance with Section 404,
we engage in a process to document and evaluate our internal
control over financial reporting, which is both costly and
challenging. In this regard, we will need to continue to dedicate
internal resources, potentially engage outside consultants, and
adopt a detailed work plan to assess and document the adequacy of
internal control over financial reporting, continue steps to
improve control processes as appropriate, validate through testing
that controls are functioning as documented, and implement a
continuous reporting and improvement process for internal control
over financial reporting.
In
addition, changing laws, regulations, and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs, and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations, and standards, and this investment may
result in increased general and administrative expenses and divert
management’s time and attention from revenue-generating
activities to compliance activities. If our efforts to comply with
new laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities
related to their application and practice, regulatory authorities
may initiate legal proceedings against us and our business may be
harmed.
As a public company, complying with applicable rules and
regulations will make it more expensive for us to obtain director
and officer liability insurance, and we may be required to incur
substantially higher costs to obtain and maintain the same or
similar coverage.
We have identified material weaknesses in our internal control over
financial reporting. If we fail to develop or maintain an effective
system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, current
and potential stockholders could lose confidence in our financial
reporting, which would harm our business and the trading price of
our securities.
In
connection with the audit of our consolidated financial statements
for the years ended December 31, 2016 and 2015, our management
concluded that the Company had material weaknesses in its internal
controls because we did not 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. In addition, we 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. Our management is
developing a plan to remediate the material weaknesses although
there can be no assurance that such plans, when enacted, will be
successful.
Management continues to review and assess our internal controls to
ensure we have adequate internal financial and accounting controls.
However, any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their
implementation, could result in additional material weaknesses, and
cause us to fail to meet our periodic reporting obligations or
result in material misstatements in our financial statements. Any
such failure could also adversely affect the results of periodic
management evaluations regarding the effectiveness of our internal
control over financial reporting that are required under
Section 404 of the Sarbanes-Oxley Act of 2002 (the
“Sarbanes-Oxley Act”) with respect to annual reports
that we will file. The existence of a material weakness could
result in errors in our financial statements that could cause us to
fail to meet our reporting obligations and cause investors to lose
confidence in our reported financial information which may lead to
a decline in our stock price.
23
Our ability to use our net operating losses to offset future
taxable income may be subject to certain limitations, which could
subject our business to higher tax liability.
We may be limited in the portion of net operating loss
carry-forwards that we can use in the future to offset taxable
income for U.S. federal and state income tax purposes. As of
September 30, 2017, we had federal and state net operating loss
carryforwards, or NOLs, of approximately $2.77 million.
A lack of future taxable income would
adversely affect our ability to utilize these NOLs. Future changes
in our stock ownership, including through acquisitions, could
result in ownership changes under Section 382 of the Code. Our NOLs
may also be impaired under similar provisions of state law. Our
NOLs may expire unutilized or underutilized, which would prevent us
from offsetting future taxable income.
We may need to raise additional capital in the future, which may
not be available on acceptable terms, or at all.
We have
experienced volatility in earnings and cash flows from operations
from year to year. If our business declines, we may need to raise
additional capital to pursue acquisitions or expand our operations.
Such additional capital may be raised through bank borrowings, or
other debt or equity financings. We cannot assure you that any
additional capital will be available on a timely basis, on
acceptable terms, or at all, and such additional financing may
result in further dilution to our stockholders.
Our
capital requirements will depend on many factors, including, but
not limited to:
●
potential
acquisitions of businesses and product lines;
●
our ability to
control costs;
●
our ability to
increase revenue, reduce net losses or generate net
income;
●
increased research
and development expenses and sales and marketing
expenses;
●
our need to respond
to technological advancements and our competitors’
introductions of new products, services or
technologies;
●
capital
improvements to new and existing facilities and enhancements to
subsidiaries’ infrastructure and systems;
●
market acceptance
of our services, and the overall level of sales of our
services;
●
our relationships
with customers and suppliers;
●
government budgets,
political agendas and other funding issues, including potential
delays in government contract awards;
●
our ability to
successfully negotiate arrangements with credit providers and the
state of the financial markets, in general; and
●
general economic
conditions, including the level of economic activity and the
effects of international conflicts.
If our
capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If
additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our
stockholders will be reduced and such securities may have rights,
preferences and privileges senior to our common stock. Additional
equity or debt financing may not be available on favorable terms,
on a timely basis, or at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to
continue our operations as planned, develop or enhance our
products, expand its sales and marketing programs, take advantage
of future opportunities or respond to competitive
pressures.
24
Risks Relating to our Common Stock and this Offering
There has been a limited public market for our common stock, the
stock price of our common stock may be volatile or may decline
regardless of our performance, and you may not be able to resell
your shares at or above the public offering price.
Our
common stock was previously quoted on the OTCQX and
has been trading on the Nasdaq Capital Market since
January 10, 2018. There is no
established trading market for our securities and there has
been a limited public market for our common stock prior to this
offering. The offering price for our units will be determined
through negotiations among the underwriters and us, and may vary
from the market price of our common stock following this offering.
The market prices of the securities of newly public companies have
historically been highly volatile. The market price of our common
stock may fluctuate significantly in response to numerous factors,
many of which are beyond our control, including:
●
overall performance
of the equity markets;
●
variations in our
results of operations, cash flows, and other financial metrics
and non-financial metrics, and how those results compare
to analyst expectations;
●
changes in the
financial projections we may provide to the public or our failure
to meet those projections;
●
failure of
securities analysts to initiate or maintain coverage of us, changes
in financial estimates by any securities analysts who follow our
company, or our failure to meet these estimates or the expectations
of investors;
●
our ability to
raise additional capital
●
recruitment or
departure of key personnel;
●
variations in
general market, financial markets, economic, and political
conditions in the United States;
●
rumors and market
speculation involving us or other companies in our
industry;
●
announcements by us
or our competitors of significant technical innovations or new
business models;
●
acquisitions,
strategic partnerships, joint ventures, or capital
commitments;
●
new laws,
regulations, or executive orders, or new interpretations of
existing laws or regulations applicable to our
business;
●
lawsuits threatened
or filed against us, or unfavorable determinations or settlements
in any such suits;
●
developments or
disputes concerning our intellectual property or our technology, or
third-party proprietary rights;
●
changes in
accounting standards, policies, guidelines, interpretations, or
principles;
●
other events or
factors, including those resulting from war, incidents of
terrorism, or responses to these events;
●
the expiration of
contractual lock-up or market standoff
agreements;
●
sales of shares of
our common stock by us or our stockholders;
●
delays in
government contracts and funding from time to time and budgetary
constraints at the federal, state and local levels;
●
the long lead times
associated with government contracts;
●
our ability to
control costs;
●
our ability to
develop, introduce, patent, market and gain market acceptance of
new products, applications and product enhancements in a timely
manner, or at all;
25
●
market acceptance
of the products incorporating our technologies and
products;
●
the introduction of
new products by competitors;
●
the availability
and cost of components used in the manufacture of our
products;
●
our success in
expanding and implementing our sales and marketing
programs;
●
the effects of
technological changes in our target markets;
●
the nature of our
government contracts;
●
decrease in
revenues derived from key or significant customers;
●
risks and
uncertainties associated with our international
business;
●
general economic
and political conditions;
●
other factors
beyond our control, including but not limited to, natural
disasters.
In
addition, the stock markets have experienced extreme price and
volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. Stock prices
of many companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those companies.
In the past, stockholders have instituted securities class action
litigation following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to
substantial costs, divert resources and the attention of management
from our business, and harm our business.
If securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business, our
stock price and trading volume could decline.
The
trading market for our common stock will depend in part on the
research and reports that securities or industry analysts publish
about us or our business, our market and our competitors. We do not
have any control over these analysts. If one or more of the
analysts who cover us downgrade our shares or change their opinion
of our shares, our share price would likely decline. If one or more
of these analysts cease covering us or fail to regularly publish
reports on us, we could lose visibility in the financial markets,
which could cause our share price or trading volume to
decline.
Because the public offering price of our common stock will be
substantially higher than the pro forma net tangible book value per
share of our outstanding common stock following this offering, new
investors will experience immediate and substantial
dilution.
The
public offering price per unit in this offering will be
substantially higher than the pro forma net tangible book value per
share of our common stock immediately following this offering based
on the total value of our tangible assets less our total
liabilities. Therefore, if you purchase units in this offering, you
may experience immediate dilution. Furthermore, if the underwriters
exercise their option to purchase additional units, if outstanding
stock options are exercised, if we issue awards to our employees
under our equity incentive plans, or if we otherwise issue
additional shares of our common stock, you could experience further
dilution. See “Dilution” for additional
information.
Holders of warrants purchased in this offering will have no rights
as common stockholders until such holders exercise their warrants
and acquire our common stock.
Until holders of warrants acquire shares of our common stock
upon exercise of the warrants included in the units, holders of
warrants will have no rights with respect to the shares of our
common stock underlying such warrants. Upon exercise of the
warrants, the holders will be entitled to exercise the
rights of a common stockholder only as to matters for which the
record date occurs after the exercise date.
We may choose to redeem the warrants issued in this offering at a
time that is disadvantageous to our warrant holders.
Subject to there being a current prospectus under the Securities
Act with respect to the common stock issuable upon exercise of the
warrants, we may redeem the warrants included in the units sold in
this offering at any time after the warrants become exercisable in
whole and not in part, at a price of $0.01 per warrant, upon a
minimum of 30 days prior written notice of redemption, if and only
if the last sales price of our common stock equals or exceeds
$ per share
(175% of the public offering price per unit in this
offering) for any 20-trading-day period ending three business days
before we send the notice of redemption. In addition, we may not
redeem the warrants unless the warrants sold in this offering and
the shares underlying those warrants are covered by an effective
registration statement from the beginning of the measurement period
through the date fixed for the redemption. Redemption of the
warrants could force the warrant holders to (i) exercise the
warrants and pay the exercise price at a time when it may be
disadvantageous for the holders to do so, (ii) sell the warrants at
the then current market price when they might otherwise wish to
hold the warrants, or (iii) accept the nominal redemption price
which, at the time the warrants are called for redemption, is
likely to be substantially less than the market value of the
warrants.
Certain warrant holders are unlikely to receive direct notice of
redemption of our warrants.
We expect most purchasers of the warrants included in the units
will hold their securities through one or more intermediaries and
consequently those holders are unlikely to receive notice directly
from us that the warrants are being redeemed. If you fail to
receive notice of redemption from a third party and your warrants
are redeemed for nominal value, you will not have recourse against
us.
26
An investor will only be able to exercise a warrant if the issuance
of common stock upon such exercise has been registered or qualified
or is deemed exempt under the securities laws of the state of
residence of the holder of the warrants.
No warrants will be exercisable and we will not be obligated to
issue shares of common stock unless the common stock issuable upon
such exercise has been registered or qualified or deemed to be
exempt under the securities laws of the state of residence of the
holder of the warrants. At the time that the warrants become
exercisable, we expect to continue to be listed on a national
securities exchange, which would provide an exemption from
registration in every state. Accordingly, we believe holders in
every state will be able to exercise their warrants as long as our
prospectus relating to the common stock issuable upon exercise of
the warrants is current. However, we cannot assure you of this
fact. As a result, the warrants may be deprived of any value, the
market for the warrants may be limited, and the holders of warrants
may not be able to exercise their warrants if the common stock
issuable upon such exercise is not qualified or exempt from
qualification in the jurisdictions in which the holders of the
warrants reside.
Sales of a substantial number of shares of our common stock may
cause the price of our common stock to decline.
Based on shares outstanding as of
2018, upon
completion of this offering, we will have outstanding a total of
shares of
common stock and warrants.
Each of our officers and directors and substantially all of our
major security holders have entered
into lock-up agreements with the underwriters that
restrict their ability to sell or transfer their shares.
The lock-up agreements pertaining to this offering will
expire 180 days from the date of this prospectus. However, our
underwriters may, in their sole discretion, permit our officers,
directors and other current stockholders who are subject to the
contractual lock-up to sell shares prior to the
expiration of the lock-up agreements. After
the lock-up agreements expire, based on shares
outstanding as of
, 2018, up to an additional
shares of
common stock will be eligible for sale in the public market,
approximately
of which are held by our officers, directors and their
affiliated entities, and will be subject to volume limitations
under Rule 144 under the Securities Act and various vesting
agreements. In addition,
shares of
our common stock that are subject to outstanding options and
warrants as of
, 2018, as well as
shares
issuable upon the conversion of our Series A Preferred Stock, and
shares
issuable upon the conversion of our Series B Preferred Stock, will
become eligible for sale in the public market to the extent
permitted by the provisions of various vesting agreements,
the lock-up agreements, and Rules 144 and 701 under the
Securities Act.
We
cannot predict what effect, if any, sales of our shares in the
public market or the availability of shares for sale will have on
the market price of our common stock. However, future sales of
substantial amounts of our common stock in the public market,
including shares issued on exercise of outstanding options, or the
perception that such sales may occur, could adversely affect the
market price of our common stock.
We also
expect that significant additional capital may be needed in the
future to continue our planned operations. To raise capital, we may
sell common stock, convertible securities or other equity
securities in one or more transactions at prices and in a manner we
determine from time to time. These sales, or the perception in the
market that the holders of a large number of shares intend to sell
shares, could reduce the market price of our common
stock.
We will have broad discretion in the use of the net proceeds from
this offering and may not use them effectively.
Our
management will have broad discretion in the application of the net
proceeds from this offering, including for any of the purposes
described below in “Use of Proceeds,” and you will not
have the opportunity as part of your investment decision to assess
whether the net proceeds are being used appropriately. Because of
the number and variability of factors that will determine our use
of the net proceeds from this offering, their ultimate use may vary
substantially from their currently intended use. If we do not use
the net proceeds that we receive in this offering effectively, our
business, financial condition, results of operations, and prospects
could be harmed, and the market price of our common stock could
decline. Pending their use, we may invest the net proceeds from
this offering in short-term, investment-grade, interest-bearing
securities such as money market accounts, certificates of deposit,
commercial paper, and guaranteed obligations of the U.S. government
that may not generate a high yield to our
stockholders.
We do not intend to pay dividends on our common stock for the
foreseeable future.
We have
never declared or paid any cash dividends on our common stock and
do not intend to pay any cash dividends on our common stock in the
foreseeable future. Our Series A Preferred Stock and our Series B
Preferred Stock are entitled to quarterly dividends as set forth in
more detail below in the section entitled “Description of
Capital Stock.” We currently anticipate that for the
foreseeable future we will retain all of our future earnings for
the development, operation and growth of our business and for
general corporate purposes. Any future determination to pay
dividends on our common stock in will be at the discretion of our
board of directors. Accordingly, investors must rely on sales of
their common stock after price appreciation, which may never occur,
as the only way to realize any future gains on their
investments.
27
Our executive officers, directors, principal stockholders and their
affiliates will continue to exercise significant influence over our
company after this offering, which will limit your ability to
influence corporate matters and could delay or prevent a change in
corporate control.
As of
January 24, 2018, our executive officers, directors,
five percent or greater stockholders and their respective
affiliates owned in the aggregate approximately
77.1% of our common stock and,
upon completion of this offering, that same group will hold in the
aggregate
approximately
% of our
common stock (assuming no exercise of the underwriters’
option to purchase additional shares, no exercise of outstanding
warrants or options, no conversion of the Series A Preferred Stock
or the Series B Preferred Stock, and no purchases of shares in this
offering by any members of this group).
As a
result, after this offering these stockholders will continue to
have the ability to influence us through this ownership position
even if they do not purchase any additional shares in this
offering. These stockholders may be able to determine all matters
requiring stockholder approval. For example, these stockholders may
be able to control elections of directors, amendments of our
organizational documents, or approval of any merger, sale of
assets, or other major corporate transaction. This may prevent or
discourage unsolicited acquisition proposals or offers for our
common stock that you may feel are in your best interest as one of
our stockholders. The interests of this group of stockholders may
not always coincide with your interests or the interests of other
stockholders and they may act in a manner that advances their best
interests and not necessarily those of other stockholders,
including seeking a premium value for their common stock, and might
affect the prevailing market price for our common
stock.
We are a "smaller reporting company" and, as a result of the
reduced disclosure and governance requirements applicable to
smaller reporting companies, our common stock may be less
attractive to investors.
We are
a "smaller reporting company," meaning that we are not an
investment company, an asset-backed issuer, or a majority-owned
subsidiary of a parent company that is not a "smaller reporting
company," have a public float of less than $75 million and
have annual revenues of less than $50 million during the most
recently completed fiscal year. As a "smaller reporting company,"
we are subject to lesser disclosure obligations in our SEC filings
compared to other issuers. Specifically, "smaller reporting
companies" are able to provide simplified executive compensation
disclosures in their filings, are exempt from the provisions of
Section 404(b) of the Sarbanes-Oxley Act requiring that
independent registered public accounting firms provide an
attestation report on the effectiveness of internal control over
financial reporting and have certain other decreased disclosure
obligations in their SEC filings, including, among other things,
only being required to provide two years of audited consolidated
financial statements in annual reports. Decreased disclosures in
our SEC filings due to our status a "smaller reporting company" may
make it harder for investors to analyze our operating results and
financial prospects.
Delaware law and provisions in our certificate of incorporation and
bylaws could make a merger, tender offer or proxy contest
difficult, thereby depressing the trading price of our common
stock.
The anti-takeover provisions of the Delaware General
Corporation Law, or the DGCL,
may discourage, delay or prevent a change of control by prohibiting
us from engaging in a business combination with stockholders owning
in excess of 15% of our outstanding voting stock for a period of
three years after the person becomes an interested stockholder,
even if a change of control would be beneficial to our
existing stockholders.
In addition, our certificate of incorporation and bylaws contain
provisions that may make the acquisition of our company more
difficult, including:
●
the vote of 66 2/3
of the voting power of the corporation entitled to vote at an
election of directors is required for the removal of a member of
our Board;
●
the vote of 66 2/3
of the voting power of the corporation entitled to vote at an
election of directors is required before any of our Bylaws may, at
any annual meeting or at any special meeting called for that
purpose, be altered, amended, rescinded or repealed;
and
●
the request of one
or more stockholders holding shares in the aggregate entitled to
cast not less than 35% of the vote at a meeting is required to call
a stockholder meeting.
These
provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors of your
choosing and cause us to take certain actions you
desire.
This
prospectus contains forward-looking statements. All statements
other than statements of historical facts contained in this
prospectus, including statements regarding our future results of
operations and financial position, business strategy, prospective
products and services, timing and likelihood of success, plans and
objectives of management for future operations, and future results
of current and anticipated products and services, are
forward-looking statements. These statements involve known and
unknown risks, uncertainties and other important factors that may
cause our actual results, performance or achievements to be
materially different from any future results, performance or
achievements expressed or implied by the forward-looking
statements.
28
In some
cases, you can identify forward-looking statements by terms such as
“may,” “will,” “should,”
“expect,” “plan,” “anticipate,”
“could,” “intend,” “target,”
“project,” “contemplates,”
“believes,” “estimates,”
“predicts,” “potential” or
“continue” or the negative of these terms or other
similar expressions. The forward-looking statements in this
prospectus are only predictions. These forward-looking statements
are based largely on current expectations and projections about
future events and financial trends that we believe may affect our
business, financial condition and results of operations. These
forward-looking statements speak only as of the date of this
prospectus and are subject to a number of risks, uncertainties and
assumptions described under the sections in this prospectus
entitled “Risk Factors” and elsewhere in this
prospectus. Because forward-looking statements are inherently
subject to risks and uncertainties, some of which cannot be
predicted or quantified and some of which are beyond our control,
you should not rely on these forward-looking statements as
predictions of future events. The events and circumstances
reflected in our forward-looking statements may not be achieved or
occur and actual results could differ materially from those
projected in the forward-looking statements. These forward-looking
statements may not be realized due to a variety of factors,
including, without limitation:
●
our history of
losses;
●
difficulties in
remaining competitive in the markets the companies
serve;
●
the effects of
future economic, business and market conditions;
●
difficulties in
successfully managing our businesses;
●
difficulties in
achieving cost savings, operating efficiencies and new revenue
opportunities as a result of our acquisitions, and the incurrence
of unforeseen costs and expenses;
●
the effects of the
uncertainty of the acquisitions we complete on relationships with
customers, employees and suppliers;
●
consolidation in
the industries we serve;
●
limitations on our
ability to continue to develop, manufacture and market innovative
products and services;
●
costs and risks
associated with acquisitions;
●
our failure to
realize anticipated benefits from other acquisitions or the
possibility that such acquisitions could adversely affect us, and
risks relating to the prospects for future
acquisitions;
●
the loss of key
employees and the ability to retain and attract key personnel,
including technical and managerial personnel;
●
quarterly and
annual fluctuations in results of operations;
●
the diminished
demand for our services;
●
the effects of war,
terrorism, natural disasters or other catastrophic events;
and
●
other risks and
uncertainties, including those listed under the heading “Risk
Factors” in this prospectus.
As a
result of these and other factors, the events and circumstances
reflected in our forward-looking statements may not be achieved or
occur and actual results could differ materially from those
projected in the forward-looking statements. This prospectus also
contains estimates and statistical assessments made by independent
parties and by us. This data involves a number of assumptions and
limitations, and you are cautioned not to give undue weight to such
estimates. Projections, assumptions and estimates of our future
performance and the future performance of the markets in which we
operate are necessarily subject to a high degree of uncertainty and
risk. Moreover, we operate in an evolving environment. New risk
factors and uncertainties may emerge from time to time, and it is
not possible for us to predict all risk factors and uncertainties.
Except as required by applicable law, we do not plan to publicly
update or revise any forward-looking statements contained herein,
whether as a result of any new information, future events, changed
circumstances or otherwise.
29
We estimate that the net proceeds from the sale of
3,156,566
units
offered by
us in this
offering at an assumed public
offering price of $3.96 per unit
will be approximately
$10.7 million or
$12.4 million if the
underwriters exercise their overallotment option in
full, and after
deducting the estimated underwriting discount and estimated
offering expenses and excluding the
proceeds, if any, from the exercise of the warrants included in the
units issued in this offering.
A $1.00
increase (decrease) in the assumed public offering price of
$3.96 per
unit would increase (decrease) the net proceeds, after deducting
the estimated underwriting discount, that we receive from this
offering by approximately $2.9 million, assuming that the
number of units offered by us, as set forth on the cover page of
this prospectus, remains the same. Each increase (decrease) of
one million shares in the number of units offered by us
would increase (decrease) the net proceeds that we receive, after
deducting the estimated underwriting discount, from this offering
by approximately $3.6 million, assuming that the
assumed public offering price remains the same.
We
intend to use the net proceeds that we receive from this offering
for purchase consideration for the acquisition of NeoSystems, the
terms of which acquisition are described in this prospectus under
"Acquisition of
NeoSystems", working capital and other general corporate
purposes, including technology and development and marketing
activities, general and administrative matters and capital
expenditures. Total cash
consideration for the acquisition of NeoSystems is expected to be
approximately $7.25 million, which comprises $5
million in cash and up to $2.25 million to redeem shares of
NeoSystems preferred stock at closing. We also anticipate paying
approximately $600,000 in transactional fees associated with the
acquisition. We do not anticipate that we will require additional
funds to consummate the acquisition. We may also use a
portion of the net proceeds to invest in or acquire third-party
businesses, products, services, technologies, or other assets.
However, we do not currently have any definitive or preliminary
plans with respect to the use of proceeds for such
purposes.
Commencing
August 29, 2017, our common stock traded on the OTCQX under the
symbol "NVMM." The following table sets forth, for each of the
fiscal periods indicated, the quarterly high and low sales prices
for our common stock as reported by the www.otcmarkets.com. OTCQX
quotations represent inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual
transactions.
|
High
|
Low
|
Year
Ending December 31, 2017
|
|
|
Fourth
Quarter
|
$ 5.50
|
$ 1.51
|
Third
Quarter
|
$5.00
|
$0.51
|
The
closing price of our common stock on January
24, 2018 was $3.96
per share. Our
common stock has been listed on the
Nasdaq Capital Markets since January 10, 2018.
The current sales prices of our
other securities quoted on the OTCQX may not be indicative of the
market prices on the Nasdaq Capital
Market.
As of
January 24,
2018, there were approximately 65 registered holders
of record of our common stock, excluding stockholders for whom
shares are held in "nominee" or "street name." The actual number of
common stockholders is greater than the number of record holders,
and includes stockholders who are beneficial owners, but whose
shares are held in street name by brokers and other nominees. This
number of holders of record also does not include stockholders
whose shares may be held in trust by other entities.
Securities Authorized for Issuance Under Equity Compensation
Plans
On August 23, 2017, our Board of Directors adopted
the Novume Solutions, Inc. 2017 Equity Award Plan.
As of the date of this
prospectus, we have granted options to purchase an aggregate
of 1,695,375 shares
of our common stock. As of December 31, 2016, under the
Company’s 2016 Equity Award Plan, options to purchase an
aggregate of 248,094 shares of our common stock were
outstanding.
DIVIDEND POLICY
We have
never declared or paid cash dividends on our common stock. We do
not expect to pay dividends on our common stock for the foreseeable
future. Instead, we anticipate that all of our earnings for the
foreseeable future will be used for the development, operation and
growth of our business. Any future determination to declare cash
dividends on our common stock would be subject to the discretion of
our board of directors and would depend on various factors,
including our results of operations, financial condition, and
capital requirements, restrictions that may be imposed by
applicable law, and other factors deemed relevant by our board of
directors.
30
In addition, our ability to pay dividends on our common stock is
restricted by the terms of the Series A and Series B Preferred
Stock, respectively, as we are required to pay full cumulative
dividends on our Preferred Stock before making any dividend payment
on our common stock. Furthermore, our ability to pay any
dividends on our common stock is subject to applicable provisions
of state law and to the terms of its credit
agreements.
The
following table sets forth our cash, cash equivalents, and
short-term investments and capitalization as of September 30, 2017
on:
●
an actual
basis;
●
a pro forma basis
to reflect the impact of the acquisitions of Global which occurred
on October 1, 2017 as well as the planned acquisition of
NeoSystems, Corp.; and
●
a pro forma as
adjusted basis to give effect to the sale of 3,156,566
shares of our common stock in this offering at an assumed combined
public offering price of $3.96 per share of common
stock and accompanying warrant, which is the
last reported sale price of our common stock on the
Nasdaq Capital
Market on January 24, 2018, after
deducting the estimated underwriting discount and estimated
offering expenses.
You
should read this table together with our consolidated financial
statements and related notes, “Unaudited Pro Forma Summary
Combined Financial Statements,” “Selected Consolidated
Financial Data,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,”
each included elsewhere in this prospectus.
|
As of
September 30, 2017
|
||
|
Actual
|
Pro
Forma (1)
|
Pro Forma - Adjusted (2)
(3)
|
CONSOLIDATED BALANCE SHEET DATA:
|
|
|
|
Cash,
cash equivalents and short-term investments
|
$3,762,265
|
$(2,534,760)
|
$8,148,240
|
Series
A cumulative convertible redeemable preferred stock, $0.0001 par
value, 505,000 shares authorized, 502,327 shares issued and
outstanding, actual
|
$ 4,246,541
|
$ 4,246,541
|
$4,246,541
|
Stockholders'
equity (deficit):
|
|
|
|
Preferred
stock, $0.0001 par value, 7,500,000 authorized, 505,000 shares
designated, no shares issued and outstanding, pro forma and pro
forma as adjusted
|
$-
|
$-
|
$ -
|
Series B cumulative convertible preferred stock, par value $0.0001
per share, 240,861 shares authorized, issued and
outstanding, pro forma
|
-
|
2,408,610
|
2,408,610
|
Common
stock, $0.0001 par value, 25,000,000 shares authorized, 13,933,784
shares issued and outstanding as of September 30, 2017, pro forma
as adjusted
|
1,394
|
1,651
|
1,967
|
Additional
paid-in capital
|
8,925,179
|
21,103,794
|
31,786,478
|
Accumulated
deficit
|
(2,595,363)
|
(2,600,160)
|
(2,600,160)
|
Total
stockholders' equity (deficit)
|
$ 6,331,210
|
$ 20,913,895
|
$31,596,895
|
Total
capitalization
|
$10,577,751
|
$25,160,436
|
$35,843,436
|
(1)
This pro forma
column reflects the impact of the acquisitions of Global which
occurred on October 1, 2017 as well as the planned acquisition of
NeoSystems. This
pro forma reflects the impact of the merger with Global, including
the elimination of Global's equity of $874,883 and the related
allocation to excess of purchase price over net assets acquired.
Consideration paid as part of this merger include (a) $750,000 in
cash, (b) 375,000 shares of Novume common stock and (c) 240,861
shares of Series B Preferred Stock. In addition, we paid $365,037
to satisfy in full all of the outstanding debt of the Global
Entities at closing and paid $175,000 to reduce the balance on
Global’s line of credit. For more detailed
information, see the unaudited pro forma condensed combined
financial statements on page 52. The
Company does not assume the automatic conversion of the Series A
Preferred Stock or Series B Preferred Stock prior to or at the
closing of this offering. The Series A Preferred Stock would
convert only if the public offering occurs and, among other
criteria, results in aggregate cash proceeds to us of not less than
$30,000,000 (net of underwriting discounts and commissions). There
is no automatic conversion feature for the Series B Preferred
Stock.
(2)
The pro forma as
adjusted column gives effect to (a) the pro forma adjustments
set forth above in (1) and (b) the sale and issuance by us of
3,156,566
shares of our common stock in this offering, based upon an assumed
combined public offering price of $3.96 per unit,
which is the last reported sale price of our common stock on the
Nasdaq Capital
Market on January 24, 2018, after
deducting the estimated underwriting discount and estimated
offering expenses.
(3)
The assumed
combined public offering price of $3.96 per unit is
the
last reported sale price of common stock on the Nasdaq Capital Market on
January 24, 2018.
Each $1.00 increase (decrease) in such public offering price would,
after deducting the estimated underwriting discount, increase
(decrease) our cash, cash equivalents and short-term investments,
working capital, total assets, and total stockholders’ equity
by approximately $2.9 million, assuming that the
number of shares offered by us, as set forth on the cover page of
this prospectus, remains the same. Similarly, each increase
(decrease) of one million shares in the number of shares offered by
us would, after deducting the estimated underwriting discount,
increase (decrease) our cash, cash equivalents, and short-term
investments, working capital, total assets, and total
stockholders’ equity by approximately $3.6
million, assuming such public offering price remains the
same.
31
The
number of shares of our common stock to be outstanding after this
offering is based on 13,933,784 shares of our common stock
outstanding as of September 30, 2017, and excludes:
●
1,219,812 shares of
our common stock issuable upon the exercise of options outstanding
as of September 30, 2017, with a weighted-average exercise price of
$1.56 per share;
●
1,780,188 shares of
our common stock reserved for future issuance under our stock-based
compensation plans, the Novume Solutions 2017 Equity Incentive Plan
as of September 30, 2017;
●
885,897 shares
issuable upon the conversion of our Series A Preferred Stock
outstanding as of September 30, 2017;
●
0 shares issuable
upon the conversion of our Series B Preferred Stock outstanding as
of September 30, 2017; and
●
1,052,122 shares
issuable upon the exercise of warrants for common stock outstanding
as of September 30, 2017.
If you
invest in our units in this offering, your interest will be diluted
immediately to the extent of the difference between the combined
public offering price per unit (without
attributing any value to the warrants), and the pro forma as
adjusted net tangible book value per share of our common stock
immediately after this offering.
Our
pro forma net tangible book value as of September 30, 2017 was
$25,510, or $0.00 per share of common stock. Pro forma net tangible
book value per share represents the amount of our total tangible
assets less our total liabilities, divided by the number of shares
of our common stock outstanding as of September 30, 2017. The pro
forma net tangible book value reflects the impact of the
acquisitions of the Global Entities which occurred on October 1,
2017, as well as the planned acquisition of NeoSystems,
Corp.
Pro
forma as adjusted net tangible book value per share reflects the
sale by us of 3,156,566 units in this offering at an
assumed public offering price of $3.96
per unit (without
attributing any value to the warrants), which is
the last reported sale price of our common stock on the
Nasdaq Capital
Market on January 24, 2018, and
after deducting the estimated underwriting discount and estimated
offering expenses. Our pro forma as adjusted net tangible book
value as of September 30, 2017 would have been $10.7 million, or
$0.54 per share. This amount represents
an immediate increase in pro forma net tangible book value of
$0.54 per share to our existing
stockholders and an immediate dilution in pro forma net tangible
book value of $3.42 per share to investors
participating in this offering at the assumed public offering
price.
The
following table illustrates this dilution on a per share basis to
new investors:
Assumed combined
public offering price per unit
|
$ 3.96
|
Pro forma net
tangible book value per share as of September 30, 2017
|
0.00
|
Increase in pro
forma net tangible book value per share attributable to new
investors purchasing in this offering
|
0.54
|
Pro forma as
adjusted net tangible book value per share after this
offering
|
0.54
|
Dilution in pro
forma net tangible book value per share to investors in this
offering
|
$ 3.42
|
32
The
assumed public offering price of $3.96 per unit is
the last reported sale price of our common stock on the
Nasdaq Capital
Market on January 24, 2018. A
$1.00 increase (decrease) in the public offering price would
increase (decrease) our pro forma as adjusted net tangible book
value per share after this offering by $2.9 million
and would, after deducting the estimated underwriting discount,
increase (decrease) dilution per share to investors in this
offering by $0.85, assuming that the number of units
offered by us, as set forth on the cover page of this prospectus,
remains the same. Similarly, each increase (decrease) of
one million shares in the number of shares and
accompanying warrants offered by us would, after deducting the
estimated underwriting discount, increase (decrease) our pro forma
as adjusted net tangible book value by $3.6 million and would decrease
(increase) dilution per share to investors by $0.15,
assuming that such assumed public offering price remains the
same.
If the
underwriters exercise their overallotment option in full, the pro
forma as adjusted net tangible book value per share after this
offering would be $
per share, and the dilution in pro forma net tangible book
value per share to new investors in this offering would be
$ per share
of our common stock.
The
following table presents, on a pro forma as adjusted basis as
described above, as of September 30, 2017, the differences between
our existing stockholders and new investors purchasing units in
this offering, with respect to the number of units purchased from
us, the total consideration paid to us, and the average price per
share paid by our existing stockholders or to be paid to us by new
investors purchasing shares in this offering at an assumed public
offering price of $3.96 per share of unit,
the last reported sale price of our common stock on
the Nasdaq Capital
Market on January 24, 2018,
before deducting the estimated underwriting discount and estimated
offering expenses.
|
Shares
Purchased
|
Shares
Purchased
|
Average
Price
Per
Share
|
||
|
Number
|
Percent
|
Amount
|
Percent
|
|
Existing
stockholders
|
13,933,784
|
82%
|
$ 21,105445
|
66%
|
$ 1.28
|
Investors
in this offering
|
3,156,566
|
18
|
10,683,020
|
34
|
$ 3.38
|
Totals
|
17,090,350
|
100.0%
|
$ 31,788,445
|
100.0%
|
$ 1.62
|
A $1.00
increase (decrease) in the assumed public offering price of
$3.96 per unit,
the last reported sale price of our common stock on the
Nasdaq Capital
Market on January 24, 2018,
would, after deducting the estimated underwriting discount,
increase (decrease) the total consideration paid by new investors
by $2.9 million and increase (decrease) the percent of
total consideration paid by new investors by
27%,
assuming that the number of units offered by us, as set forth on
the cover page of this prospectus, remains the same.
Except
as otherwise indicated, the above discussion and tables assume no
exercise of the underwriters’ overallotment option to
purchase 473,485 additional units. If the underwriters
exercise their option to purchase additional units in full, our
existing stockholders would own 79.3% and our new investors
would own 20.7% of the total number of
shares of our common stock outstanding upon the completion of this
offering.
The
number of shares of our common stock to be outstanding after this
offering is based on 13,933,784 shares of our common stock
outstanding as of September 30, 2017, and excludes:
●
1,219,812 shares of
our common stock issuable upon the exercise of options outstanding
as of September 30, 2017, with a weighted-average exercise price of
$1.56 per share;
●
1,780,188 shares of
our common stock reserved for future issuance under our stock-based
compensation plans, the Novume Solutions 2017 Equity Incentive Plan
as of September 30, 2017;
33
●
885,897 shares
issuable upon the conversion of our Series A Preferred Stock
outstanding as of September 30, 2017;
●
0 shares issuable
upon the conversion of our Series B Preferred Stock outstanding as
of September 30, 2017; and
●
1,052,122 shares
issuable upon the exercise of warrants for common stock outstanding
as of September 30, 2017.
The
following tables summarize our consolidated financial data. We
derived our selected consolidated statements of operations data for
the years ended December 31, 2015 and 2016, and our selected
consolidated balance sheet data as of December 31, 2015 and
2016 from our audited consolidated financial statements included
elsewhere in this prospectus. We derived our selected consolidated
statements of operations data for the nine months ended September
30, 2016 and 2017 and our selected consolidated balance sheet data
as of September 30, 2017 from our unaudited interim consolidated
financial statements included elsewhere in this prospectus. Our
unaudited interim consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting
principles, or GAAP, on the same basis as our audited annual
consolidated financial statements and, in the opinion of
management, reflect all adjustments, consisting only of normal,
recurring adjustments, that are necessary for the fair presentation
of our consolidated financial position as of September 30, 2017 and
our consolidated results of operations for the three months ended
September 30, 2016 and 2017. Our historical results are not
necessarily indicative of the results to be expected in the future,
and the results for the three and nine months ended September 30,
2017 are not necessarily indicative of the results to be expected
for the full year or any other period. You should read the
following selected consolidated financial data in conjunction with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements, the accompanying notes and other financial
information included elsewhere in this prospectus.
|
Year
Ended December 31,
|
Three
Months ended September 30,
|
Nine
Months ended September 30,
|
|||
|
2015
|
2016
|
2016
|
2017
|
2016
|
2017
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
Revenue
|
$9,661,795
|
$12,128,406
|
$2,405,529
|
$4,421,574
|
$9,582,874
|
$11,131,825
|
Cost
of revenue
|
5,496,722
|
6,959,514
|
1,334,436
|
2,457,806
|
5,496,588
|
6,017,982
|
Gross
profit
|
4,165,073
|
5,168,892
|
1,071,093
|
1,963,768
|
4,086,286
|
5,113,843
|
Selling,
general and administrative expenses
|
3,795,678
|
5,262,768
|
1,151,514
|
2,997,566
|
3,624,005
|
8,036,339
|
Income
(loss) from operations
|
369,395
|
(93,876)
|
(80,421)
|
(1,033,798)
|
462,281
|
(2,922,496)
|
Other
(expense) income, net
|
-
|
(165,079)
|
(15,656)
|
17,296
|
(28,693)
|
44,659
|
Income
(loss) before taxes
|
369,395
|
(258,955)
|
(96,077)
|
(1,016,502)
|
433,588
|
(2,877,837)
|
Income
tax benefit (expense
|
-
|
219,971
|
40,535
|
225,142
|
(13,380)
|
964,377
|
Net
income (loss) from continuing operations
|
$369,395
|
$(38,984)
|
$(55,542)
|
$(791,360)
|
$420,208
|
$(1,913,460)
|
Net
(loss) income per share attributable to common stock -
basic
|
$269.63
|
$(0.01)
|
$(0.01)
|
$ (0.09)
|
$0.06
|
$ (0.23)
|
Net
(loss) income per share attributable to common stock -
diluted
|
$269.63
|
$(0.01)
|
$(0.01)
|
$ (0.09)
|
$0.06
|
$ (0.23)
|
Weighted
average shares used to compute net (loss) income per share
attributable to common stock - basic
|
1,370
|
3,958,619
|
9,713,956
|
11,756,560
|
7,016,373
|
10,920,866
|
Weighted
average shares used to compute net (loss) income per share
attributable to common stock - diluted
|
1,370
|
3,958,619
|
9,713,956
|
11,756,560
|
7,123,160
|
10,920,866
|
Pro
forma net (loss) income per share attributable to common stock -
basic (unaudited)
|
$ 0.12
|
$ (0.01)
|
$ (0.00)
|
$ (0.07)
|
$ 0.04
|
$ (0.18)
|
Pro
forma net (loss) income per share attributable to common stock -
diluted (unaudited)
|
$ 0.12
|
$ (0.01)
|
$ (0.00)
|
$ (0.07)
|
$ 0.04
|
$ (0.18)
|
Pro
forma weighted average shares used to compute net (loss) income per
share attributable to common stock - basic (unaudited)
|
3,157,936
|
7,115,185
|
12,870,522
|
14,913,126
|
10,172,939
|
14,077,432
|
Pro
forma weighted average shares used to compute net (loss) income per
share attributable to common stock - diluted
(unaudited)
|
3,157,936
|
7,115,185
|
12,870,522
|
14,913,126
|
10,279,726,
|
14,077,432
|
STOCK BASED COMPENSATION DISCLOSURE:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Three Months ended September,
|
Nine Months ended September,
|
|||
|
2015
|
2016
|
2016
|
2017
|
2016
|
2017
|
General
and administrative
|
$-
|
$26,844
|
$-
|
$107,321
|
$-
|
$227,470
|
Total
|
$-
|
$26,844
|
$-
|
$107,321
|
$-
|
$227,470
|
34
|
As of
September 30, 2017
|
||
|
Actual
|
Pro
Forma (1)
|
Pro Forma - Adjusted (2)
(3)
|
CONSOLIDATED BALANCE SHEET DATA:
|
|
|
|
Cash,
cash equivalents and short-term investments
|
$3,762,265
|
$(2,534,760)
|
$ 8,148,240
|
Series
A cumulative convertible redeemable preferred stock, $0.0001 par
value, 505,000 shares authorized, 502,327 shares issued and
outstanding, actual
|
$ 4,246,541
|
$ 4,246,541
|
$ 4,246,541
|
Stockholders'
equity (deficit):
|
|
|
|
Preferred
stock, $0.0001 par value, 7,500,000 authorized, 505,000 shares
designated, no shares issued and outstanding, pro forma and pro
forma as adjusted
|
$-
|
$-
|
$ -
|
Series B cumulative convertible preferred stock, par value $0.0001
per share, 240,861 shares authorized, issued and
outstanding, pro forma
|
-
|
2,408,610
|
2,408,610
|
Common
stock, $0.0001 par value, 25,000,000 shares authorized, 13,933,784
shares issued and outstanding as of September 30, 2017, pro forma
as adjusted
|
1,394
|
1,651
|
1,967
|
Additional
paid-in capital
|
8,925,179
|
21,103,794
|
31,786,478
|
Accumulated
deficit
|
(2,595,363)
|
(2,600,160)
|
(2,600,160)
|
Total
stockholders' equity (deficit)
|
$ 6,331,210
|
$ 20,913,895
|
$ 31,596,895
|
Total
capitalization
|
$10,577,751
|
$25,160,436
|
$ 35,843,436
|
(1)
This pro forma
column reflects the impact of the acquisitions of Global which
occurred on October 1, 2017 as well as the planned acquisition of
NeoSystems. This
pro forma reflects the impact of the merger with Global, including
the elimination of Global's equity of $874,883 and the related
allocation to excess of purchase price over net assets acquired.
Consideration paid as part of this merger include (a) $750,000 in
cash, (b) 375,000 shares of Novume common stock and (c) 240,861
shares of Series B Preferred Stock. In addition, we paid $365,037
to satisfy in full all of the outstanding debt of the Global
Entities at closing and paid $175,000 to reduce the balance on
Global’s line of credit. For more detailed
information, see the unaudited pro forma condensed combined
financial statements on page 52. The
Company does not assume the automatic conversion of the Series A
Preferred Stock or Series B Preferred Stock prior to or at the
closing of this offering. The Series A Preferred Stock would
convert only if the public offering occurs and, among other
criteria, results in aggregate cash proceeds to us of not less than
$30,000,000 (net of underwriting discounts and commissions). There
is no automatic conversion feature for the Series B Preferred
Stock.
(2)
The pro forma as
adjusted column gives effect to (a) the pro forma adjustments
set forth above in (1) and (b) the sale and issuance by us of
3,156,566
shares of our common stock in this offering, based upon an assumed
combined public offering price of $3.96 per unit, which is the
last reported sale price of our common stock on the
Nasdaq Capital
Market on January 24, 2018, after
deducting the estimated underwriting discount and estimated
offering expenses.
(3)
The assumed
combined public offering price of $3.96 per unit is
the
last reported sale price of our common stock on the
Nasdaq Capital
Market on January
24, 2018.
Each $1.00 increase (decrease) in such public offering price would,
after deducting the estimated underwriting discount, increase
(decrease) our cash, cash equivalents and short-term investments,
working capital, total assets, and total stockholders’ equity
by approximately $2.9 million, assuming that the
number of shares offered by us, as set forth on the cover page of
this prospectus, remains the same. Similarly, each increase
(decrease) of one million shares in the number of shares offered by
us would, after deducting the estimated underwriting discount,
increase (decrease) our cash, cash equivalents, and short-term
investments, working capital, total assets, and total
stockholders’ equity by approximately
$3.6 million, assuming such
public offering price remains the same.
35
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
“Selected Consolidated Financial Data” and our
consolidated financial statements, the accompanying notes, and
other financial information included elsewhere in this prospectus.
This discussion contains forward-looking statements that involve
risks and uncertainties, such as our plans, estimates, and beliefs.
Our actual results could differ materially from those
forward-looking statements below. Factors that could cause or
contribute to those differences include, but are not limited to,
those identified below and those discussed under “Risk
Factors” included elsewhere in this prospectus.
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
We were
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, the 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. (“AOC Key
Solutions”). AOC
Key Solutions 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, or ATSE,
solutions, including speed, red light, and distracted driving
cameras.
Our
headquarters are located in Chantilly, Virginia and as of December
31, 2016, the Company had a satellite office in New Orleans,
Louisiana. As of December 31, 2016, we had 29 and access to
approximately 350 consultants. Through the acquisition of
Firestorm, we added a satellite office in Roswell, Georgia. Through
the merger with Brekford, we added an office in Hanover, Maryland.
As of September 30, 2017, Novume had 77 employees and access to
approximately 400 consultants.
In an
effort to create specific awareness about us in the Government
Contracting, or GovCon, industry, through our recently-formed
subsidiary, Novume Media, we 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, we will also seek to serve as a partner or
incubator for emerging businesses, such as the ATSE business, where
an understanding of government contracting procedures and contacts
with other seasoned providers of government services or products
can be critical to success.
36
General
The
information provided in this discussion and analysis of our
financial condition and results of operations covers the three and
nine months ended September 30, 2017 and 2016 and the years ended
December 31, 2016 and 2015. During fiscal year 2017, we completed
the acquisition of Firestorm (described below) and consummated the
merger with Brekford (described below). As of the date of hereof,
we had not completed the detailed valuation study necessary to
arrive at the required final estimates of the fair value of the
Brekford assets we acquired and the liabilities assumed and the
related allocations of purchase price. We have not identified all
adjustments necessary to conform Brekford’s accounting
policies to our accounting policies. As of the date of hereof, we
have 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
our consolidated balance sheet and/or statements of operations,
which will include operations of Novume, AOC Key
Solutions, Firestorm, Brekford and Novume
Media.
In
connection with the audit of our consolidated financial statements
for the years ended December 31, 2016 and 2015, our management
concluded that we had material weaknesses in our internal controls
because we do 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 our consolidated financial
statements and related disclosures would be prepared in accordance
with GAAP. In addition, we 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. Our management is developing a plan to remediate
the material weaknesses although there can be no assurance that
such plans, when enacted, will be successful.
Our
significant assets as of September 30, 2017 were cash and equity
interest in our principal operating subsidiaries, AOC Key
Solutions, Brekford and Firestorm. Thus, the
financial information in this section for periods prior to March
15, 2016 is for AOC Key
Solutions 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 AOC Key
Solutions. The financial information for periods
subsequent to January 25, 2017 is prepared on a consolidated basis
for KeyStone, AOC Key
Solutions and Firestorm. For periods subsequent to
the Brekford Merger on August 28, 2017, the financial information
is prepared on a consolidated basis for Novume, AOC Key
Solutions, 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. Since 1983, our subsidiaries have served thousands of these
entities. In 2017, we provided services to 14 of the Top
100 largest federal contractors (based on their fiscal 2016 prime
contracts in IT, systems integration, professional services and
telecommunications) as identified by Washington Technology
(https://washingtontechnology.com/toplists/top-100-lists/2017.aspx).
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. We believe 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 resources
and client contacts, our ultimate objective is to expand our
ability to meet our 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 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.
37
We
intend to fund organic growth and add both vertical and horizontal
capabilities by acquiring service providers through a
market-focused and disciplined strategy. Our efforts to identify
prospective target businesses will look for opportunities where the
combination of resources will be additive to our existing
capabilities 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 we
provide to our existing customers, as well as carefully considered
expansions of our customer base.
We are
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 monthly,
with revenue recognized as the services are provided. In a few
cases, we may enter into a fixed-fee engagement for our services.
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 most our client engagements
and do not provide us with a high degree of predictability of
future period performance.
Our
financial results are impacted principally by the:
1)
demand by clients
for our services;
2)
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.
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 our services 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.
Although
the new administration has expressed a desire to reduce the federal
government bureaucracy, we cannot assume that this will reduce the
demand for our 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, we
believe 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.
38
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 our wholly-owned subsidiary, and Brekford Merger
Sub ceased to exist. KeyStone Merger Sub also became our
wholly-owned subsidiary, 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.
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”), we acquired all of the
membership interests in each of the Firestorm Entities for the
following consideration:
●
$500,000 in cash in
the aggregate paid 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 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.
39
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 our 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
prospectus. 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 our wholly-owned subsidiary, AOC Key
Solutions. 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 AOC Key
Solutions.
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 AOC Key
Solutions noted above.
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 increased use of consultants, which
are more expensive than employees, and increased non-billable
expenses for AOC Key
Solutions.
40
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. We 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.
We
anticipate that our 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
AOC Key
Solutions initially elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under
those provisions, AOC Key
Solutions did not pay federal corporate income tax,
and in most instances state income tax, on its taxable income.
AOC Key
Solutions 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.
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 AOC Key
Solutions.
41
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
AOC Key
Solutions 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 AOC Key
Solutions 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, 2017
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. We 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, 2017 increased to 72.2%
compared to 37.8% in the comparable period in 2016.
We
anticipate that our general and administrative expenses will
continue to increase, however at a slower 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, 2017 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
AOC Key
Solutions initially elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under
those provisions, AOC Key
Solutions did not pay federal corporate income tax,
and in most instances state income tax, on its taxable income.
AOC Key
Solutions 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,
2017 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.
42
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
We
expect to finance our operations over the next twelve months from
the date of this prospectus primarily through existing cash flow
and from the net proceeds of the Regulation A Offering,
supplemented as necessary by funds available through access to
credit and through access to additional capital. The Regulation A
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. We 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. We
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.
43
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 AOC Key
Solutions stockholders’
distributions.
Non-Cash Financing Activities
In
March 2016, the AOC Key
Solutions stockholders exchanged 100% of their
outstanding shares of common stock in AOC Key
Solutions 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.
Lease Obligations
We
lease 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%. We also lease office
space in New Orleans, Louisiana under a three-year lease expiring
May 31, 2018, and in Roswell, Georgia under a lease expiring
January 31, 2022. In addition, we lease office space from Global
Public Safety, Inc. 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 2022 are as
follows:
2017
|
$194,200
|
2018
|
729,229
|
2019
|
656,100
|
2020
|
96,552
|
2021
|
32,077
|
Thereafter
|
2,673
|
Total
|
$1,710,831
|
We are
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 we 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.
Comparison of the Years Ended December 31, 2016 and
2015
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. KeyStone was formed
in March 2016 as a holding company for its wholly owned subsidiary
AOC Key Solutions, Inc. (“AOC Key Solutions”). AOC Key
Solutions provides consulting and technical support services to
assist clients seeking U.S. federal government contracts in the
technology, telecommunications, defense, and aerospace
industries.
The
audited results for the periods shown below should be reviewed in
conjunction with KeyStone’s audited consolidated financial
statements and notes as of and for the years ended
December 31, 2016 and 2015, respectively, included elsewhere
in this prospectus.
KeyStone Solutions, Inc. Consolidated Statements of
Operations
for the Years Ended December 31, 2016 and 2015
|
Year
Ended December 31,
|
|
|
2016
|
2015
|
REVENUE
|
$ 12,128,406
|
$ 9,661,795
|
Cost of
revenue
|
6,959,514
|
5,496,722
|
Gross
profit
|
5,168,892
|
4,165,073
|
OPERATING
EXPENSES
|
|
|
Selling, general,
and administrative expenses
|
5,262,768
|
3,795,678
|
Income (loss) from
operations
|
(93,876)
|
369,395
|
OTHER
EXPENSES
|
|
|
Interest
expense
|
(165,079)
|
—
|
Total other
expenses
|
(165,079)
|
—
|
Income (loss)
before taxes
|
(258,955)
|
369,395
|
Benefit from income
taxes
|
219,971
|
—
|
Net income
(loss)
|
$ (38,984)
|
$ 369,395
|
44
Revenue
Consolidated
revenue for the year ended December 31, 2016 is entirely
attributable to the our wholly-owned subsidiary, AOC Key Solutions.
Revenue increased by $2,466,611, or 25.5%, to $12,128,406 for the
year ended December 31, 2016 compared to $9,661,795 in the
comparable period in 2015. This increase was primarily due to an
increase in the demand for services by clients as a result of the
U.S. federal government putting more contracts out for bid during
this period than in the comparable period.
Cost of Revenue
Total
cost of revenue for the year ended December 31, 2016 increased
by $1,462,792, or 26.6%, to $6,959,514 compared to $5,496,722 in
the comparable period in 2015. This increase was mostly
attributable to a $1,307,176 increase in consultant expense to
support the stronger demand for services, a $112,249 increase in
billable and non-billable expenses due to additional client
engagements requiring increased travel and other direct costs and a
$43,367 increase in staff billable labor. During 2016, employee
billable labor increased 3.2% and consultant labor increased 33.4%
over 2015 levels.
Gross Profit
Gross
profit for the year ended December 31, 2016 increased by
$1,003,819, or 24.1%, to $5,168,892 compared to $4,165,073 for the
comparable period in 2015. The gross profit margin remained
relatively consistent at 42.6% for the year ended December 31,
2016 compared to 43.1% in the comparable period in 2015. During
2016, the number of projects remained relatively constant compared
to the 2015 level, however, the average contract size increased by
approximately 26%.
Operating Costs and Expenses
Operating
costs and expenses for the year ended December 31, 2016
increased by $1,467,090, or 38.7%, to $5,262,768 compared to
$3,795,678 in the comparable period in 2015. This increase was due
to an increase in AOC Key Solutions’ payroll related expenses
and employee bonuses, offset by decreases in net rent and
administrative expenses. Operating cost attributable to the holding
company were primarily for expenses associated with professional
and legal services in forming the Company and the merger of AOC Key
Solutions and KeyStone and were included in operating costs and
expenses for the year ended December 31, 2016. As percentage
of revenue, operating costs and expenses for the year ended
December 31, 2016 increased to 43.4% compared to 39.3% in the
comparable period in 2015.
We
anticipate that our general and administrative expenses will
increase 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 Expenses
Other
expenses for the year ended December 31, 2016 were $165,079
and represented net interest expense for the period relating to the
Avon Road Note and a line of credit offset by interest income.
Other expenses for the year ended December 31, 2015 were
zero.
Income Taxes
AOC Key
Solutions elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Under those provisions, AOC Key
Solutions did not pay federal corporate income tax, and in most
instances state income tax, on its taxable income. AOC Key
Solutions revoked its S Corporation election upon the
March 15, 2016 merger with KeyStone and is now subject to
corporate income taxes.
The
benefit from income tax for the year ended December 31, 2016
was $219,971 and is primarily comprised of a deferred tax
benefit.
Net Income (Loss)
Due
primarily to the factors noted above, net loss for the year ended
December 31, 2016 was $38,984 compared to net income of
$369,395 for the comparable period in 2015. The net loss margin was
0.3% for the year ended December 31, 2016 compared to a net
income margin of 3.8% for the comparable period in
2015.
45
Cash Flow
We
expect to finance our operations over the next twelve months from
the date of this prospectus primarily through existing cash flow
and from the net proceeds of the Regulation A Offering,
supplemented as necessary by funds available through access to
credit and through access to additional capital. The Regulation A
Offering is further described under Liquidity and Capital
Resources.
The net
cash flows from operating, investing and financing activities for
the periods below were as follows:
|
Year
ended December 31,
|
|
|
2016
|
2015
|
Net cash provided
by (used in):
|
|
|
Operating
activities
|
$ (136,079)
|
$ 260,659
|
Investing
activities
|
(36,833)
|
(57,343)
|
Financing
activities
|
2,393,633
|
(267,758)
|
Net increase
(decrease) in cash and cash equivalents:
|
$ 2,220,721
|
$ (64,442)
|
Cash Provided By (Used for) Operating Activities
For the
year ended December 31, 2016, net cash used for operating
activities was $136,079. Cash was used primarily to fund our
operations and working capital needs. We also incurred non-cash
expenses including depreciation and amortization, deferred rent,
share-based compensation for services and financing related
costs.
For the
year ended December 31, 2015, net cash provided by operating
activities was $260,659. Cash was provided by our operations and
working capital. We also incurred non-cash expenses including
depreciation and amortization and deferred rent.
Cash Used for Investing Activities
For the
year ended December 31, 2016, net cash used for investing
activities of $36,833 related to the purchase of computer hardware
and equipment.
For the
year ended December 31, 2015, net cash used for investing
activities of $57,343 related to the purchase of computer hardware
and equipment.
Cash Provided by (Used for) Financing Activities
For the
year ended December 31, 2016, net cash provided by financing
activities of $2,393,633 related to the proceeds from the issuance
of preferred stock and a subordinated note, offset by loan
origination costs and AOC Key Solutions stockholders’
distributions.
For the
year ended December 31, 2015, net cash used for financing
activities of $(267,758) related to the AOC Key Solutions
stockholders’ distributions.
Non-Cash Financing Activities
In
March 2016, AOC Key Solutions’ stockholders exchanged 100% of
their outstanding shares of common stock in AOC Key Solutions for
proportionate shares of KeyStone Solutions’ outstanding
common stock and $1,192,844 of undistributed earnings were
contributed to KeyStone.
Lease Obligations
We
lease 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%. We also lease office
space in New Orleans, Louisiana under a three-year lease expiring
May 31, 2018.
Rent
expense for the years ended December 31, 2016 and 2015 was
$507,815 and $552,794, respectively.
As of
December 31, 2016, the future obligations over the primary
terms of long-term leases expiring in 2017, 2018 and 2019 are as
follows:
2017
|
$ 505,484
|
2018
|
513,939
|
2019
|
435,314
|
Total
|
$ 1,454,737
|
We are
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 we 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 was $182,534 and $156,375 for the
years ended December 31, 2016 and 2015,
respectively.
46
Liquidity and Capital Resources
We have
funded our operations primarily through cash from operating
activities of AOC Key
Solutions, Firestorm, the $500,000 Avon Note (see
below) and the Regulation A Offering. As of September 30, 2017, we
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 (KeyStone) commenced its Regulation A
Offering of up to 3,000,000 Units. At the initial closing of the
Regulation A Offering, on December 23, 2016, we sold 301,570 Units
and received aggregate gross proceeds of $3,015,700. At the second
closing of the Regulation A Offering, on January 23, 2017, we sold
119,757 Units and received aggregate gross proceeds of $1,197,570.
At the third and final closing of the Regulation A Offering, on
March 21, 2017, we 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
Regulation A 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. The holders of 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 Series A Preferred Stock prior to the Brekford Merger. We
anticipate that we will pay the quarterly cash dividends through
cash flow, 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, we paid cash dividends of $75,695 to
holders of record of our Series A Preferred Stock as of March 30,
2017. On July 8, 2017, we paid cash dividends of $87,907 to
shareholders of record as of June 30, 2017. On September 30, 2017,
we declared and accrued dividends of $87,907 payable to
shareholders of record as of September 30, 2017.
AOC Key
Solutions 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, we had granted to
SSB a security interest in our accounts receivable. SSB was
required to advance funds to us 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. Our obligations under the
2015 Loan Agreement were guaranteed by James McCarthy, the Chairman
of Novume (and former chairman of AOC Key
Solutions), and his wife. We 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 AOC Key
Solutions’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, we 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 matured on July 31, 2017, bore interest at the Wall Street
Journal Prime Rate, floating, plus 0.50% and was secured by a first
lien on all of Novume’s business assets; and 2) an optional
term loan of $100,000 which must have been drawn by July 31, 2017,
was for permanent working capital, bore interest at the Wall Street
Journal Prime Rate, floating, plus 0.75%, required 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 our 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 and balance sheet
covenants, as well as affirmative and negative operational and
ownership covenants. We were in compliance with all 2016 Line of
Credit covenants at December 31, 2016. In August 2017, we
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, we had no balances due, respectively,
for the 2016 Line of Credit and the 2015 Loan Agreement. When we
replaced the 2015 Loan Agreement with the 2016 Line of Credit on
August 11, 2016, neither line of credit had a balance due. We
terminated the 2016 Line of Credit in August 2017 and consequently
there are no amounts outstanding as of the date of this
prospectus.
On
March 16, 2016, we entered into a Subordinated Note and Warrant
Purchase Agreement (the “Avon Road Note Purchase
Agreement”) pursuant to which we agreed to issue up to
$1,000,000 in subordinated debt and warrants to purchase up to
242,493 shares of our 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, our CEO
and a member of our 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.
47
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.
Pursuant
to the terms of the acquisition of the membership interests in the
Firestorm Entities, we 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, we did not have any material commitments for
capital expenditures.
On October 1, 2017 (the “Global Closing Date”), we
completed our acquisition of Global Technical Services, Inc.
(“GTS”) and Global Contract Professionals, Inc.
(“GCP) (collectively, the “Global”) (the
“Global Merger”). Consideration (“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 our Series B Preferred Stock. In addition to
the merger consideration, we 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, we paid $175,000 in the aggregate to
reduce the current borrowed amounts under the Wells Fargo Credit
Facilities as of the Global Closing Date.
On November 16, 2017, we entered into an Agreement and Plan of
Merger (the “NeoSystems Merger Agreement”) with NeoSystems HoldCo,
Inc., a Virginia corporation (“NeoSystems HoldCo”),
NeoSystems LLC, a Virginia limited liability company and a wholly
owned subsidiary of NeoSystems HoldCo (“NeoSystems
LLC”) (the “NeoSystems Merger”). Upon the
consummation of the NeoSystems Merger (the “NeoSystems
Closing”), we will pay the
participating stockholders the following: (a) $5 million in cash
and (b) an amount of shares of Novume common stock equal to $10
million (determined by dividing such amount by the price per share
to the public of such shares of Novume common stock sold in the
first Qualifying Offering by the Company) minus
$1,982,514, which represents the
aggregate dollar value of the spread of the NeoSystems options that
will be assumed by us at closing (collectively, the
“NeoSystems Merger
Consideration”). As consideration for the consummation of the
NeoSystems Merger in addition to the NeoSystems Merger
Consideration, at Closing we will (a) assume each option
outstanding immediately prior to the
NeoSystems Closing that is held by an optionholder that continues
in the employment, or service as a consultant or director, of
NeoSystems; (b) assume the obligations of NeoSystems with respect
to certain of its debt facilities, including outstanding principal
totaling, in the aggregate, $4.95 million; and (c) redeem all of
the shares of NeoSystems preferred stock at the NeoSystems Closing for up
to an amount of $2.25 million.
Our
acquisition of Global was consistent with our corporate strategy of
acquiring and building professional services companies that add to
the product mix which we can provide to our subsidiaries’
existing customer base. Specialty staffing is a service that most
large aviation and aerospace companies use. Many of our
subsidiaries’ customers operate in this space and use
staffing companies fulfill the need various employee roles. We
believe Global has the opportunity to provide specialty staffing
support to contractors outside of the aviation and aerospace
sectors, thereby giving support to a wider spectrum of potential
clients. Since the Global Entities operate as professional services
companies, we have not experienced a material change in our
business operations.
With
the acquisition of Global on October 1, 2017, we assumed
approximately $3,413,247 outstanding on a line of credit. With the
anticipated acquisition of NeoSystems, we will assume approximately
$2,976,427 of notes payable. If we require additional capital
resources to grow our business, either internally or through
acquisition, we may need to seek to secure additional debt
financing. There can be no assurance that such capital will be
available to us, if at all, upon terms acceptable to
us.
Off-Balance Sheet Arrangements, Contractual Obligations and
Commitments
As of
the date of this prospectus, we 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.
48
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements
which have been prepared in accordance with GAAP. The preparation
of these consolidated financial statements requires our management
to make estimates and judgments that affect the reported amounts in
our consolidated financial statements.
We
believe 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.
We base our estimates on historical experience and on various other
assumptions that our management 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.
Our
accounting policies are further described in its historical audited
consolidated financial statements and the accompanying notes
included in this prospectus. We have identified the following
critical accounting policies:
Revenue Recognition
We
recognize 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. We
principally derive 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, we recognize 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 we
receive a percentage of collected fines, revenue is calculated
based upon the posted payments from citizens multiplied by our
contractual percentage. For contracts where we receive 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. Our fixed-fee contracts typically have
a revenue neutral provision whereby the municipality’s
payment to us cannot exceed amounts collected from citizens within
a given month.
Accounts Receivable
Accounts
receivable are customer obligations due under normal trade terms.
We perform continuing credit evaluations of our clients’
financial condition, and we generally do 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.
We
record an allowance for doubtful accounts based on specifically
identified amounts that are believed to be uncollectible. We also
record as an additional allowance a certain percentage of aged
accounts receivable, based on historical experience and our
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, we 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.
Income Taxes
Through
March 15, 2016, AOC Key
Solutions had elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code. Under
those provisions, AOC Key
Solutions did not pay U.S. federal corporate income
taxes, and in most instances state income tax, on its taxable
income. Instead, the stockholders of AOC Key
Solutions were liable for individual income taxes on
their respective shares of AOC Key
Solutions’ net income. AOC Key
Solutions 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.
Our
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. Our management 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.
49
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. We are
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. We are currently evaluating the effect
of this update but do not believe it will have a material impact on
our 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. We are currently evaluating the effect of this
update but do not believe it will have a material impact on our
financial statements and related
disclosures.
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. We are currently evaluating the effect that
this update will have on our 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.
50
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.
We are 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. We 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 we will
apply the modified retrospective method. We expect revenue
recognition acrossour portfolio of services to remain largely
unchanged. However, we expect to recognize revenue earlier than we
do 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 we have
not finalized our assessment of the impact of the ASU, based on the
analysis completed to date, we do not currently anticipate that the
ASU will have a material impact on our 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 our
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. We adopted this standard and
the impact of the adoption was not material to the consolidated
financial statements.
51
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. We 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). We 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. We 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. We adopted this standard and
the impact of the adoption was not material to the consolidated
financial statements.
We do
not believe that any recently issued accounting standards, in
addition to those referenced above, would have a material effect on
our consolidated financial statements.
52
The
following unaudited pro forma condensed combined financial
statements are based on the historical financial statements of
Novume, Global and NeoSystems after giving effect to our recent
acquisition of Global and the anticipated acquisition of
NeoSystems, and the assumptions and adjustments described in the
accompanying notes to these unaudited pro forma condensed combined
financial statements.
In October, 2017, Novume acquired all the outstanding shares of the
Global Entities.
The Company determined the Global Entities were businesses as
defined in the accounting literature and that the Company was the
accounting acquirer in the transaction. The acquisition of the
Global Entities was accounted for as a business combination under
the acquisition method of accounting. Under this method, the assets
acquired and liabilities assumed were recorded in the
Company’s consolidated financial statements at their
respective fair values as of the acquisition dates, and the results
of these acquisitions are included in the Company’s
consolidated results from the respective dates of
acquisition. As
consideration for the acquisition, we paid: (a) $750,000 in cash,
(b) 375,000 shares of our common stock and (c) 240,861 shares of
Series B Preferred Stock. In addition we paid $365,037 to satisfy
in full all of the outstanding debt of the Global Entities, except
for certain intercompany debt and ordinary course debt, and amounts
due under Global’s Wells Fargo credit facilities, which
remained in effect following the consummation of the acquisition.
In connection with the Wells Fargo credit facilities, at closing,
we delivered to Wells Fargo Bank, National Association, general
continuing guaranties, guaranteeing the obligations of the Global
Entities 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.
On November 16, 2017, we entered into a merger agreement with
NeoSystems. The
Company determined that NeoSystems Corp. is a business as defined
in the accounting literature and that the Company will be the
accounting acquirer in the anticipated transaction. The planned
merger with NeoSystems will be accounted for as a business
combination under the acquisition method of accounting. Under this
method, the assets acquired and liabilities assumed will be
recorded in the Company’s consolidated financial statements
at their respective fair values as of the acquisition dates, and
the results of these acquisitions will be included in the
Company’s consolidated results from the respective dates of
acquisition. Pursuant to the merger agreement, we will acquire
NeoSystems through a forward merger. Upon the consummation of
the merger (the “Closing”), the NeoSystems stockholders
will receive the following: (a) $5 million in cash, and (b) an
amount of shares of our common stock equal to $10 million
(determined by dividing such amount by the price per share to the
public of shares of our common stock sold in the first Qualifying
Offering by the Company) minus
$1,982,514, which represents the
aggregate dollar value of the spread of the options of NeoSystems
that will be assumed by the Company at closing. A “Qualifying
Offering” is defined as a firm commitment underwritten public
offering of the Company for an aggregate price to the public of at
least $10 million, which results in the Company’s successful
listing of ccommon stock on the Nasdaq Stock Market or the New York
Stock Exchange. In addition we will (a) assume each option
outstanding immediately prior to the closing that is held by an
optionholder that continues in the employment, or service as a
consultant or director of NeoSystems; (b) assume the obligations of
NeoSystems with respect to certain of its debt facilities,
including outstanding principal totaling, in the aggregate, $4.95
million; and (c) redeem all of the shares of NeoSystems preferred
stock at closing for up to an amount of $2.25
million.
These
pro forma condensed combined financial statements also give effect
to the acquisitions of Firestorm and Brekford which occurred during
fiscal year 2017.
The
unaudited pro forma condensed combined balance sheet of Novume,
Global and NeoSystems as of September 30, 2017 is presented as if
the Global and anticipated NeoSystems acquisitions had occurred on
September 30, 2017. The unaudited pro forma condensed combined
statement of operations of Novume, Global, NeoSystems, Firestorm
and Brekford for the nine months ended September 30, 2017 is
presented as if the all of the acquisitions had taken place on
January 1, 2017. The unaudited pro forma condensed combined balance
sheet of Novume, Global, NeoSystems, Firestorm and Brekford as of
December 31, 2016 is presented as if the Global and anticipated
NeoSystems acquisitions had occurred on December 31, 2016. The
unaudited pro forma condensed combined statement of operations of
Novume, Global, NeoSystems, Firestorm and Brekford for the fiscal
year ended December 31, 2016 is presented as if the all of the
acquisitions had taken place on January 1, 2016.
The
unaudited pro forma condensed combined financial information does
not purport to represent what the Company’s results of
operations would have been if the acquisition of Global and
anticipated acquisition of NeoSystems had occurred on January 1,
2016 or January 1, 2017 or what such results will be for any future
periods or what the consolidated balance sheet would have been if
the acquisition had occurred on September 30, 2017 or December 31,
2016. The actual results in the periods following the acquisitions
may differ significantly from that reflected in the unaudited pro
forma condensed combined financial information for a number of
reasons including, but not limited to, differences between the
assumptions used to prepare the unaudited pro forma condensed
combined financial information and the actual amounts and the
completion of a final valuation of the acquisitions. In addition,
no adjustments have been made for non-recurring integration plans
or operational efficiencies that may have been achieved if the
acquisitions had occurred on January 1, 2017 or January 1,
2016.
The
unaudited pro forma condensed combined financial information has
been prepared giving effect to the acquisitions, which are
accounted for as a business combinations in accordance with the
Financial Accounting Standards Board Accounting Standards
Codification 805, “Business Combinations.” The
unaudited pro forma adjustments are based on management’s
preliminary estimates of the values of the tangible and intangible
assets and liabilities acquired. As a result, the actual
adjustments may differ materially from those presented in the
unaudited pro forma condensed consolidated financial statements. A
change in the unaudited pro forma adjustments of the purchase price
for the acquisitions would primarily result in a reallocation
affecting the value assigned to tangible and intangible assets. The
income statement effect of these changes will depend on the nature
and amount of the assets or liabilities adjusted.
53
These
unaudited pro forma condensed combined financial statements,
including the notes hereto, should be read in conjunction with
(i) the historical consolidated financial statements for
Novume for the nine months ended September 30, 2017; the historical
consolidated financial statements for Novume for the years ended
December 31, 2016 and 2015 and (ii) the historical
audited financial statements of Global and NeoSystems included
below.
|
Nine Months ended September 30, 2017
|
Year ended December 31, 2016
|
Pro Forma Statement of Operations Data:
|
|
|
Revenue
|
$55,208,371
|
$70,068,301
|
Cost
of revenue
|
31,969,193
|
41,814,554
|
Gross
profit
|
23,239,179
|
28,253,747
|
Salaries
and related expenses
|
1,237,539
|
1,645,073
|
Selling,
general and administrative expenses
|
25,008,602
|
30,855,324
|
Total
operating expenses
|
26,246,141
|
32,500,397
|
Loss
from operations
|
(3,006,963)
|
(4,246,650)
|
Other
expense, net
|
(65,113)
|
628,398
|
Interest
expense, net
|
(991,303)
|
(2,056,881)
|
Loss
from continuing operations before provision from income
taxes
|
(4,063,379)
|
(5,675,133)
|
Provision
for Income Taxes
|
940,809
|
1,836,123
|
Net
income (loss) from continuing operations
|
$(3,122,570)
|
$(3,839,010)
|
|
As of
September 30, 2017
|
As of
December 31, 2016
|
Pro Forma Balance Sheet Data:
|
|
|
Total
assets
|
$45,262,505
|
$46,492,910
|
Total
liabilities and mezzanine debt
|
$ 24,348,610
|
$21,314,532
|
Total
stockholders' equity
|
$ 20,913,895
|
$25,178,378
|
54
NOVUME SOLUTIONS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2017
(UNAUDITED)
|
Novume Solutions, Inc.
|
Global Technical Services, Inc.
|
Global Contract Professionals, Inc.
|
Pro Forma Adjustments
|
Ref
|
Novume Solutions, Inc.
|
NeoSystems, Corp.
|
Pro Forma Adjustments
|
Ref
|
Novume Solutions, Inc.
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$3,762,265
|
$14,447
|
$6,487
|
$(1,090,037)
|
(1)
|
$2,693,162
|
$2,022,078
|
$(7,250,000)
|
(6)
|
$(2,534,760)
|
Investments
|
-
|
-
|
-
|
-
|
|
-
|
561,780
|
-
|
|
561,780
|
Accounts
receivable, net
|
3,300,742
|
3,103,292
|
1,015,174
|
-
|
|
7,419,208
|
7,408,726
|
-
|
|
14,827,934
|
Note
receivable, current portion
|
300,000
|
645,505
|
-
|
(645,505)
|
(3)
|
300,000
|
165,742
|
-
|
|
465,742
|
Inventory
|
169,232
|
-
|
-
|
-
|
|
169,232
|
-
|
-
|
|
169,232
|
Prepaids and
other current assets
|
253,607
|
118,722
|
3,545
|
-
|
|
375,874
|
813,026
|
-
|
|
1,188,900
|
Total current
assets
|
7,785,846
|
3,881,966
|
1,025,206
|
(1,735,542)
|
|
10,957,476
|
10,971,352
|
(7,250,000)
|
|
14,678,828
|
Property and
equipment, net
|
365,036
|
90,457
|
23,303
|
-
|
|
478,796
|
3,272,326
|
-
|
|
3,751,122
|
Excess
purchase price over net assets
|
1,960,345
|
-
|
-
|
3,725,525
|
(1)
|
5,685,870
|
-
|
15,833,617
|
(6)
|
21,519,487
|
Intangibles,
net
|
2,168,941
|
-
|
-
|
-
|
|
2,168,941
|
-
|
-
|
|
2,168,941
|
Note
receivable, non-current
|
1,649,000
|
-
|
-
|
-
|
|
1,649,000
|
-
|
-
|
|
1,649,000
|
Deferred tax
asset
|
1,184,359
|
-
|
-
|
-
|
|
1,184,359
|
-
|
-
|
|
1,184,359
|
Investment at
cost
|
262,140
|
-
|
-
|
-
|
|
262,140
|
-
|
-
|
|
262,140
|
Other
non-current assets
|
39,387
|
-
|
9,241
|
-
|
|
48,628
|
-
|
-
|
|
48,628
|
TOTAL
ASSETS
|
$15,415,054
|
$3,972,423
|
$1,057,750
|
$1,989,983
|
|
$22,435,210
|
$14,243,678
|
$8,583,617
|
|
$45,262,505
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
$3,290,345
|
$603,888
|
$194,930
|
$(48,539)
|
(1)
|
$4,040,624
|
$3,485,624
|
-
|
|
$7,526,248
|
Obligations
under other notes payable - current portion
|
-
|
2,656,421
|
1,402,331
|
(645,505)
|
(3)
|
3,071,750
|
4,979,404
|
-
|
|
8,051,154
|
|
|
|
|
(341,497)
|
(1)
|
|
|
|
|
|
Other current
liabilities
|
72,500
|
69,940
|
23,231
|
4,795
|
(2)
|
100,526
|
468,756
|
-
|
|
569,282
|
|
|
|
|
(69,940)
|
(1)
|
|
|
|
|
|
Total current
liabilities
|
3,362,845
|
3,330,249
|
1,620,492
|
(1,100,686)
|
|
7,212,900
|
8,933,784
|
-
|
|
16,146,684
|
|
|
|
|
|
|
|
|
|
|
|
LONG - TERM
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Notes payable
– stockholders
|
1,419,753
|
-
|
-
|
200,000
|
(1)
|
1,619,753
|
-
|
-
|
|
1,619,753
|
Other notes
payable - net of current portion
|
-
|
954,316
|
-
|
(954,316)
|
(1)
|
-
|
-
|
-
|
|
-
|
Derivative
liability
|
-
|
-
|
-
|
-
|
|
-
|
471,470
|
(471,470)
|
(6)
|
-
|
Deferred
compensation liability
|
-
|
-
|
-
|
-
|
|
-
|
446,678
|
-
|
|
446,678
|
Deferred rent,
net of current portion
|
54,705
|
-
|
-
|
-
|
|
54,705
|
1,834,249
|
-
|
|
1,888,954
|
Total
long-term liabilities
|
1,474,458
|
954,316
|
-
|
(754,316)
|
|
1,674,458
|
2,752,397
|
(471,470)
|
|
3,955,385
|
TOTAL
LIABILITIES
|
4,837,303
|
4,284,565
|
1,620,492
|
(1,855,003)
|
|
8,887,358
|
11,686,181
|
(471,470)
|
|
20,102,069
|
|
|
|
|
|
|
|
|
|
|
|
Series A
convertible redeemable preferred stock
|
4,246,541
|
-
|
-
|
-
|
|
4,246,541
|
-
|
-
|
|
4,246,541
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
(DEFICIT) EQUITY
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
1,394
|
10,000
|
441
|
(10,441)
|
(1)
|
1,431
|
3,591,903
|
(3,591,903)
|
(6)
|
1,651
|
|
|
|
|
38
|
(1)
|
|
|
220
|
(6)
|
|
Additional
paid-in capital
|
8,925,179
|
565,984
|
(240,117)
|
(325,867)
|
(1)
|
9,491,429
|
1,250,383
|
(1,250,383)
|
(6)
|
21,103,794
|
|
|
|
|
566,250
|
(1)
|
|
|
7,999,781
|
(6)
|
|
|
|
|
|
|
(1)
|
|
|
3,612,584
|
(6)
|
|
Preferred
Stock
|
-
|
-
|
-
|
2,408,610
|
(1)
|
2,408,610
|
571
|
(571)
|
(6)
|
2,408,610
|
Treasury
Stock
|
-
|
(4,464,860)
|
-
|
4,464,860
|
(1)
|
-
|
-
|
-
|
|
-
|
Accumulated
(Deficit) Earnings
|
(2,595,363)
|
3,576,734
|
(323,065)
|
(4,795)
|
(2)
|
(2,600,159)
|
(2,285,360)
|
2,285,359
|
(6)
|
(2,600,160)
|
|
|
|
|
(3,253,669)
|
(1)
|
|
|
|
|
|
Other
comprehensive loss
|
-
|
-
|
-
|
-
|
|
-
|
-
|
-
|
|
-
|
TOTAL
STOCKHOLDERS' (DEFICIT) EQUITY
|
6,331,210
|
(312,142)
|
(562,742)
|
3,844,986
|
|
9,301,311
|
2,557,497
|
9,055,087
|
|
20,913,895
|
TOTAL
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
|
$15,415,054
|
$3,972,423
|
$1,057,751
|
$1,989,983
|
|
$22,435,210
|
$14,243,678
|
$8,583,617
|
|
$45,262,505
|
55
NOVUME SOLUTIONS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(UNAUDITED)
|
Novume Solutions, Inc.
|
Brekford Traffic Safety, Inc. (7)
|
Firestorm, LLC & Affiliate (5) (8)
|
Global Technical Services, Inc.
|
Global Contract Professionals, Inc.
|
Pro Forma Adjustments
|
Ref
|
Novume Solutions, Inc.
|
NeoSystems, Corp.
|
Pro Forma Adjustments
|
Ref |
Novume Solutions, Inc.
|
Net
revenue
|
$11,131,825
|
$2,068,759
|
$36,760
|
$13,650,759
|
$4,936,613
|
$-
|
|
$31,824,716
|
$23,383,655
|
$-
|
|
$55,208,371
|
Cost of
revenue
|
6,017,982
|
778,378
|
6,279
|
12,193,454
|
4,408,811
|
-
|
|
23,404,904
|
8,564,289
|
-
|
|
31,969,193
|
Gross
Profit
|
5,113,843
|
1,290,381
|
30,482
|
1,457,305
|
527,802
|
-
|
|
8,419,812
|
14,819,366
|
-
|
|
23,239,178
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
related expenses
|
-
|
1,237,539
|
-
|
-
|
-
|
-
|
|
1,237,539
|
-
|
-
|
|
1,237,539
|
Selling,
general and administrative expenses
|
8,036,339
|
825,545
|
10,741
|
1,334,855
|
542,020
|
-
|
|
10,749,500
|
14,259,102
|
-
|
|
25,008,602
|
Total
operating expenses
|
8,036,339
|
2,063,084
|
10,741
|
1,334,855
|
542,020
|
-
|
|
11,987,039
|
14,259,102
|
-
|
|
26,246,141
|
Income (loss)
from operations
|
(2,922,496)
|
(772,703)
|
19,740
|
122,450
|
(14,218)
|
-
|
|
(3,567,227)
|
560,264
|
-
|
|
(3,006,963)
|
Other
(expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expense) income, net
|
(97,624)
|
17,546
|
-
|
(157,554)
|
(72,323)
|
(4,795)
|
(2)
|
(314,750)
|
(676,553)
|
-
|
|
(991,303)
|
Change in fair
value of derivative liability
|
-
|
6,132
|
-
|
-
|
-
|
-
|
|
6,132
|
-
|
-
|
|
6,132
|
Other income
(expense)
|
142,283
|
(235,724)
|
-
|
10,982
|
(2,511)
|
-
|
|
(84,970)
|
13,725
|
-
|
|
(71,245)
|
Total other
(expense) income
|
44,659
|
(212,046)
|
-
|
(146,572)
|
(74,834)
|
(4,795)
|
|
(393,588)
|
(662,828)
|
-
|
|
(1,056,416)
|
Net income
(loss) - before taxes and foreign currency
|
(2,877,837)
|
(984,749)
|
19,740
|
(24,122)
|
(89,052)
|
(4,795)
|
|
(3,960,815)
|
(102,564)
|
-
|
|
(4,063,379)
|
Benefit from
income taxes
|
964,377
|
2,068,132
|
-
|
-
|
-
|
(2,132,725)
|
(4)
|
899,784
|
41,025
|
-
|
|
940,809
|
Net income
(loss) - from continuing operations
|
$(1,913,460)
|
$1,083,383
|
$19,740
|
$(24,122)
|
$(89,052)
|
$(2,137,520)
|
|
$(3,061,031)
|
$(61,539)
|
$-
|
|
$(3,122,570)
|
(Loss) income
per share - basic and diluted
|
$ (0.23)
|
$0.02
|
|
$(0.55)
|
$(2.02)
|
$ -
|
(5)
|
$ (0.26)
|
$(0.02)
|
$-
|
|
$ (0.23)
|
Weighted
average number of shares - basic and diluted
|
10,920,866
|
49,311,264
|
|
44,050
|
44,050
|
(46,011,446)
|
(5)
|
14,308,784
|
3,507,419
|
(1,315,638)
|
|
16,500,565
|
(1)
Reflects the impact
of the acquisition of Global on October 1, 2017 and the related
allocation to excess of purchase price over net assets acquired.
Consideration paid as part of the Global merger includes (a)
$550,000 in cash, (b) 375,000 shares of Novume common stock which
was valued at the closing price on October 2, 2017 price of $1.51,
(c) 240,861 shares of Series B Preferred Stock valued at $10 per
share under the agreement and (d) $200,000 in holdback liability.
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 and paid $175,000 to reduce the balance on
Global’s line of credit. Total cash paid related this
transaction was $1,090,037. See the detail of the purchase price
allocation below:
56
Global
Entities Purchase Price Allocation
|
|
Assets
acquired
|
$ 5,030,173
|
Liabilities
acquired
|
(4,490,764)
|
Net assets
acquired
|
539,409
|
Consideration paid
(see below)
|
4,264,934
|
Excess
consideration paid over net assets
|
$3,725,525
|
|
|
Cash
consideration
|
$ 550,000
|
Cash paid for
acquired liabilities
|
540,037
|
Total cash
paid
|
1,090,037
|
Holdback
consideration
|
200,000
|
Common stock
consideration
|
566,288
|
Series B Preferred
Stock consideration
|
2,408,610
|
Total acquisition
consideration
|
$ 4,264,934
|
(2)
Reflects
interest expense of $4,795 on the discounted $907,407 notes payable
issued at 7% per annum by Novume as part of the Firestorm
acquisition.
(3)
Reflects
the elimination of intercompany balances between the Global
Entities.
(4)
Brekford’s
vehicle services business (the “Vehicle Services
business”) was sold to an unrelated third party on February
28, 2017. Brekford met the criteria for the Vehicle Services
business to be classified as held for sale in December 2016 as
Brekford had entered into a letter of intent with the purchaser and
concluded that such sale was probable prior to December 31, 2016.
In the three months ended March 31, 2017 and 2016, Brekford
reported financial results for both operations and discontinued
operations. ASC 740-20-45 sets down the general rule for allocating
income tax expense or benefit between operations and discontinued
operations. The general rule requires the computation of tax
expense or benefit by entity taking into consideration all items of
income, expense, and tax credits. Next, a computation is made
taking into consideration only those items related to continuing
operations. Any difference is allocated to items other than
continuing operations (e.g. discontinued operations). Under these
general rules, no tax expense or benefit would be allocated to
discontinued operations. An exception to these rules apply under
ASC 740-20-45-7 where an entity has 1) a loss from continuing
operations and income related to other items such as discontinued
operations and 2) the entity would not otherwise recognize a
benefit for the loss from continuing operations under the approach
described in ASC 740-20-45. This fact pattern applies for the three
months ended March 31, 2017 and 2016. Application of this rule
exception results in the allocation of tax expense to discontinued
operations with an offsetting amount of tax benefit reported by the
continuing operations. Overall, Brekford allocated $2,132,725 and
$0 of tax expense to net income from discontinued operations and an
offsetting tax benefit to net loss from continuing operations in
the three months ended March 31, 2017 and 2016, respectively. This
pro forma adjustment reflects the elimination of this $2,132,725
tax benefit recognized in current operations related to the
discontinued operations during the three months ended March 31,
2017.
(5)
Because
Firestorm is an LLC, no earnings per share is
calculated.
(6)
Reflects the impact of the merger of NeoSystems
with Novume, which is anticipated to close in the first quarter of
2018, including the related allocation to excess of purchase
price over net assets acquired. Consideration paid for this merger
includes (a) $5,000,000 in cash, (b) $8,000,000 in Novume common
stock, currently estimated at 2,191,781 shares based on closing
share price of $3.65 as of November 14, 2017, (c) debt reduction
payments totaling approximately $2,250,000, and (d) the value of
assumed fully-vested options under the existing NeoSystems plan
totaling approximately $3,613,000. Pro forma adjustment assumes
that existing notes
payable non current are reclassified as notes payable current as a
result of this transaction. See the detail of the purchase
price allocation below:
NeoSystems, Corp. Purchase Price Allocation
|
|
Assets
acquired
|
$ 14,243,678
|
Liabilities
acquired
|
(11,214,711)
|
Net assets
acquired
|
3,028,967
|
Consideration paid
(See below)
|
18,862,584
|
Excess
consideration paid over net assets
|
$ 15,833,617
|
|
|
Cash
consideration
|
$ 5,000,000
|
Cash paid for
redemption of preferred stock
|
2,250,000
|
Total cash
paid
|
7,250,000
|
Common stock
consideration
|
8,000,000
|
Common stock option
consideration
|
3,612,584
|
Total acquisition
consideration
|
$ 18,862,584
|
(7)
Reflects the
operations of Brekford Traffic Safety, Inc. for the period before
the Brekford Merger, January 1, 2017 through August 28,
2017.
(8)
Reflects the
operations of Firestorm, LLC & Affiliate for the period before
the Firestorm Merger, January 1, 2017 through January 23,
2017.
57
NOVUME SOLUTIONS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
(UNAUDITED)
|
Novume Solutions, Inc.
|
Brekford, Corp.
|
Firestorm Solutions, LLC and Firestorm Franchising, LLC
(1)
|
Global Technical Services, Inc.
|
Global Contract Professionals, Inc.
|
Pro Forma Adjustments
|
Ref
|
Novume Solutions, Inc.
|
NeoSystems, Corp.
|
Pro Forma Adjustments
|
Ref
|
Novume Solutions, Inc.
|
Net
revenue
|
$12,128,406
|
$2,534,264
|
$1,195,474
|
$18,116,381
|
$6,272,572
|
$-
|
|
$40,247,097
|
$29,821,204
|
$-
|
|
$70,068,301
|
Cost of
revenue
|
6,959,514
|
827,304
|
686,722
|
16,076,148
|
5,605,520
|
-
|
|
30,155,208
|
11,659,346
|
-
|
|
41,814,554
|
Gross
Profit
|
5,168,892
|
1,706,960
|
508,752
|
2,040,233
|
667,052
|
-
|
|
10,091,889
|
18,161,858
|
-
|
|
28,253,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
related expenses
|
-
|
1,645,073
|
-
|
-
|
-
|
-
|
|
1,645,073
|
-
|
-
|
|
1,645,073
|
Selling,
general and administrative expenses
|
5,262,768
|
1,071,272
|
563,897
|
2,313,754
|
896,702
|
490,680
|
(2)
|
10,599,073
|
20,256,251
|
-
|
|
30,855,324
|
Total
operating expenses
|
5,262,768
|
2,716,345
|
563,897
|
2,313,754
|
896,702
|
490,680
|
|
12,244,146
|
20,256,251
|
-
|
|
32,500,397
|
Income (loss)
from operations
|
(93,876)
|
(1,009,385)
|
(55,145)
|
(273,521)
|
(229,650)
|
(490,680)
|
|
(2,152,257)
|
(2,094,393)
|
-
|
|
(4,246,650)
|
Other
(expense) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
(165,079)
|
(402,168)
|
-
|
(125,015)
|
(71,621)
|
(63,519)
|
(3)
|
(827,402)
|
(1,229,479)
|
|
|
(2,056,881)
|
Change in fair
value of derivative liability
|
-
|
74,676
|
-
|
-
|
-
|
-
|
|
74,676
|
806,568
|
-
|
|
881,244
|
Other income
(expense)
|
-
|
-
|
12,596
|
2,074
|
(682)
|
-
|
|
13,988
|
25,077
|
-
|
|
39,065
|
Loss on
extinguishment of debt
|
-
|
(291,911)
|
-
|
-
|
-
|
-
|
|
(291,911)
|
-
|
-
|
|
(291,911)
|
Total other
(expense) income
|
(165,079)
|
(619,403)
|
12,596
|
(122,941)
|
(72,303)
|
(63,519)
|
|
(1,030,649)
|
(397,834)
|
-
|
|
(1,428,483)
|
Net income
(loss) - before taxes and foreign currency
|
(258,955)
|
(1,628,788)
|
(42,549)
|
(396,462)
|
(301,953)
|
(554,199)
|
|
(3,182,906)
|
(2,492,227)
|
-
|
|
(5,675,133)
|
Benefit from
income taxes / income tax expense
|
219,971
|
230,900
|
-
|
-
|
-
|
-
|
|
450,871
|
1,385,252
|
-
|
|
1,836,123
|
Net income
(loss) - from continuing operations
|
(38,984)
|
(1,397,888)
|
(42,549)
|
(396,462)
|
(301,953)
|
(554,199)
|
|
(2,732,035)
|
(1,106,975)
|
-
|
|
(3,839,010)
|
58
(1)
Because
Firestorm is an LLC, no earnings per share is
calculated.
(2)
Reflects
amortization expense of $490,680 on the excess of purchase price
consideration over net asset values related to the acquisition of
Firestorm for the year ended December 31, 2016.
(3)
Reflects
interest expense of $63,519 on the discounted $907,407 notes
payable issued at 7% per annum by Novume as part of the Firestorm
acquisition for the years ended December 31, 2016 and
2015.
59
Overview
We are
a leading provider of support services to the government
contracting market. Generally speaking, our clients are companies
that serve the government. We:
●
Capture business by
helping our clients to win government contracts.
●
Manage risk by being
prepared for, and responding to, disruptive events and creating
secure systems.
●
Run client back-end
services by providing accounting, HR, IT and other managed
services.
●
Perform their
contract requirements by providing specialized staffing services
primarily in the aerospace and aviation industries.
We
support the government contracting industry that:
●
Represented over
$439 billion of U.S. federal government spending in FY 2017
according to USASpending.gov.
●
Has proven to be
relatively recession resistant.
●
According to the
U.S. federal government’s SAM database, as of January 2, 2018
there are over 528,000 government contractors of which over 52,000
are located in Washington, DC, Maryland and Virigina, many of which
are locatged in an area commonly known as the "Beltway" is in close
proximity to our headquarters.
We see
the professional services support industry in which we operate
as:
●
Highly
fragmented
●
Comprised of
numerous small- and medium-sized businesses that are ripe for
consolidation.
We
believe these factors provide tremendous growth opportunities for
us.
Description of Services
Government Contracting Support Solutions
Our
solutions assist government contractors with critical aspects of
their business. Our services include:
●
Outsourced
accounting and finance services
●
Managed information
technology solutions
●
Cloud hosting and
security
●
Market intelligence
and opportunity identification
●
Capture and
strategic advisory
●
Proposal strategy
and development
●
Teaming
support
●
Managed human
capital services
Our
services also help commercially-focused firms gain entry into the
government contracting market. Since 1983, we have assisted our
clients with over $160 billion of government contract
awards.
60
Risk Mitigation
and Crisis Management
We
combine best practice consulting with proven crisis management
expertise, empowering clients to both anticipate and evaluate risks
and manage disruptive events when they occur. We assess, audit,
develop, train and test strategies and programs
encompassing:
●
Predictive
intelligence
●
Business
continuity
●
Risk
assessment
●
Crisis management
and communications
●
Emergency and cyber
incident response
●
Behavioral risk and
threat assessment
●
Workplace violence
prevention
We are
focused on prevention in addition to planning and response
initiatives. For example, our behavioral risk and threat assessment
program, BERTHA®,
positions organizations to prevent violence from occurring. This
program enables our clients to identify early warning signs that
may be exhibited by an individual long before they are on a path to
violence.
By
educating others on emerging threats and strategies to combat those
threats, we increase awareness of our initiatives through no-fee
webinars, stress tests, and social media and blog articles that
include analyses by members of our highly-credentialed expert
council. We partner with industry associations and aggregators to
deliver meaningful risk mitigation strategies and education. We
also serve clients ranging from some of the world’s largest
global companies to main street businesses, public and private and
across all industry sectors. We offer services to clients that
enhance their ability to manage risk and respond to adverse events,
thereby minimizing people, brand, reputation, financial, legal and
regulatory impacts.
Specialty Staffing
We
provide the Department of Defense and the aerospace and aviation
industry with experienced maintenance and modification specialists.
We provide quality specialized contract personnel, temp-to-hire
professionals, direct hires, and temporary or seasonal hires to a
diverse group of companies nationally. Furthermore, we have been
instrumental in placing highly-skilled technical professionals in
some of the world’s most prestigious engineering firms and
government facilities for over 20 years. Some of the professionals
that we place in the aerospace industry include:
●
FAA Certified
Airframe & Power Plant Mechanics
●
Avionics and
Embedded Software Engineers
●
FCC Certified
Avionic Technicians
●
I.A. Licensed
Aircraft Inspectors
●
Flight Test
Engineers
●
Process/Repair
Engineers
●
Simulation
Engineers
Our acquisition of
Global was consistent with our corporate strategy of acquiring and
building professional services companies that add to the product
mix which we can provide to our subsidiaries’ existing
customer base. Specialty staffing is a service that most large
aviation and aerospace companies use. Many of our
subsidiaries’ customers use specialty staffing companies to
fulfill various employee roles. We believe Global has the
opportunity to provide specialty staffing support to contractors
outside of the aviation and aerospace sectors, thereby potentially
supportin a wider spectrum of potential clients. Since the Global
Entities operate as professional services companies, we have not
experienced a material change in our business operations. Upon
consummation of the acquisition, we commenced the integration of
administrative functions and marketing efforts into our operations.
The integration is ongoing. As consideration for the acquisition we
paid the following: (a) $750,000 in
cash, subject to certain reductions in accordance with the terms of
the merger agreement, (b) 300,000 shares of our common stock, and
(c) 240,861 shares of our Series B Cumulative Convertible Preferred
Stock. In
addition, at the closing of the acquisition, we paid $365,037 to
satisfy in full all of the outstanding debt of the Global Entities,
except for certain intercompany debt and ordinary course debt, and
amounts due under the Wells Fargo Credit Facilities, which remained
in effect following the consummation of the acquisition. In
connection with the Wells Fargo Credit Facilities, we delivered to
Wells Fargo Bank, National Association, general continuing
guaranties, guaranteeing the obligations of the Global Entities and
paid $175,000 in the aggregate to reduce the current borrowed
amounts under the Wells Fargo Credit
Facilities.
With
the acquisition of Global on October 1, 2017, we assumed
approximately $3,413,247 outstanding on a line of credit. With the
anticipated acquisition of NeoSystems, we will assume approximately
$2,976,427 of notes payable. If we require additional capital
resources to grow our business, either internally or through
acquisition, we may need to seek to secure additional debt
financing. There can be no assurance that such capital will be
available to us, if at all, upon terms acceptable to
us.
Industry
We
provide professional services that offer scalable and compliant
outsourced support to companies that deliver services to government
and commercial clients. The industry in which we operate is
fragmented with a large number of small firms providing niche
services.
61
A
unique characteristic of the government contracting industry is
that many of these companies are concentrated in the Beltway. As
shown below, the U.S. federal government’s contract spending
in Virginia, Maryland and the District of Columbia was in excess of
$92 billion in FY 2017, according to USASpending.gov. This
represents 21% of the $436 billion of total contract spending in FY
2017.
Source:
USASpending.gov
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. We believe that there is a unique opportunity
for consolidation in this sector, both in the Washington, DC
market, and in other parts of the country.
While
our immediate goal is to improve our ability to serve this sector
by pooling our subsidiaries’ resources and client contacts,
our ultimate objective is to expand our ability to meet the unique
needs of this sector by assembling, through organic growth and
strategic acquisitions, a complimentary suite of service and
systems providers with demonstrated ability to satisfy its need 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. Drawing on the insights and experience of our
combined leadership team, we expect to both increase our contact
with, and improve our understanding of, the needs of the
enterprises we serve. We would like to be recognized as the best
place to go for outsourced services when a government contractor
has to meet an unusual need.
62
Clients
To be a
government contractor, a company must be able to meet rigid
standards, therefore, our clients are typically well-established,
financially-stable businesses with a reputation for excellence and
high standards and a demonstrated ability to survive and prosper
through innovation and adaptation. The U.S. federal government
spent an average of over $450 billion each year from FY 2013
through 2017 for goods and services, according to USASpending.gov,
creating one of the largest and most stable markets in the world,
and there are thousands of government contractors providing these
goods and services.
Source:
USASpending.gov
The
U.S. federal government’s SAM database as of January 2, 2018
includes over 528,000 government contractors and over 52,000 are
located in Washington, DC, Maryland and Virginia. Government
contractors range from small privately-owned lifestyle companies to
members of the Fortune 100.
Since
1983, we have served thousands of these entities. In 2017, we provided services to 14 of the Top
100 largest federal contractors (based on their fiscal 2016 prime
contracts in IT, systems integration, professional services and
telecommunications) as identified by Washington Technology
(https://washingtontechnology.com/toplists/top-100-lists/2017.aspx).
Some of
our clients have include those shown below:
63
Marketing and Sales
We
strive to position ourselves as a preferred, single-source provider
of specialized professional services to our clients. We obtain
client engagements primarily through business development efforts,
cross-selling of our services to existing clients, and maintaining
client relationships, as well as referrals from existing and former
clients.
Our
business development efforts emphasize lead generation, industry
group networking and corporate visibility. Most of our business
development efforts are led by members of our professional teams,
who are also responsible for managing projects. Our business
development efforts are further supported by personnel located at
our corporate headquarters.
As our
service offerings become more diverse, we anticipate increasing our
cross-selling opportunities. Our goals are to offer a broader range
of services to existing clients and to broaden our client base
using our existing value-added solutions.
Competition
We
believe that the sectors in which we operate are highly fragmented
and characterized by many smaller companies generally having fewer
than ten employees. These companies tend to focus their operations
on local customers or specialized niche activities. As a result, we
compete with a large number of smaller, more specialized companies
that concentrate their resources in particular areas of expertise.
The extent of our competition varies according to sectors and
geographic areas.
We
believe we compete on the quality of service, relevant experience,
staffing capabilities, reputation, geographic presence, stability,
and price. Price differentiation remains an important element in
competitive tendering and is a significant factor in bidding for
contracts. The importance of the foregoing factors varies widely
based upon the nature, location, and scale of our clients’
needs. We believe that certain economies of scale can be realized
by service providers that establish a national presence and
reputation for providing high-quality and cost-effective services.
Our ability to compete successfully will depend upon the
effectiveness of our marketing efforts, the strength of our client
relationships, our ability to accurately estimate costs and bid for
work, the quality of the work we perform and our ability to hire
and train qualified personnel.
Competitive Strengths
We
believe we have the following competitive strengths:
●
Experienced, talented, and
motivated professionals –
We
employ seasoned professionals with a broad array of specialties, a
strong customer service orientation and in many cases, the required
professional certifications and advanced degrees. Our executive
officers have an average of more than 30 years of operating and
management experience and have been involved in analyzing potential
acquisition transactions. We place a high priority on attracting,
motivating and retaining top professionals to serve our clients,
and our compensation system emphasizes the use of performance-based
incentives, including opportunities for stock ownership, to achieve
this objective.
●
Niche
expertise – The
services that we provide are highly-specialized professional
services that have high barriers to entry. While we have a cadre of
professionals with the requisite skills, we also have access to
numerous consultants who can provide subject matter expertise for
unique projects and who can supplement our workforce based on
client demand.
●
Industry-recognized quality
of service –
We
believe that we have developed a strong reputation for quality
service based upon our industry-recognized depth of experience,
ability to attract and retain quality professionals, and expertise
across multiple service sectors.
64
●
Strong, long-term client
relationships –
Our combination of niche market experience and professionals with
requisite expertise has enabled us to develop strong relationships
with our core clients. In the case of our outsourced accounting and
finance services group, historically, client retention has been
over 90%. By serving clients on a long-term basis, we are able to
gain a deep understanding of their overall business needs as well
as the unique technical requirements of their projects. This
increased understanding gives us the opportunity to provide
superior value to our clients by allowing us to more fully assess
and better manage the risks inherent in their
projects.
●
One-stop shop
– The
combination of services we offer allows our clients to focus on
executing their contracts and getting more work by not being
encumbered with administrative functions required when doing
business with the government.
Growth Strategies
We
intend to use the following growth strategies as we seek to expand
our market share in our current areas of expertise and eventually
position ourselves as a preferred provider of comprehensive
specialized professional services to our clients:
●
Strategic
Acquisitions –
We seek acquisitions that allow us to expand or enhance our
capabilities in our existing service offerings. In analyzing new
acquisitions, we pursue opportunities that function as profitable
stand-alone operations or are complementary to our existing
businesses. We believe that expanding our business through
strategic acquisitions will enable us to exploit economies of scale
in the areas of finance, human resources, marketing,
administration, information technology, and legal, while also
providing cross-selling opportunities among our vertical service
offerings.
●
Common Theme
– Most
government contractors have the need for the services that we
provide. Our companies sell to the same client pool allowing for
one-stop-shop, cross selling opportunities.
●
Geographic Expansion
– Parts of the country have substantial government presence
that allow for easy expansion of our footprint, such as the U.S.
Navy in San Diego and the U.S. Air Force in Denver.
●
Business
Development – With
additional resources we intend to grow our business by investing in
a larger sales force and integrated client relationship management
tools.
The
universe of providers that service our clients is fragmented and
diverse. Drawing on the insights and experience of our combined
leadership team, we expect to both increase our contact with, and
improve our understanding of, the needs of the enterprises we
serve. By working together under common leadership, we believe our
combined companies can better identify the qualities in our
companies that the world’s leading businesses value most. We
will then work to further enhance each company’s ability to
perform in these areas by providing material support as well as
exchanges of talent and ideas. Using our digital and broadcast
media outlets and increased contact with our clients, we will also
be working to enhance our clients’ awareness of these
capabilities across our platform.
Through
our core businesses, we occasionally become aware of situations
where our resources can play a critical role in bringing an
organization to the next level in its development. Under
appropriate circumstances we may receive or retain an interest in
these organizations as part of our enterprise
initiative.
Our History
We are
a Delaware corporation that was formed in February 2017 to
effectuate the mergers of, and become a holding company for
KeyStone Solutions, Inc. (“KeyStone”) and Brekford. Our
services are provided through six wholly owned subsidiaries: AOC
Key Solutions, Inc.; Firestorm Solutions, LLC and Firestorm
Franchising, LLC (collectively referred to as
“Firestorm”); Global Technical Services, Inc. and
Global Contract Professionals; Inc. (collectively referred to as
“Global” or the "Global Entities"); and Novume
Media, Inc. (“Novume Media”).
We
conduct core operations through our primary operating
subsidiaries:
●
Government Contracting
Support Solutions – AOC Key Solutions
has been helping government contractors to win business since
1983.
●
Risk Mitigation and Crisis
Management –
Firestorm has been in business since 2005.
●
Specialty Staffing
– Global provides
these services and has been supplying personnel to the
aerospace/aviation industry since 1989.
Acquisition of NeoSystems
On
November 16, 2017, we entered into an Agreement and Plan of Merger
(the “Merger Agreement”) by and among Novume,
NeoSystems Holding, LLC, our wholly owned subsidiary, NeoSystems
HoldCo, Inc., (“NeoSystems HoldCo”), NeoSystems LLC, a
wholly owned subsidiary of NeoSystems HoldCo
(“NeoSystems”), Robert W. Wilson, Jr., in his personal
capacity, Michael Tinsley, in his personal capacity and Michael
Tinsley, in his capacity as the representative of each shareholder
of NeoSystems Holdco that has not demanded and perfected appraisal
rights under the Virginia Stock Corporation Act (the
“Participating Stockholders”). Pursuant to the Merger
Agreement, we will acquire NeoSystems through a forward merger (the
“Merger”).
65
Upon
the consummation of the Merger (the “Closing”), the
Participating Stockholders will receive the following: (a) $5
million in cash and (b) an amount of shares of the Company’s
common stock equal to $10 million (determined by dividing such
amount by the price per share to the public of such shares of
common stock sold in the first Qualifying Offering by the Company)
minus $1,982,514, which represents the aggregate dollar value of
the spread of the options of NeoSystems Holdco (the “HoldCo
Options”) that will be assumed by Novume at Closing
(collectively, the “Merger Consideration”). A
“Qualifying Offering” is defined as a firm commitment
underwritten public offering of the Company for an aggregate price
to the public of at least $10 million, which results in the
Company’s successful listing of common stock on the Nasdaq
Stock Market or the New York Stock Exchange. The Merger
Consideration is subject to certain adjustments in accordance with
the Merger Agreement, including the assumption of NeoSystems’
obligations with respect to the holders of certain debt facilities
and shares of preferred stock of NeoSystems Preferred Stock.
Pursuant to the Merger Agreement, the Participating Stockholders
may not, directly or indirectly, sell, offer to sell or contract to
sell the shares of common stock received as Merger Consideration
until 180 calendar days after the Qualifying Offering.
As
additional consideration for the Merger, at Closing we will (a)
assume each HoldCo Option outstanding immediately prior to Closing
that is held by an optionholder that continues in the employment,
or service as a consultant or director, of NeoSystems; (b) assume
the obligations of NeoSystems with respect to certain of its debt
facilities, including outstanding principal totaling, in the
aggregate, $4.95 million; and (c) redeem all of the shares of
NeoSystems preferred stock at Closing for up to an amount of
$2.25 million. The consummation of the Merger is subject to, among
other things, the completion of the Qualifying
Offering.
NeoSystems
Corp, based in Tysons Corner, Virginia, delivers integrated
strategic back office services and solutions to enable, run, and
secure government contractors, nonprofit organizations and
commercial entities. NeoSystems currently maintains a 97% client
retention rate, supports 700 companies and over 70,000 employees
with its outsourced services and NeoSystems' experts have
implemented hundreds of fully integrated financial and business
management systems. Adding NeoSystems to the Novume family of
companies will create opportunities to provide a greater breadth of
services to our existing clients and also provide access to a
broader client base for our existing services. The acquisition of
NeoSystems will allow for the cross-selling of services amongst the
Novume family of companies. Since a majority of NeoSystems’
clients are government contractors, they are potential clients for
AOC Key Solutions’ business development and consulting
services. Similarly, since there is increased demand for the crisis
management and risk mitigation services provided by Firestorm,
these services could be offered to NeoSystems’ clients. The
opportunity also exists for cross-selling NeoSystems’
services to AOC Key Solutions and Firestorm clients. Many of AOC
Key Solutions’ clients align in size with those that
NeoSystems serves. NeoSystems is partnered with the world's leading
software companies, including Deltek, Ultimate Software, IBM, and
others to provide best-in-class solutions. NeoSystems is
Deltek’s first and only Platinum Partner.
NeoSystems
has provided outsourced services since 2003. Our core business will
be strengthened with the completion of the acquisition of
NeoSystems as it will help broaden our government contracting
support solutions. Our core business will be strengthened with the
completion of the acquisition of NeoSystems as it will help broaden
our government contracting support solutions.
Employees
As of
January 22, 2018, we had 121 employees,
of which 111 were full-time. With the anticipated
acquisition of NeoSystems, we will have a total of approximately
270 employees. To date, we have been able to locate
and engage highly-qualified employees as needed and do not expect
our growth efforts to be constrained by a lack of qualified
personnel.
Regulation
We are
regulated in some of the fields in which we operate. When working
with governmental agencies and entities, we must comply with laws
and regulations relating to the formation, administration, and
performance of contracts. These laws and regulations contain terms
that, among other things may require certification and disclosure
of all costs or pricing data in connection with various contract
negotiations. We also work with U.S. federal government contractors
and have staff cleared to work on classified materials. One of our
leased facilities is cleared for classified material. We are
subject to the laws and regulations that restrict the use and
dissemination of information classified for national security
purposes.
66
To help
ensure compliance with these laws and regulations, our employees
are sometimes required to complete tailored ethics and other
compliance training relevant to their position and our
operations.
Properties
Our
principal executive offices are located at 14200 Albemarle Point
Place, Suite 200, Chantilly, Virginia. We do not own any real
property. We currently operate out of six leased locations and our
lease terms are multiyear commitments. We do not consider any of
our leased properties to be materially important to us. While we
believe it is necessary to maintain offices through which our
services are coordinated, we feel there are an ample number of
available office rental properties that could adequately serve our
needs should we need to relocate or expand our
operations.
Legal Proceedings
As of
the date of this prospectus, there are no material legal
proceedings, claims, or litigation pending against the Company and
its subsidiaries or to which any of the Company’s or its
subsidiaries is the subject. From time to time, we may become
involved in legal proceedings, claims and litigation arising in the
ordinary course of our business. When we believe a loss is probable
and can be reasonably estimated, we accrue the estimated loss in
our consolidated financial statements. Where the outcome of these
matters is not determinable, we do not make a provision in our
financial statements until the loss, if any, is probable and can be
reasonably estimated or the outcome becomes known.
The
following table sets forth our directors and executive
officers.
Name
|
Age
|
Position
|
Since
|
Executive Officers:
|
|
|
|
James K.
McCarthy
|
66
|
Chairman of the
Board
|
2017
|
Robert A.
Berman
|
58
|
Chief Executive
Officer and Member of the Board
|
2017
|
Dr. Richard
Nathan
|
73
|
Chief Operating
Officer and Member of the Board
|
2017
|
Harry
Rhulen
|
54
|
President
|
2017
|
Carl M. Kumpf,
Jr.
|
51
|
Chief Financial
Officer
|
2017
|
Suzanne
Loughlin
|
56
|
General Counsel and
Chief Administrative Officer
|
2017
|
Riaz
Latifullah
|
61
|
Executive Vice
President, Corporate Development
|
2017
|
Directors:
|
|
|
|
James K.
McCarthy
|
66
|
Chairman of the
Board
|
2016
|
Robert
Berman
|
58
|
Director
|
2016
|
Dr. Richard
Nathan
|
73
|
Director
|
2016
|
Glenn
Goord
|
66
|
Director -
Independent
|
2016
|
Paul A. de
Bary
|
71
|
Director -
Independent
|
2017
|
Christine J.
Harada
|
44
|
Director -
Independent
|
2017
|
Marta
Tienda
|
67
|
Director -
Independent
|
2017
|
Our
seven-member board of directors currently has four directors who
are “independent” within the meaning of NASDAQ Rule
5605(b)(1).
67
Executive Officers and Directors
James K. McCarthy, Chairman
James
K. McCarthy serves as our Chairman of the Board of Directors.
Mr. McCarthy served as our Chief
Strategy Officer through March 2017 and he currently hosts
The
Bridge, a weekly 30-minute
broadcast television program produced by us devoted exclusively to
bridging the gap between today's government and the private
sector. Mr. McCarthy’s career spans over 30 years
of marketing strategy creation, proposal development, and oral
presentation coaching to contractors seeking to expand their market
shares or to enter the government contracts market sector. As a
founder and the Technical Director of AOC Key Solutions, he built
an organization that, over the last five years, has played a part
in winning an average of $9 billion per year in federal
contract awards for its clients. Mr. McCarthy has worked at
AOC Key Solutions since 1983. Mr. McCarthy has served in an
advisory role with the George Washington University, Virginia
Science and Technology Campus, Technology Accelerator and has been
a frequent speaker with the George Mason University Procurement and
Technical Assistance Center. Mr. McCarthy has also served on
the board of Coalition for Government Procurement and on the
Veterans Institute for Procurement GovCon Council. In February
2016, Mr. McCarthy was named to Executive Mosaic’s
Washington 100 as one of the top–100 most influential leaders
in the government contracting arena. He was the founder and host of
Government Contracting Weekly, a television show dedicated to
supporting contractors in their quest for government business. Mr.
McCarthy holds a BA in Political Science and Government and an MA
in Public Policy and Government from Ohio University.
Robert A. Berman, Chief Executive Officer and Director
Robert
Berman is our Chief Executive Officer and is a member of the Board
of Directors and has served in such capacities since March 16,
2016. Since January 2000, Mr. Berman has served as the General
Partner of Avon Road Partners, L.P., a limited partnership
investing in real estate and the broadcast media industry. From
2006 through March 2015, Mr. Berman held the office of Chairman and
Chief Executive Officer at Cinium Financial Services Corporation, a
privately-held specialty finance company, and its predecessor,
Upper Hudson Holdings, LLC. Prior to Cinium, Mr. Berman was Chief
Executive Officer of Empire Resorts, Inc., a NASDAQ-listed gaming
company, from 2002-2005.
In the
late 1990’s, Mr. Berman led a special advisory committee of
large shareholders who worked to identify a new strategic direction
for Executone Information Systems, Inc. a publicly-traded telecom
company. Following the committee’s recommendations, the
company was restructured in 1998, and Mr. Berman was appointed to
Executone’s Board of Directors. After the restructuring, the
company’s market capitalization increased by more than $500
million. From 1997 until 1999, Mr. Berman was Chairman and Chief
Executive Officer of Hospitality Worldwide Services
(“HWS”), a publicly-traded company that became the
premiere service provider to the hospitality industry. Under Mr.
Berman’s leadership HWS grew from a small company with under
$25 million in net revenues in 1996 to more than $229 million in
net revenues in 1998 with offices on several continents and 3,000
employees. While at HWS Mr. Berman executed a successful
acquisition strategy that resulted in multiple operating divisions
that provided a one-stop shop to serve the needs of the hotel
industry. Mr. Berman was also instrumental in forging partnerships
with institutional investors including ING and Apollo RE leading to
the acquisition, re-positioning, and sale of more than $100 million
of hotel properties.
Richard Nathan, PhD, Chief Operating Officer and
Director
Dr.
Richard Nathan is our Chief Operating Officer and is a member of
the Board of Directors. He brings over 45 years of corporate
management, program management and business and proposal
development experience and has had responsibility for
large management and operation contracts valued at hundreds
of millions of dollars and managed service and technical
contracts for DOE, DoD, DHS, NASA, EPA, and state governments.
Dr. Nathan has directed and grown the environmental and energy
business for a large corporation, and served as a corporate officer
and held management and technical positions at Battelle Memorial
Institute and Mason & Hanger. Dr. Nathan had worked
at AOC Key Solutions, and its predecessor company American
Operations Corporation, for over 17 years and most recently as AOC
Key Solutions’ Chief Executive Officer. Dr. Nathan holds a BS
in Chemistry from the Massachusetts Institute of Technology and a
PhD in Chemistry from the Polytechnic Institute of
Brooklyn.
Harry Rhulen, President
Mr. Rhulen
is our President. He also is a founder, and served as CEO, of
Firestorm, since its inception in 2005, until our acquisition of
Firestorm in January of 2017. Mr. Rhulen previously served as
an executive and CEO of a public insurance holding company with
U.S. and European operations, commencing 1989 through 2005.
Mr. Rhulen has extensive diligence experience having
participated in over thirty M&A transactions. He has lead
several public offerings raising in excess of $350 million.
Mr. Rhulen worked as a consultant in many industries, using
his risk management, crisis management, and business management
skills, as well as his public company, legal, bankruptcy, and due
diligence experience to help his clients. Mr. Rhulen holds
both a Juris Doctor and Masters of Business Degree from Syracuse
University and graduated Cum Laude from the College of Insurance,
New York, New York.
68
Carl Kumpf, Chief Financial Officer
Carl
Kumpf is our Chief Financial Officer of Novume. Prior to his
appointment in August 2017, Mr. Kumpf co-founded Integral Financial
Group (“IFG”) in 2005 and has served as the principal
and Chief Executive Officer of such company since that time. As a
principal and CEO of IFG, Mr. Kumpf served as the external
accounting advisor to several IPOs and as the interim
CFO/Controller for several private high-tech and services companies
and oversaw the successful first year Sarbanes-Oxley implementation
of a large government contractor. Mr. Kumpf also served as the
Chief Accounting Officer at InPhonic, Inc. from September 2004
through October 2005. Prior to InPhonic, from May 2002 through
April 2004, he was the Chief Financial Officer for MorganFranklin
Corporation. Mr. Kumpf holds a BBA in Accounting from the College
of William and Mary. He is a CPA in the Commonwealth of Virginia.
Mr. Kumpf is a past chairman of the News Media Internal Auditor
Association, a member of the AICPA and a member of the Virginia
State Society of CPAs.
Riaz Latifullah, Executive Vice President, Corporate
Development
Riaz
Latifullah previously served as our Chief Financial Officer and now
serves as Executive Vice President, Corporate Development. Prior to
joining Novume, Mr. Latifullah served as the Chief Financial
Officer of the American Grandparents Association /
Grandparents.com. Mr. Latifullah spent 13 years with AARP, a
non-profit organization that advocates on behalf of people over age
50. With AARP he served as Vice President, Financial Management,
Senior Director Strategic Markets and Director Brand Operations. As
an in-house entrepreneur with AARP he created and launched five
start-up operations bringing significant changes to the
organization. In other positions before AARP Mr. Latifullah
served as General Manager for TV on the WEB, an internet video
production company, a Government Relations Representative for the
U.S. Merchant Marine Academy Alumni Foundation and an Investment
Banking Associate for Ryan, Lee and Company. Mr. Latifullah holds
an MBA from Stanford University, and MSE in Naval Architecture and
Marine Engineering from the University of Michigan and a BS in
Marine Engineering from the U.S. Merchant Marine
Academy.
Suzanne Loughlin, Chief Administrative Officer and General
Counsel
Ms. Loughlin
is our Chief Administrative Officer (CAO) and General Counsel. She
is also a founder of our subsidiary, Firestorm. Ms. Loughlin
has extensive consultative experience in the development of crisis
management and communications, workplace violence, emergency
response, and business continuity plans for clients ranging from
some of the world’s largest global companies to educational
institutions and governmental entities. Her previous career
experience includes serving as a Director and CAO of a public
insurance holding company with U.S. and European operations, where
she was responsible for HR, IT, Corporate Communications,
Facilities, Government Relations and Internal Audit. She was also a
litigator with a major New York City law firm and Managing Attorney
of a law firm with multiple offices throughout the country.
Ms. Loughlin is a licensed attorney in New York. She also
holds an Emergency Management Professional Development Series
Certification from FEMA, and is a member of the Association of
Threat Assessment Professionals. Ms. Loughlin holds a Juris
Doctor degree from New York Law School and a BS in Psychology from
St. Lawrence University.
Glenn Goord, Director
Mr. Goord
is a 32-year veteran of the New York State Department of
Correctional Services and served as Commissioner from 1996 until
2006. As Commissioner, he oversaw the nation’s fourth largest
state prison system, administering an operating budget of
$2.3 billion in state and federal funds, plus
$245 million in capital expenditures. Mr. Goord’s
outstanding contributions to furthering excellence in corrections
earned him the Carl Robison Award, the highest honor bestowed by
the Middle Atlantic States Correctional Association. In 1998 he
earned the Charles Evans Hughes Award for public service from the
Albany based Capital Area Chapter for the American Society for
Public Administration (ASPA). In 2002, the ASPA awarded
Mr. Goord its highest honor, the Governor Alfred E. Smith
Award, for his direction of the Department’s immediate and
expansive efforts to aid New York City following the
September 11, 2001 terrorist attack. Mr. Goord holds a BA
Psychology from Fairleigh Dickinson University.
69
Paul A. de Bary, Director
Paul A.
de Bary has been a member of the board of managers of TDI, LLC, an
agent for a manufacturer of digital X-ray systems for medical,
veterinary and industrial applications from 2001 through the
present. He has also served as chairman of the Board of Ethics of
the Town of Greenwich, Connecticut since 2008. He was a managing
director at Marquette de Bary Co., Inc., a New York based
broker-dealer, from 1996 to 2015, where he served as a financial
advisor for state and local government agencies, public and private
corporations and non-profit organizations, as well as general
counsel. He previously served as a director of Empire Resorts, Inc.
(Nasdaq: NYNY) from 1996 to 2010, where he served as chairman of
its audit committee as well as, at various times throughout his
tenure as a director, a member of the governance and compensation
committees and various special committees. Prior to that,
Mr. de Bary was a managing director in the Public Finance
Department of Prudential Securities from 1994 to 1997 and a partner
in the law firm of Hawkins, Delafield & Wood in New York
from 1975 to 1994. Mr. de Bary is a member of the American Bar
Association, the New York State Bar Association and the Association
of the Bar of the City of New York. Mr. de Bary holds a Juris
Doctor degree, an MBA and an AB from Columbia
University.
Christine J. Harada, Director
Christine
J. Harada has over 20 years of success in leading government and
management consulting organizations. She previously served as the
Federal Chief Sustainability Officer from November 2015 through
January 2017. Prior to that role, Ms. Harada was the Acting Chief
of Staff of the U.S. General Services Administration
(“GSA”) from March 2015 through November 2015. While at
the GSA, Ms. Harada also served as Associate Administrator,
Government-wide Policy and Chief Acquisition Officer for the GSA
from June 2014 through February 2015. Ms. Harada’s private
sector experience includes serving as Global Manager,
Transformation/Large Scale Change Practice at the Boston Consulting
Group from May 2013 through June 2014, and her tenure as a
principal at Booz Allen Hamilton from January 2004 through April
2013. Ms. Harada holds an MA, International Studies and an MBA,
Finance from the Lauder Institute and the Wharton School at the
University of Pennsylvania, respectively. She also holds an MS
Aeronautics/Astronautics and a BS Aeronautics/Astronautics from
Stanford University and the Massachusetts Institute of Technology,
respectively.
Marta Tienda, PhD, Director
Marta
Tienda has served as the Maurice P. During ’22 professor in
demographic studies at Princeton University since 1999. She has
also been a Professor of Sociology and Public Affairs, and Research
Associate in the Office of Population Research at Princeton since
1997. Previously she held permanent positions at the universities
of Chicago, where she served as chair of the sociology department,
and Wisconsin-Madison, and visiting appointments at NYU, Stanford
and Brown. She is a member of the National Academy of Education,
the American Academy of Political and Social Science, and the
American Academy of Arts and Sciences. She is past president of the
Population Association of America, and from 2004 to 2006 chaired
the National Research Council’s Panel on Hispanics. She
serves on the board of the Population Reference Bureau, Robin Hood,
and the Jacobs Foundation of Switzerland. In addition to chairing
the Board of Trustees of the Alfred P. Sloan Foundation, she serves
as an independent trustee of the Board of Trustees of Teachers
Insurance Annuity Association (TIAA). She is emeritus trustee of
Brown University, the Federal Reserve Bank of New York, the W.T.
Grant Foundation, The Carnegie Corporation of New York, the Kaiser
Family Foundation, and the Russell Sage Foundation. Dr. Tienda
received honorary doctorates from Ohio State University, Lehman
College and Bank Street College. She has published over 200
scientific papers and several monographs and edited books. She has
a BA in Spanish (education) from Michigan State University, and MA
and PhD degrees in sociology from the University of Texas at
Austin.
Family Relationship
Our President Harry Rhulen is the brother of our Chief
Administrative Officer and General Counsel, Suzanne Loughlin. There
are no other family relationships among our executive officers and
directors.
Committees of the Board
Board Committees and Independence
Our
board has established three standing committees—audit,
compensation, and nominating and corporate governance—each of
which operates under a charter that has been approved by our
board.
Our
board has determined that all of the members of each of the
board’s three standing committees are independent as defined
under the rules of The NASDAQ Capital Market. In addition, all
members of the audit committee meet the independence requirements
contemplated by Rule 10A-3 under the Securities Exchange Act of
1934, or the Exchange Act.
Audit Committee
We have
an Audit Committee comprised of directors who are
“independent” within the meaning of NASDAQ Rule
5605(b)(1). The Audit Committee assists our Board in overseeing the
financial reporting process and maintaining the integrity of our
financial statements, and of our financial reporting processes and
systems of internal audit controls, and our compliance with legal
and regulatory requirements. The Audit Committee is responsible for
reviewing the qualifications, independence and performance of our
independent registered public accounting firm and review our
internal controls, financial management practices and investment
functions and compliance with financial legal and regulatory
requirements. The Audit Committee is also responsible to perform
risk and risk management assessments as well as to prepare any
report of the Audit Committee that may be required by the proxy
rules of the SEC to be included in the Corporation’s annual
proxy statement. Our Board has identified and appointed Paul de
Bary as its “audit committee financial expert,” as
defined by the SEC in Item 407 of Regulation S-K. Mr. de Bary
also serves as the Chair of the Audit Committee, and is joined on
the committee by Ms. Harada and Mr. Goord.
70
Compensation Committee
We have
a Compensation Committee comprised of members who are
“Non-Employee Directors” within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) and “outside directors”
within the meaning of Section 162(m) of the Code. They are
also “independent” directors within the meaning of
NASDAQ Rule 5605(b)(1). The Compensation Committee is responsible
for overseeing the establishment and maintenance of our overall
compensation and incentive programs to discharge the Board’s
responsibilities relating to compensation of our executive officers
and directors, including establishing criteria for evaluating
performance and setting appropriate levels of compensation, and to
produce an annual report on executive compensation for inclusion in
the Corporation’s proxy statement in accordance with the
rules and regulations of the SEC. The Compensation Committee
advises and makes recommendations to our Board on all matters
concerning director compensation. Mr. Goord serves as Chair of the
Compensation Committee and is joined by Ms. Harada and Dr.
Tienda.
Compensation Committee Interlocks and Insider
Participation
None of
the members of the Compensation Committee has been, during 2016 or
2017, an officer or employee of Novume or any of its subsidiaries
or predecessor companies, or was formerly an officer of Novume or
any of its subsidiaries or predecessor companies or had any
relationship requiring disclosure by us under Item 404 of
Regulation S-K. No interlocking relationship as described in
Item 407(e)(4) of Regulation S-K exists between any of our
executive officers or Compensation Committee members, on the one
hand, and the executive officers or compensation committee members
of any other entity, on the other hand, nor has any such
interlocking relationship existed in the past.
Corporate Governance Committee
Our
Board has a Corporate Governance Committee that that (1) reviews
and recommends improvements to our governance guidelines and
corporate policies; (2) monitors compliance with our Code of
Conduct; (3) trains new members of the Board of Directors; (4)
reviews the performance of the Board of Directors and its various
committees and makes recommendations intended to improve that
performance, (5) evaluates and makes recommendations concerning
changes in the charters of the various Committees of the Board of
Directors, (6) evaluates the performance of the Chief Executive
Officer of the Corporation, (7) oversees the development and
implementation of succession planning for Corporation senior
management positions; (8) identifies and recommends candidates for
nomination as members of the Board of Directors and its committees
and (9) such other matters as may be required to ensure compliance
with applicable federal and state laws or the requirements of any
exchange on which the Company maintains a listing for its
securities. The committee will be required to be comprised of
entirely “independent” directors within the meaning of
NASDAQ Rule 5605(b)(1). Ms. Harada currently serves as the
Chair of the Corporate Governance Committee and is joined on the
committee by Dr. Tienda and Mr. de Bary.
The
Chair and members of each committee are summarized in the table
below:
Name
|
Audit
Committee
|
Compensation
Committee
|
Corporate
Governance Committee
|
Christine Harada --
(Independent)
|
x
|
x
|
Chair
|
Paul de Bary --
(Independent)
|
Chair
|
|
x
|
Glenn Goord --
(Independent)
|
x
|
Chair
|
|
Marta Tienda --
(Independent)
|
|
x
|
x
|
71
Board Leadership Structure
Our
board of directors is currently led by its chairman, James
McCarthy. Our board of directors recognizes that it is important to
determine an optimal board leadership structure to ensure the
independent oversight of management as the company continues to
grow. We separate the roles of chief executive officer and chairman
of the board in recognition of the differences between the two
roles. The chief executive officer is responsible for setting the
strategic direction for the company and the day-to-day leadership
and performance of the company, while the chairman of the board of
directors provides guidance to the chief executive officer and
presides over meetings of the full board of directors. We believe
that this separation of responsibilities provides a balanced
approach to managing the board of directors and overseeing the
company.
Our Organizational Guidelines provide for a Lead Director to
be elected whenever the Chair of the Board of Directors is not an
independent director. The responsibilities of the Lead Director are
to: 1) preside at meetings of our stockholders and Board of
Directors if the Chair is absent; 2) call meetings and executive
sessions of the independent directors of the Board; 3) establish
the agenda and preside at all executive sessions and other meetings
of the independent directors of the Board and communicate the
results of meetings of the independent directors to the Chair and
other members of management, as appropriate; 4) communicate with
the independent directors of the Board between meetings as
necessary or appropriate, serve as a liaison between the Chair and
the independent directors and communicate independent director
consensus on important issues to the Chair; 5) approve Board
meeting agendas and schedules for regular meetings of the Board of
Directors to assure there is sufficient time for discussion of all
agenda items and approve meeting materials and other information to
be sent to the Board in advance of regular meetings; 6) evaluate
the quality and timeliness of information sent to the Board by the
Chief Executive Officer and other members of management; 7) oversee
the evaluation of the Chief Executive Officer and assist the Board
Chair on matters of Board succession planning and crisis
management; 8) assist the Chair of the Governance Committee with
individual director evaluations; and 9) be available for
consultation and direct communication at the request of major
stockholders. Mr. de Bary currently serves as Lead
Director.
The Board’s Role in Risk Oversight
Our
board of directors has responsibility for the oversight of our risk
management processes and, either as a whole or through its
committees, regularly discusses with management our major risk
exposures, their potential impact on our business and the steps we
take to manage them. The risk oversight process includes receiving
regular reports from board committees and members of senior
management to enable our board to understand the company’s
risk identification, risk management and risk mitigation strategies
with respect to areas of potential material risk, including
operations, finance, legal, regulatory, strategic and reputational
risk.
The
audit committee reviews information regarding liquidity and
operations, and oversees our management of financial risks.
Periodically, the audit committee reviews our policies with respect
to risk assessment, risk management, loss prevention and regulatory
compliance. Oversight by the audit committee includes direct
communication with our external auditors, and discussions with
management regarding significant risk exposures and the actions
management has taken to limit, monitor or control such exposures.
The compensation committee is responsible for assessing whether any
of our compensation policies or programs has the potential to
encourage excessive risk-taking. The nominating and corporate
governance committee manages risks associated with the independence
of the board, corporate disclosure practices, and potential
conflicts of interest. While each committee is responsible for
evaluating certain risks and overseeing the management of such
risks, the entire board is regularly informed through committee
reports about such risks. Matters of significant strategic risk are
considered by our board as a whole.
72
The following table provides the total compensation for each person
who served as a non-employee member of our board of directors
during fiscal year 2017, including all compensation awarded to,
earned by or paid to each person who served as a non-employee
director for some portion or all of fiscal year
2017:
Name
|
Fees
earned or paid in cash ($)
|
Stock
awards ($)
|
Option
awards ($) (1)
|
Non-equity
incentive plan compensation ($)
|
Nonqualified
deferred compensation earnings ($)
|
All
other compensation ($)
|
Total
($)
|
Paul
de Bary (2)
|
54,000
|
-
|
24,874
|
-
|
-
|
-
|
78,874
|
Glenn
Goord (3)
|
40,000
|
-
|
26,484
|
-
|
-
|
-
|
66,484
|
Christine
Harada (4)
|
16,000
|
-
|
47,523
|
-
|
-
|
-
|
63,523
|
Marta
Tienda (5)
|
-
|
-
|
108,900
|
-
|
-
|
-
|
108,900
|
(1)
The amount shown
reflects the aggregate grant date fair value of option awards
computed in accordance with Financial Accounting Standards Board
Accounting Standards Codification 718.
(2)
As of
December 31, 2017, Mr. de Bary held fully-vested options to
purchase 48,499 shares of our common stock at a strike price of $1.5464 per
share.
(3)
As of
December 31, 2017, Mr. Goord held fully-vested options to
purchase 48,499 shares of our common stock at a strike price of $1.2887 per
share.
(4)
As of
December 31, 2017, Ms. Harada held fully-vested options to
purchase 48,499 shares of our common stock at a strike price of $1.6753 per
share.
(5)
As of
December 31, 2017, Dr. Tienda held fully-vested options to
purchase 48,499 shares of our common stock at a strike price of $3.81 per
share.
Effective August 23, 2017, our non-employee directors are
compensated for their services as follows;
|
Annual ($) (1)
|
Board Meeting
|
Committee Meeting
|
||
Position
|
|
In Person ($)
|
Telephonic ($)
|
In Person ($)
|
Telephonic ($)
|
Board
Member
|
25,000
|
1,000
|
500
|
500
|
250
|
Governance
Committee Chair
|
20,000
|
1,500
|
500
|
500
|
250
|
Audit
Committee Chair
|
20,000
|
1,500
|
500
|
500
|
250
|
Compensation
Committee Chair
|
20,000
|
1,500
|
500
|
500
|
250
|
(1) Payments are made on a quarterly
basis.
Directors
who are officers or employees of Novume or its subsidiaries do not
receive any compensation for service on our Board, but employee
directors will be reimbursed for expenses incurred in attending
meetings of our Board or any committees thereof.
73
The following table sets forth information about the annual paid
compensation of our: principal executive officer, Mr. Berman; two
most highly compensated executive officers other than the principal
executive officer, Messrs. James
McCarthy and Mr. Latifullah, who were serving as
executive officers as of December 31, 2017; and two additional
individuals, Messrs. Greg McCarthy and Mr. Berrigan, for whom
disclosure would have been required but for the fact that the
individual was not serving as an executive officer as of December
31, 2017. While all named executive officers were eligible
for bonuses in 2016 and 2017, due to our startup nature and because
the first closing of the Regulation A Offering did not occur until
December 23, 2016, management elected to only issue bonuses to
Mr. Gregory McCarthy and Mr. Berrigan for AOC Key
Solutions and individual sales performance.The information in
this table for the Company’s most recently completed fiscal
year is based on the information available to the Company as of the
date of this prospectus. This information may not be complete and
may change as the Company completes the audit of its financial
statements for the fiscal year ended December 31, 2017. Any change
to the information below will be included in the Company’s
annual report on Form 10-K for the fiscal year ended December 31,
2017.
Name/Capacities in which compensation was received
|
Year
|
Salary ($)
|
Bonus ($)
|
|
All
other compensation ($)
|
|
Total ($)
|
Robert
Berman
|
2017
|
395,000
|
-
|
|
-
|
|
395,000
|
Chief
Executive Officer (1)
|
2016
|
300,000
|
-
|
|
-
|
|
300,000
|
James
K. McCarthy
|
2017
|
293,231
|
-
|
|
8,931
|
(2)
|
302,162
|
Chief
Strategy Officer (3)
|
2016
|
298,989
|
-
|
|
10,600
|
(2)
|
309,589
|
Riaz Latifullah (4)
|
2017
|
258,333
|
-
|
|
-
|
|
258,333
|
Chief Financial Officer (5)
|
2016
|
200,000
|
-
|
|
-
|
|
200,000
|
Greg
McCarthy
|
2017
|
272,380
|
5,381
|
(6)
|
10,800
|
(2)
|
288,561
|
Chief
Executive Officer of AOC Key Solutions
|
2016
|
229,800
|
42,762
|
(7)
|
9,497
|
(2)
|
282,059
|
Kevin
Berrigan
|
2017
|
232,792
|
18,500
|
(6)
|
-
|
|
251,292
|
SVP
and Chief Financial Officer of AOC Key Solutions
|
2016
|
209,724
|
11,641
|
(6)
|
4,461
|
(2)
|
225,826
|
(1)
|
Mr. Berman was an independent consultant in 2016 and became an
employee on January 1, 2017.
|
(2)
|
Amount
represents 401(k) matching contribution.
|
(3)
|
Mr. James McCarthy was Chief Executive Officer through March 15,
2016 and was appointed to serve as Chief Strategy Officer, a
position he held through March 2017.
|
(4)
|
Mr.
Latifullah served as Chief Financial Officer until August 28, 2017
at which time he transitioned to EVP of Corporate
Development.
|
(5)
|
Mr.
Latifullah was an independent consultant in 2016 and became and
employee on January 1, 2017.
|
(6)
|
Amount
represents subjective bonus.
|
(7)
|
Amount represents commissions on sales and subjective
bonus.
|
74
2016 Outstanding Equity Awards at Fiscal Year-End.
There
were no outstanding equity awards to our Named Executive Officers
as of December 31, 2017.
Employment Agreements
We have
entered into employment agreement our executives in connection with
his or her commencement of employment with us.
Berman Employment Agreement
The
Employment Agreement with Robert Berman (the “Berman
Employment Agreement”) provides that Mr. Berman will
serve as our Chief Executive Officer. The agreement has an initial
term, which was effective as of December 23, 2016, of five years
with automatically renewing one-year terms thereafter.
Mr. Berman’s base salary is $395,000 per annum, and he
is eligible for a bonus as determined by our Compensation
Committee. Mr. Berman is also eligible to receive all such
other benefits as are provided to other management
employees.
In the
event of a “Change of Control”, as defined in the
Berman Employment Agreement, whether during the initial term or
thereafter, we shall have the right to terminate the Berman
Employment Agreement. In the event we exercise the option to
terminate Mr. Berman’s agreement, we will be required to
pay Mr. Berman an amount equal to Mr. Berman’s base
salary per annum multiplied by the number of years and portions
thereof remaining under the Berman Employment Agreement.
Mr. Berman may be terminated by the Company for
“Cause”, as defined in the Berman Employment
Agreement.
Mr. Berman
also agreed as consideration for entering into the Berman
Employment Agreement, that for the period during his employment and
for twelve months thereafter, (i) he will not compete with the
Company in the “Geographic Area”, as defined in the
Berman Employment Agreement, and (ii) he will not solicit any
of our existing employees, suppliers or customers.
Rhulen Employment Agreement
The
employment agreement with Harry Rhulen (the “Rhulen
Employment Agreement”) provides that Mr. Rhulen will
serve as our President for an initial five-year term that began on
January 25, 2017. His base salary is $275,000 per annum, and
he will be eligible for a bonus as determined by our Compensation
Committee. Mr. Rhulen is also eligible to receive all such
other benefits as are provided to other management
employees.
Mr. Rhulen
was previously granted options to purchase 80,000 shares of the
common stock, par value $0.001 per share, of KeyStone at a strike
price of $3.00 per share. These options were converted into options
to purchase 155,195 shares of our common stock at a strike price of
$1.5464 per share. The conversion did not affect their vesting
schedule; the options were to begin vesting on the first
anniversary of Mr. Rhulen’s initial employment as President
and continue vesting monthly over the following two
years.
We may
terminate Mr. Rhulen’s employment agreement for
“Cause,” as defined in the Rhulen Employment Agreement.
If we terminate Mr. Rhulen’s employment other than for
“Cause,” or Mr. Rhulen terminates his employment
for “Good Reason”, as defined in the Rhulen Employment
Agreement, we will be required to pay Mr. Rhulen an amount
equal to the remaining amount of base salary payable under the
Rhulen Employment Agreement until the end of the initial five-year
term and our contribution to Mr. Rhulen’s health
insurance premiums.
75
Mr. Rhulen
also agreed that, for the period during his employment and for one
year thereafter, (i) he will not compete with the Company in
the “Restricted Territory”, as defined in Exhibit A to
the Rhulen Employment Agreement, and (ii) he will not solicit
any of our existing employees, suppliers or customers.
James K. McCarthy Offer Letter
The
amended and restated James K. McCarthy Offer Letter (the
“McCarthy Offer Letter”) provides that
Mr. McCarthy will serve as our Host and Moderator -- The
Bridge on TV. His employment is at will, subject to providing
120-days’ notice of resignation or termination. We may pay
Mr. McCarthy’s salary in lieu of notice for some or all
of the 120-day notice period. His base salary is $298,989 per
annum, and he is eligible for a bonus as determined by our
Compensation Committee. Mr. McCarthy will also be eligible to
receive all such other benefits as are provided to other management
employees.
Mr. McCarthy
also agreed that, for the period during his employment and for two
years thereafter, (i) he will not compete with the Company in
the “Restricted Territory”, as defined in Exhibit A to
the McCarthy Offer Letter, and (ii) he will not solicit any of
our existing employees, suppliers or customers.
Nathan Employment Agreement
The
employment agreement with Richard Nathan (the “Nathan
Employment Agreement”) provides Mr. Nathan will serve as
our Chief Operating Officer for a term until December 31,
2017, with the option to extend the term in writing. His base
salary is $225,200 per annum, and he is eligible for a bonus as
determined by our Compensation Committee. Mr. Nathan is also
eligible to receive all such other benefits as are provided to
other management employees. We may terminate
Mr. Nathan’s employment agreement for
“Cause,” as defined in the Nathan Employment Agreement.
If we terminate Mr. Nathan’s employment other than for
“Cause,” or Mr. Nathan terminates his employment
for “Good Reason”, as defined in the Nathan Employment
Agreement, we will be required to pay Mr. Nathan an amount
equal to six months of Mr. Nathan’s base salary and
Novume’s contribution to Mr. Nathan’s health
insurance premiums.
Mr. Nathan
also agreed that, for the period during his employment and for two
years thereafter, (i) he will not compete with the Company in
the “Restricted Territory”, as defined in Exhibit A to
the Nathan Employment Agreement, and (ii) he will not solicit
any of our existing employees, suppliers or customers.
Kumpf Employment Agreement
The
employment agreement with Carl Kumpf (the “Kumpf Employment
Agreement”) provides that Mr. Kumpf is Chief Financial
Officer for an initial three-year term that began on August 28,
2017. His base salary is $275,000 per annum, and he is eligible for
a bonus as determined by the our Compensation Committee. Mr. Kumpf
is also eligible to receive all such other benefits as are provided
to other management employees. Mr. Kumpf was granted options to
purchase 174,595 shares of common stock, which will begin vesting
on August 28, 2017 and continue vesting in equal monthly
installments over the following three years, at a strike price of
$1.6753 per share.
We may
terminate Mr. Kumpf’s employment agreement for
“Cause,” as defined in the Kumpf Employment Agreement.
If we terminate Mr. Kumpf’s employment other than for
“Cause,” or Mr. Kumpf terminates his employment
for “Good Reason”, as defined in the Kumpf Employment
Agreement, we will be required to pay Mr. Kumpf an amount
equal to one (1) year of base salary payable under the Kumpf
Employment Agreement. Mr. Kumpf is permitted to remain as the owner
of and have a financial interest IFG and to sell, assign, or
otherwise convey IFG or components thereof, assets of IFG, and his
interest or control of IFG.
Mr. Kumpf
also agreed that, for the period during his employment and for one
year thereafter, (i) he will not compete with the Company in
the “Restricted Territory”, as defined in Exhibit A to
the Kumpf Employment Agreement, and (ii) he will not solicit
any of our existing employees, suppliers or customers.
76
Loughlin Employment Agreement
The
employment agreement with Suzanne Loughlin (the “Loughlin
Employment Agreement”) provides that Ms. Loughlin is
General Counsel and Chief Administrative Officer for an initial
five-year term that began on January 25, 2017. Her base salary
is $225,000 per annum, and she is eligible for a bonus as
determined by our Compensation Committee. Ms. Loughlin is also
eligible to receive all such other benefits as are provided to
other management employees.
Ms. Loughlin
was previously granted options to purchase 80,000 shares of the
common stock, par value $0.001 per share, of KeyStone at a strike
price of $3.00 per share. These options were converted into options
to purchase 155,195 shares of our common stock at a strike price of
$1.5464 per share. The conversion did not affect their vesting
schedule; the options were to begin vesting on the first
anniversary of Ms. Loughlin’s initial employment as General
Counsel and Chief Administrative Officer and continue vesting
monthly over the following two years.
We may
terminate Ms. Loughlin’s employment agreement for
“Cause,” as defined in the Loughlin Employment
Agreement. If we terminate Ms. Loughlin’s employment
other than for “Cause,” or Ms. Loughlin terminates
her employment for “Good Reason”, as defined in the
Loughlin Employment Agreement, we will be required to pay
Ms. Loughlin an amount equal to the remaining amount of base
salary payable under the Loughlin Employment Agreement until the
end of the initial five-year term and our contribution to
Ms. Loughlin’s health insurance premiums.
Ms. Loughlin
also agreed that, for the period during her employment and for one
year thereafter, (i) she will not compete with the Company in the
“Restricted Territory”, as defined in Exhibit A to the
Loughlin Employment Agreement, and (ii) she will not solicit
any of our existing employees, suppliers or customers.
Amended Latifullah Agreement
In
connection with Mr. Latifullah’s transition to Executive Vice
President, Corporate Development, on August 28, 2017, Mr.
Latifullah and Novume entered into a Restated, Amended and
Supplemental Employment Agreement (the “Amended Latifullah
Agreement”), which amended and restated his original
employment agreement with KeyStone effective as of December 23,
2016, which was assumed by Novume. The Amended Latifullah Agreement
provides that he is Executive Vice President, Corporate Development
for a term that ends on December 23, 2019. His base salary is
$205,000 per annum, and he will be eligible for a bonus as
determined by our Compensation Committee. Mr. Latifullah is also
eligible to receive all such other benefits as are provided to
other management employees. Mr. Latifullah was previously granted
options to purchase 90,000 shares of the common stock, par value
$0.001 per share, of KeyStone at a strike price of $2.75 per share.
These options were converted into options to purchase 174,595
shares of our common stock at a strike price of $1.4176 per share.
The conversion did not affect their vesting schedule; the options
began vesting in equal monthly installments on March 1, 2017 and
will continue vesting monthly until March 1, 2019.
The
Amended Latifullah Agreement may be terminated with or without
cause, as defined in the agreement. Subject to certain conditions,
the Amended Latifullah Agreement provides that, if Mr. Latifullah
is terminated without cause, or if he leaves for good reason, he
will be provided a severance package equal to a pre-determined
number of months of base salary and such percentage of health
premiums as would have been paid for by Novume during the
corresponding time period (collectively, the “Separation
Payment”) pursuant to the schedule below:
●
September
1-September 30, 2017, a period of twelve (12) months after
termination;
●
October 1-October
31, 2017, a period of eleven (11) months after
termination;
●
November 1-November
30, 2017, a period of ten (10) months after
termination;
●
December 1-December
31, 2017, a period of nine (9) months after
termination;
●
January 1-January
31, 2018, a period of eight (8) months after
termination;
●
February 1-February
28, 2018, a period of seven (7) months after termination;
or
●
March 1, 2018 or
after, a period of six (6) months after termination.
77
Additionally,
half of all unvested options issued to Mr. Latifullah under the
Amended Latifullah Agreement would vest immediately.
Mr. Latifullah
also agreed that, for the period during his employment and for one
year thereafter, (i) he will not compete with Novume in the
“Restricted Territory”, as defined in Exhibit A to the
Latifullah Employment Agreement, and (ii) he will not solicit
any of Novume’s existing employees, suppliers or
customers.
Bonus Eligibility
Bonuses
for our executive officers may be conditioned on the achievement of
objective goals, which may not be waived after being set, based on
one or more of the following performance measures: earnings;
operating profits (including measures of earnings before interest,
taxes, depreciation and amortization; free cash flow or adjusted
free cash flow; cash from operating activities; revenues; net
income (before or after tax); financial return ratios; market
performance; stockholder return and/or value; net profits; earnings
per share; profit returns and margins; stock price; working
capital; capital investments; returns on assets; returns on equity;
returns on capital investments; selling, general and administrative
expenses; discounted cash flows; productivity; expense targets;
market share; cost control measures; strategic initiatives; changes
between years or periods that are determined with respect to any of
the above-listed performance criteria; net present value; sales
volume; cash conversion costs; leverage ratios; maintenance of
liquidity; integration of acquired businesses; operational
efficiencies, including Lean Six Sigma initiatives; regulatory
compliance, including the Sarbanes-Oxley Act of 2002; and economic
profit.
Our
Board has adopted the 2017 Equity Award Plan (the “Equity
Award Plan”). The purpose of the 2017 Equity Award Plan is to
promote the interests of Novume (including its subsidiaries and
affiliates, if any) and its stockholders by using equity interests
in Novume to attract, retain and motivate its management,
nonemployee directors and other eligible persons and to encourage
and reward their contributions to our performance and
profitability.
The
total shares of our common stock issuable under the Plan is
3,000,000 shares. As of January 24, 2018, the total
number of options issued under the Equity Award Plan is 1,695,375,
and the total shares of our common stock remaining available for
issuance under the Equity Award Plan is 1,304,625.
Highlights of the Equity Award Plan
The
Plan permits us to take a flexible approach to our equity awards by
permitting the grant of restricted stock, restricted stock units,
restricted stock purchase rights, stock options, stock appreciation
rights, performance awards and other stock awards. We have also
designed the Equity Award Plan to include a number of provisions
that our 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. We
cannot, without stockholder approval, reduce the exercise price of
an award (except for adjustments in connection with a
recapitalization), and, at any time when the exercise price of an
award is above the market value of our common stock, we 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 Equity Award Plan can be automatically
replenished.
78
No Automatic
Grants. The Equity Award 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.
No Tax
Gross-Ups. The Plan does
not provide for any tax gross-ups.
No liberal change-in-control
definition. The
change-in-control definition contained in the Equity Award 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 Equity Award
Plan are assumed by a successor in connection with a change in
control of the Company, 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 Equity
Award Plan prohibits the current payment of dividends or dividend
equivalent rights on unearned performance-based
awards.
Limitation on
amendments. No amendments
to the Equity Award 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
Equity Award 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 KeyStone’s
shares are traded.
Administered by the
Administrator. The Equity Award
Plan is administered by our Board of Directors (in such capacity,
the “Administrator”).
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.
Equity Award Plan Principal Features
The
principal features of the Equity Award Plan are summarized below.
This summary is not complete, however, and is qualified by the
terms of the Plant.
Shares Available Under the Equity Award Plan
The
maximum aggregate number of shares of our common stock available
for issuance under the Plan is 1,304,625. Shares subject to an
award may be authorized but unissued, or reacquired shares of our
common stock or treasury shares. If an award under the Equity Award
Plan expires or becomes unexercisable without having been exercised
in full, or an award is settled for cash, the unissued shares that
were subject to the award will become available for future grant
under the Novume Equity Award Plan, as will any shares that are
withheld by us when an option is exercised or tax withholdings are
satisfied by the tendering of shares. However, shares that have
been issued under the Equity Award Plan will not be returned to the
Equity Award Plan and will not be available for future distribution
under the Equity Award Plan.
Equity Award Plan Administration
The
Equity Award Plan is administered by the Administrator. The
Administrator has the exclusive authority, subject to the terms and
conditions set forth in the Equity Award Plan, to determine all
matters relating to awards under the Equity Award Plan, including
the selection of individuals to be granted an award, the type of
award, the number of shares of our 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.
79
Term
The
Equity Award Plan provides that it will continue in effect for a
term of ten (10) years, unless sooner terminated pursuant to
its provisions.
Eligibility
Awards
under the Equity Award Plan may be granted to employees (including
officers), consultants and directors of the Company, its
subsidiaries and affiliates. In addition, an award under the Equity
Award Plan may be granted to a person who is offered employment by
us or a subsidiary or affiliate, provided that such award shall be
immediately forfeited if such person does not accept such offer of
employment within an established time period. If otherwise
eligible, an employee, consultant or director who has been granted
an award under the Equity Award Plan may be granted other awards.
Although all employees of the Company, its subsidiaries and
affiliates are eligible to receive awards under the Equity Award
Plan, it is not possible to estimate the number of additional
individuals who may become eligible to receive awards under the
Equity Award Plan from time to time.
Awards
The
Equity Award Plan is broad-based and flexible, providing for awards
to be made in the form of (a) restricted stock and restricted
stock units, (b) restricted stock purchase rights,
(c) incentive stock options, which are intended to qualify
under Section 422 of the Code, (d) non-qualified stock
options, which are not intended to qualify under Section 422
of the Tax Code, (e) stock appreciation rights,
(f) performance awards, (g) performance shares,
(h) performance units or (i) other stock-based awards
that relate to or serve a similar function to the awards described
above. Awards may be made on a standalone, combination or tandem
basis. Additional information about some of the awards is set forth
below.
Restricted Common Stock Awards, Restricted Stock Purchase Rights
and Restricted Stock Units
Awards of Restricted Common Stock, Restricted Stock Purchase Rights
and Restricted Stock Units
Awards
of restricted common stock and grants of restricted stock purchase
rights of shares of our common stock awarded or granted to the
recipient, all or a portion of which are subject to a restriction
period set by the Administrator during which restriction period the
recipient or purchaser shall not be permitted to sell, transfer or
pledge the restricted common stock. Restricted stock units are
notional accounts that are valued solely by reference to shares of
our common stock, subject to a restriction period set by the
Administrator and payable in our common stock, cash or a
combination thereof. The restriction period for both restricted
stock and restricted stock units may be based on period of service,
which shall not be less than one (1) year, performance of the
recipient or the Company, its subsidiaries, divisions or
departments for which the recipient is employed or such other
factors as the Administrator may determine.
Rights as a Stockholder
Subject
to any restrictions set forth in the award agreement, a recipient
or purchaser of our restricted common stock will possess all of the
rights of a holder of our common stock of Novume, including the
right to vote and receive dividends. Cash dividends on the shares
of our common stock that are the subject of an award agreement
shall be paid in cash to the recipient or purchaser and may be
subject to forfeiture as set forth in the award agreement. The
recipient of restricted stock units shall not have any of the
rights of a stockholder of the Company; the Administrator shall be
entitled to specify with respect to any restricted stock unit award
that upon the payment of a dividend by the Company, the Company
will hold in escrow an amount in cash equal to the dividend that
would have been paid on the restricted stock units had they been
converted into the same number of shares of our common stock and
held by the recipient on that date. Upon adjustment and vesting of
the restricted stock unit, any cash payment due with respect to
such dividends shall be made to the recipient.
Termination of Employment, Consultancy or Director
Relationship
Generally,
upon termination of employment, consultancy or a director
relationship for any reason during the restricted period, the
recipient or purchaser will forfeit the right to the shares of
restricted our common stock to the extent that the applicable
restrictions have not lapsed at the time of such
termination.
80
Common Stock Options
Types
Stock options to purchase shares of our common stock may be granted
under the Equity Award Plan to directors and consultants in
the form of nonqualified stock options and to employees in the form
of incentive stock options or nonqualified stock options.
Exercise Price
The per
share exercise price for shares underlying common stock options
will be determined by the Administrator, provided that the exercise
price must be at least equal to 100% of the fair market value per
share of common stock on the date of grant. In the case of an
incentive stock option granted to an employee who, at the time of
grant, owns more than 10% of the total combined voting power of all
classes of our stock, the per share exercise price must be at least
equal to 110% of the fair market value per share of common stock on
the date of grant.
Term of Option; Vesting
The
term during which a common stock option may be exercised will be
determined by the Administrator, provided that no common stock
option will be exercisable more than ten (10) years from the
date of grant. In the case of an incentive stock option granted to
an employee who, at the time of grant, owns more than 10% of the
total combined voting power of all classes of stock of the Company
or its subsidiaries or affiliates, the term of such common stock
option may not be more than five (5) years. The Administrator
has full authority, subject to the terms of the Plan, to determine
the vesting period or limitation or waiting period with respect to
any common stock option granted to a participant or the shares
purchased upon exercise of such option; provided, however, that such
vesting restriction or limitation or waiting period shall not be
less than one (1) year. In addition, the Administrator
may, for any reason, accelerate the exercisability of any common
stock option.
Other Awards
Stock Appreciation Rights
The
Administrator may grant to an employee, consultant or a director a
right to receive the excess of the fair market value of shares of
our common stock on the date the stock appreciation right is
exercised over the fair market value of such shares on the date the
stock appreciation right was granted. Such spread may, in the sole
discretion of the Administrator, be paid in cash or common stock or
a combination of both.
Performance Awards
The
Administrator may grant performance awards to employees based on
the performance of a recipient over a specified period. Such
performance awards may be awarded contingent upon future
performance of the Company or its affiliates or subsidiaries during
that period. A performance award may be in the form of common stock
(or cash in an amount equal to the fair market value thereof) or
the right to receive an amount equal to the appreciation, if any,
in the fair market value of common stock over a specified period.
Performance awards may be paid, in the Administrator’s
discretion, in cash or stock or some combination thereof. Each
performance award will have a maximum value established by the
Administrator at the time the award is made. Unless otherwise
provided in an award agreement or by the Administrator, performance
awards terminate if the recipient does not remain an employee of
the Company, or its affiliates or subsidiaries, at all times during
the applicable performance period.
81
Other Stock-Based Awards
The
Administrator may, in its discretion, grant other stock-based
awards that are related to or serve a similar function to the
awards described above.
Material Terms of Performance Goals for Qualified Performance-Based
Compensation
Under
section 162(m) of the Code, in order for us to deduct compensation
in excess of $1,000,000 that is paid in any year to any
“covered employee,” such compensation must be treated
as “qualified performance-based,” within the meaning of
section 162(m) of the Tax Code. A “covered employee” is
defined under section 162(m) of the Code as a company’s
principal executive officer or any of such company’s three
other most highly compensated executive officers named in the proxy
statement (other than the principal executive officer or principal
financial officer). Section 7 of the Equity Award Plan sets
forth the procedures the Administrator should follow to avoid the
deductibility limitations of section 162(m) of the Tax Code when
making long-term incentive performance awards under the Equity
Award Plan to current covered employees and employees whom the
Administrator anticipates may become covered employees between the
time of grant and payment of the award. However, there can be no
guarantee that amounts payable under the Plan will be treated as
“qualified performance-based” compensation and we
reserve the flexibility to pay nondeductible compensation when
necessary to achieve our compensation objectives.
Among
other things, in order for an award under Section 7 of the
Equity Award Plan to be treated as “qualified
performance-based” compensation that is not subject to the
$1,000,000 cap, stockholder approval of the material terms of the
performance goals is required at least every five (5) years.
The material terms include the employees eligible to receive the
compensation, a description of the performance criteria and the
maximum amount of compensation that may be paid to any one
employee. A description of the material terms for qualified
performance-based compensation in the Equity Award Plan
follows:
Employees Eligible to Receive
Compensation. A
performance-based award under the Equity Award Plan may be granted
to employees (including officers) of the Company, its subsidiaries
and affiliates. In addition, a performance-based award may be
granted to a person who is offered employment by the Company or a
subsidiary or affiliate, provided that such award shall be
immediately forfeited if such person does not accept such offer of
employment within an established time period.
Performance
Criteria. When making an award
under the Equity Award 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. Section 7 of the
Equity Award Plan includes the performance criteria the
Administrator has adopted, subject to stockholder approval, for a
“qualified performance-based compensation” award, which
shall consist of objective tests based on one or more of the
following:
●
earnings;
●
operating profits
(including measures of earnings before interest, taxes,
depreciation and amortization;
●
free cash flow or
adjusted free cash flow;
●
cash from operating
activities;
●
revenues;
●
net income (before
or after tax);
●
financial return
ratios;
●
market
performance;
●
stockholder return
and/or value;
●
net
profits;
●
earnings per
share;
82
●
profit returns and
margins;
●
stock
price;
●
working
capital;
●
capital
investments;
●
returns on
assets;
●
returns on
equity;
●
returns on capital
investments;
●
selling, general
and administrative expenses;
●
discounted cash
flows;
●
productivity;
●
expense
targets;
●
market
share;
●
cost control
measures;
●
strategic
initiatives;
●
changes between
years or periods that are determined with respect to any of the
above-listed performance criteria;
●
net present
value;
●
sales
volume;
●
cash conversion
costs;
●
leverage
ratios;
●
maintenance of
liquidity;
●
integration of
acquired businesses;
●
operational
efficiencies, including Lean Six Sigma initiatives;
●
regulatory
compliance, including the Sarbanes-Oxley Act of 2002;
and
●
economic
profit.
Performance
criteria may be measured solely on a Company, subsidiary or
business unit basis, on specific capital projects or groups of
projects or a combination thereof. Further, performance criteria
may reflect absolute entity performance or a relative comparison of
entity performance to the performance of one or more peer groups of
entities or other external measure of the selected performance
criteria. The measure for any such award may include or exclude
items to retain the intents and purposes of specific objectives,
such as losses from discontinued operations, extraordinary gains or
losses, the cumulative effect of accounting changes, acquisitions
or divestitures, foreign exchange impacts, acceleration of
payments, costs of capital invested, discount factors, and any
unusual or nonrecurring gain or loss. In order to qualify as
performance-based under section 162(m) of the Code, the performance
criteria will be established before 25% of the performance period
has elapsed and will not be subject to change (although future
awards may be based on different performance criteria). The
performance periods may extend over one to five calendar years, and
may overlap one another.
83
Other Provisions
Termination, Amendment and Employee Retirement Income Security Act
of 1974 (“ERISA”) Status
The
Equity Award Plan provides that the Administrator may generally
amend, alter, suspend or terminate the Equity Award Plan and the
Administrator may prospectively or retroactively amend any or all
of the terms of awards granted under the Equity Award Plan, so long
as any such amendment does not impair the rights of any recipient
without the recipient’s consent. Stockholder approval is
required for any material Equity Award Plan amendment or any
amendment necessary to comply with the Tax Code or any other
applicable laws or stock exchange requirements. The Equity Award
Plan is not subject to the provisions of ERISA.
Anti-dilution Provisions
Subject
to any required action by our stockholders, the number of shares of
common stock covered by each outstanding award (and the purchase or
exercise price thereof), and the number of shares of common stock
that have been authorized for issuance under the Equity Award Plan,
but as to which no awards have yet been granted (or which have been
returned to the Equity Award Plan upon cancellation or expiration
of an award or the withholding of shares by the Company) will be
proportionately adjusted to prevent dilution or enlargement of
rights in the event of any stock split, stock dividend, combination
or reclassification of the common stock or other relevant
capitalization change.
Prohibition on Loans to Participants
We may
not lend money to any participant under the Equity Award Plan for
the purpose of paying the exercise or base price associated with
any award or for the purpose of paying any taxes associated with
the exercise or vesting of an award.
Withholding Obligations
We may
take such steps as are considered necessary or appropriate for the
withholding of any federal, state, local or foreign taxes of any
kind that we are required by any law or regulation of any
governmental authority to withhold in connection with any award
under the Equity Award Plan, including, without limiting the
generality of the foregoing, the withholding of all or any portion
of any payment or the withholding of the issue of common stock to
be issued under the Equity Award Plan, until such time as the
recipient has paid us for any amount we are required to withhold
with respect to taxes. Unless otherwise determined by the
Administrator, withholding obligations may be settled with vested
common stock, including vested common stock that is part of the
award that gives rise to the withholding requirement. The
Administrator may establish such procedures as it deems
appropriate, including the making of irrevocable elections, for the
settlement of withholding obligations with vested common
stock.
Potential Dilutive Impact of the Equity Award Plan
We are
committed to effectively managing its employee equity compensation
programs while minimizing stockholder dilution. For this reason, in
administering our equity compensation program, we consider both our
“burn rate” and “overhang” in evaluating
the impact of the program on our stockholders. We define
“burn rate” as the number of equity awards granted
during the year, divided by the weighted average number of shares
of our common stock outstanding during the period. The burn rate
measures the potential dilutive effect of our equity grants. We
define “overhang” as the number of full value awards
granted (but not yet vested or issued) and stock options granted
(but not yet exercised) divided by the number of shares of common
stock outstanding at the end of the period.
Certain Federal Income Tax Consequences
The
following is a brief summary of the principal federal income tax
consequences of the receipt of restricted common stock and
restricted stock units, the grant and exercise of common stock
options awarded under the Equity Award Plan and the subsequent
disposition of shares acquired upon such exercise and the receipt
of certain other awards under the Plan. This summary is based upon
the provisions of the Code as in effect on the date of this
offering circular, current regulations adopted and proposed
thereunder and existing judicial decisions, as well as
administrative rulings and pronouncements of the Internal Revenue
Service (all of which are subject to change, possibly with
retroactive effect). This summary is not intended to be exhaustive
and does not describe all federal, state or local tax laws.
Furthermore, the general rules discussed below may vary, depending
upon the personal circumstances of the individual holder.
Accordingly, participants should consult a tax advisor to determine
the income tax consequences of any particular
transaction.
84
Taxation of Restricted Novume Common Stock
In
general, except in the case of an election under section 83(b) of
the Code, a participant will not incur any tax upon the grant of
shares of stock which are subject to a substantial risk of
forfeiture. However, when the restrictions lapse or the shares
become freely transferable, the participant will recognize ordinary
income equal to the fair market value of the applicable shares at
such time, less the amount, if any, paid for such shares, unless
the participant has made a section 83(b) election with respect to
such shares or has elected to defer receipt of such shares, as
discussed below.
If a
participant makes a section 83(b) election within 30 days of a
grant of restricted common stock, the participant will recognize
ordinary income at the time of grant in an amount equal to the
difference between the fair market value of the restricted shares
on the grant date and the amount, if any, paid for such restricted
shares. If the participant makes such an election, he or she will
not recognize any further income with respect to such shares solely
as a result of a later lapse of the restrictions.
If a
participant holds the restricted common stock as a capital asset
after the earlier of either (1) the vesting of such restricted
common stock or (2) the making of a timely section 83(b)
election with respect to such restricted common stock, any
subsequent gain or loss will be taxable as long-term or short-term
capital gain or loss, depending upon the holding period. For this
purpose, the basis in the restricted common stock generally will be
equal to the sum of the amount (if any) paid for the restricted
common stock and the amount included in ordinary income as a result
of the vesting event or section 83(b) election, as applicable;
provided, however, that, if a participant forfeits restricted
common stock with respect to which a section 83(b) election was
made prior to vesting, the participant’s capital loss is
limited to the amount (if any) paid for such restricted Novume
common stock.
In
general, at the time a participant recognizes ordinary income with
respect to the restricted common stock, will be entitled to a
deduction in an amount equal to the ordinary income recognized by
the participant, which deduction may be limited by section 162(m)
of the Code.
Taxation of Restricted Stock Units; Stock Appreciation Rights;
Performance Shares and Performance Units
In
general, a participant will not incur any tax upon the grant of
restricted stock units, stock appreciation rights, performance
shares or performance units. However, when the restrictions lapse,
the participant will recognize ordinary income in an amount equal
to the sum of the cash and the fair market value of any property
received.
Taxation of Non-Qualified Stock Options
In
general, a participant will not recognize any income upon the grant
of a non-qualified stock option. Upon the exercise of a
non-qualified stock option, however, a participant generally will
recognize ordinary income in an amount equal to the excess of the
fair market value of the non-qualified option stock on the date of
exercise over the exercise price (i.e., the “spread”)
and Novume will be entitled to a deduction in an equal amount,
which may be limited by section 162(m) of the Code.
Upon
subsequent sales of shares obtained through the exercise of
non-qualified stock options, the participant may realize short-term
or long-term capital gain or loss, depending upon the holding
period of the shares, if such shares constitute capital assets in
the participant’s hands. The gain or loss will be measured by
the difference between the sales price and the tax basis of the
shares sold. The tax basis for this purpose generally will be fair
market value of the shares on the date of exercise.
85
Taxation of Incentive Stock Options
A
participant who is granted an incentive stock option does not
recognize taxable income at the time the option is granted or upon
its exercise, although the exercise is an adjustment item for
alternative minimum tax purposes and may subject the participant to
alternative minimum tax. If the shares acquired upon exercise are
sold after the expiration of two years from the grant of the option
and one year after exercise of the option, any gain or loss is
treated as long-term capital gain or loss. If these holding periods
are not satisfied, the participant recognizes ordinary income at
the time of disposition equal to the difference between the
exercise price and the lower of (1) the fair market value of
the shares at the date of the option exercise or (2) the sale
price of the shares. Any gain or loss recognized on such a
premature disposition of the shares in excess of the amount treated
as ordinary income is treated as long-term or short-term capital
gain or loss, depending on the holding period. Unless limited by
section 162(m) of the Tax Code, we are generally entitled to a
deduction in the same amount as the ordinary income recognized by
the participant.
Taxation of Other Stock Based Awards
Other
awards may be granted under the Equity Award Plan. Since the
amount, character and timing of income recognized in connection
with such awards will vary depending upon the specific terms and
conditions of such awards, no information regarding the tax
consequences of the receipt of such awards may be provided at this
time.
Tax Withholding
Our
obligations under the Equity Award Plan are conditioned upon proper
arrangements being in place with participants in the Equity Award
Plan for the payment of withholding tax obligations. Unless
otherwise determined by the Administrator, withholding tax
obligations may be settled with shares of our common stock,
including shares that are part of the award that gives rise to the
withholding obligation.
In
light of the factors described above, the Administrator believes
that the ability to grant equity compensation is vital to our
ability to continue to attract, motivate, reward, and retain
individuals.
Our
amended and restated certificate of incorporation limits the
liability of our directors for monetary damages to the fullest
extent permitted by the Delaware General Corporation Law, or DGCL.
Consequently, our directors will not be personally liable to us or
our stockholders for monetary damages for any breach of fiduciary
duties as directors, except liability for:
●
any breach of the
director’s duty of loyalty to us or our
stockholders;
●
any act or omission
not in good faith or that involves intentional misconduct or a
knowing violation of law;
●
unlawful payments
of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL; or
●
any transaction
from which the director derived an improper personal
benefit.
Our
amended and restated certificate of incorporation and our restated
bylaws require us to indemnify our directors and officers to the
maximum extent not prohibited by the DGCL and allow us to indemnify
other employees and agents as set forth in the DGCL. Subject to
certain limitations, our restated bylaws will also require us to
advance expenses incurred by our directors and officers for the
defense of any action for which indemnification is required or
permitted, subject to very limited exceptions.
We
believe that these charter provisions and indemnification
agreements are necessary to attract and retain qualified persons
such as directors and officers. We also maintain directors’
and officers’ liability insurance.
The
limitation of liability and indemnification provisions in our
restated certificate of incorporation and restated bylaws may
discourage stockholders from bringing a lawsuit against our
directors and officers for breach of their fiduciary duty. They may
also reduce the likelihood of derivative litigation against our
directors and officers, even though an action, if successful, might
benefit us and other stockholders. Further, a stockholder’s
investment may be adversely affected to the extent that we pay the
costs of settlement and damage awards against directors and
officers as required by these indemnification
provisions.
86
At
present, there is no pending litigation or proceeding involving any
of our directors or executive officers as to which indemnification
is required or permitted, and we are not aware of any threatened
litigation or proceeding that may result in a claim for
indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers, or persons
controlling us, we have been informed that in the opinion of the
SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
In
addition to the executive officer and director compensation
arrangements discussed above under “Compensation of Novume
Directors” and “Executive Compensation,” the
following is a description of each transaction since January 1,
2014 and
any currently proposed transaction in which (i) we have been
or are to be a participant, (ii) the amount involved exceeded
or will exceed the lesser of $120,000 or one percent of the average
of our total assets at year end for the last two completed fiscal
years, and (iii) any of our directors, executive officers,
holders of more than five percent of our capital stock, or
any immediate family member of, or person sharing the household
with, any of these individuals, had or will have a direct or
indirect material interest.
Firestorm Acquisition
As part
of the consideration for the acquisition of Firestorm Solutions, LLC and Firestorm
Franchising, LLC in January, 2017, we issued subordinated
promissory notes to Harry Rhulen, our President, and Suzanne
Loughlin, our General Counsel and Chief Administrative Officer. The
principal amount of the promissory note to Mr. Rhulen is
$166,666.66 and the principal amount of the promissory note to
Ms. Loughlin is $166,666.67. Each of the promissory notes
bears interest at a rate of 2%. In connection with the acquisition,
we also paid cash of $125,000 to each of Mr. Rhulen and
Ms. Loughlin, issued warrants to purchase 105,209 shares of
our common stock, exercisable over a period of five years, at an
exercise price of $2.58 per share, and issued warrants to purchase
105,209 shares of our common stock, exercisable over a period of
five years, at an exercise price of $3.60 per
share.
Prior to the consummation of the Firestorm Acquisition, Mr. Rhulen
and Ms. Loughlin were not officers of the Company.
Avon Road Note Purchase Agreement
On March 16, 2016, we entered into a Subordinated Note and
Warrant Purchase Agreement pursuant to which we agreed to issue up
to $1,000,000 in subordinated debt and warrants to purchase up to
242,493 shares of our common stock at an exercise price of $1.03
per share to Avon Road Partners, L.P., an affiliate of Robert
Berman, our CEO and a member of our Board of Directors.
Simultaneously with the entry into the Subordinated Note and
Warrant Purchase Agreement we issued subordinated notes with a face
amount of $500,000 and warrants to purchase 121,247 shares of our
common stock to the Avon Road. The warrants expire on
March 16, 2019. 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.
The
foregoing transaction was reviewed and approved by officers and
directors other than Mr. Berman.
Review, Approval, or Ratification of Transactions with Related
Parties
Our
written related party transactions policy and the Charter of our
Governance Committee require that any transaction with a related
person that must be reported under applicable rules of the SEC must
be reviewed and either approved, disapproved or ratified by our
Governance Committee.
Prior
to August 2017, we had no formal, written policy or procedure for
the review and approval of related-party transactions.
87
The
following table sets forth, as January 24, 2018,
information concerning the beneficial ownership of Novume common
stock by (i) each person or group of persons known to
beneficially own more than 5% of the outstanding shares of our
common stock, (ii) each person who is our executive officer or
director and (iii) all such executive officers and directors
as a group. Beneficial ownership and percentage ownership are
determined in accordance with the rules of the SEC. Under these
rules, beneficial ownership generally includes any shares as to
which the individual or entity has sole or shared voting power or
investment power and includes any shares that an individual or
entity has the right to acquire beneficial ownership of within 60
days of January
24, 2018 through the exercise of any option,
warrant, conversion privilege or similar right. In computing the
number of shares beneficially owned by a person and the percentage
ownership of that person, shares of our common stock that could be
issued upon the exercise of outstanding options and warrants that
are exercisable within 60 days of January
24, 2018 are considered to be outstanding.
These shares, however, are not considered outstanding as of
January
24, 2018 when computing the percentage
ownership of each other person, except as specifically set forth
below.
To our knowledge,
except as indicated in the footnotes to the following table, all
beneficial owners named in this table have sole voting and
investment power with respect to all shares shown as beneficially
owned by them. Percentage of ownership is based on
14,496,697 shares of common stock outstanding as of
January
24, 2018.
|
Shares
Beneficially Owned
|
||
Name
and address of beneficial owner (1)
|
Number
of Shares (2)
|
|
Percent
of class
|
Directors and Named Executive Officers
|
|
|
|
Robert
A. Berman
|
4,561,951
|
(3)
|
30.6%
|
James
McCarthy
|
5,451,671
|
|
37.6%
|
Richard
Nathan
|
3,207,045
|
(4)
|
22.1%
|
Harry
Rhulen
|
532,510
|
(5)
|
3.6%
|
Suzanne
Loughlin
|
532,510
|
(5)
|
3.6%
|
Paul
de Bary
|
48,499
|
(6)
|
*
|
Glenn
Goord
|
48,499
|
(6)
|
*
|
Christine
Harada
|
48,499
|
(6)
|
*
|
Marta
Tienda
|
48,499
|
(6)
|
*
|
Riaz
Latifullah (7)
|
94,573
|
(8)
|
*
|
Carl
Kumpf (9)
|
29,100
|
(10)
|
*
|
5% or Greater Shareholders
|
|
|
|
C.B.
Brechin
|
743,333
|
|
5.1%
|
Scott
Rutherford
|
748,226
|
|
5.2%
|
Paul
Milligan
|
781,722
|
(11)
|
5.2%
|
All
current Directors and executive officers as a group (11
persons)
|
14,603,356
|
|
79.0%
|
*
Less than
1%
(1)
The address of
those listed is c/o Novume Solutions, Inc., 14420 Albemarle Point
Place, Suite 200, Chantilly, VA, 20151. Unless otherwise indicated,
all shares are owned directly by the beneficial owner.
(2)
Based on
14,496,697 shares of our common stock issued and
outstanding as of the January 24, 2018.
(3)
Consists of:
(i) options to purchase 4,318,857 outstanding shares of our
common stock in the aggregate from Mr. James McCarthy
(2,725,836 shares) and Dr. Richard Nathan (1,593,021
shares) granted by Mr. McCarthy and Dr. Nathan to
Avon Road, and (ii) 121,247 shares of our common stock issued to
Avon Road. Mr. Berman is the general partner of Avon Road, and
therefore may be deemed to share beneficial ownership with Avon
Road of the shares reported herein. The 4,318,857 shares underlying
the Avon Road Options are already outstanding as they are held by
Mr. James McCarthy and Dr. Richard Nathan and are
therefore included in the beneficial ownership calculation for all
persons including Mr. Berman.
(4)
Consists of: (i)
3,186,041 shares of our common stock, (ii) a Unit Warrant to
purchase 4,849 shares of our common stock at a $1.031 exercise
price and (iii) 16,155 shares of our common stock acquirable
through the conversion of 10,000 shares of Novume Series A
Preferred Stock at a $6.19 conversion price.
(5)
Consists of:
(i) 315,625 shares of our common stock, (ii) a warrant to
purchase 105,209 shares of our common stock at a $2.5774 exercise
price, (iii) a warrant to purchase 105,209 shares of our
common stock at a $3.6083 exercise price and (iv) options
to
purchase 6,467 shares of our common stock that are exercisable
within 60 days.
(6)
Consists of options
to purchase 48,499 shares of our common stock.
(7)
Mr. Latifullah
served as our Chief Financial Officer until August 28, 2017 when he
began serving as our Executive Vice President of Corporate
Development.
(8)
Consists of options
to purchase 94,573 shares of our common stock that are exercisable
within 60 days.
(9)
Mr. Kumpf was
appointed Chief Financial Officer on August 28, 2017.
(10)
Consists of options
to purchase 29,100 shares of our common stock that are exercisable
within 60 days.
(11)
Consists of: (i)
300,000 shares of our common stock and (ii) 481,722 shares of our
common stock acquirable through the conversion of 240,861 shares of
our Series B Preferred Stock at a $2.00 conversion
price.
88
The
following description summarizes the most important terms of our
capital stock. Because it is only a summary, it does not contain
all the information that may be important to you. For a complete
description, you should refer to our amended and restated
certificate of incorporation and restated bylaws, which are
included as exhibits to the registration statement of which this
prospectus forms a part, and to the applicable provisions of
Delaware law.
Our
authorized capital stock consists of 30,000,000 shares of
common stock, $0.0001 par value per share, and 2,000,000 shares of
undesignated preferred stock, $0.0001 par value per
share.
As of
January 24, 2018, there were outstanding
14,496,697 shares of our common stock, held by
approximately 65 stockholders of record, and 1,695,375
shares of our common stock issuable upon exercise of outstanding
stock options.
Common Stock
Dividend Rights
Subject
to preferences that may apply to any shares of preferred stock
outstanding at the time, the holders of our common stock are
entitled to receive dividends out of funds legally available if our
board of directors, in its discretion, determines to issue
dividends and then only at the times and in the amounts that our
board of directors may determine. See “Dividend Policy”
for additional information.
Voting Rights
Holders
of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders. Our amended and
restated certificate of incorporation does not provide for
cumulative voting for the election of directors. As a result, the
holders of a majority of our voting shares can elect all of the
directors then standing for election.
No Preemptive or Similar Rights
Our
common stock is not entitled to preemptive rights, and is not
subject to redemption or sinking fund provisions.
Right to Receive Liquidation Distributions
Upon
our liquidation, dissolution or winding-up, the assets legally
available for distribution to our stockholders would be
distributable ratably among the holders of our common stock and any
participating preferred stock outstanding at that time, subject to
prior satisfaction of all outstanding debt and liabilities and the
preferential rights of and the payment of liquidation preferences,
if any, on any outstanding shares of preferred stock.
Preferred Stock
Pursuant
to our amended and restated certificate of incorporation, our board
of directors will be authorized, subject to limitations prescribed
by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in
each series, and to fix the designation, powers, preferences, and
rights of the shares of each series and any of its qualifications,
limitations, or restrictions, in each case without further vote or
action by our stockholders. Our board of directors can also
increase or decrease the number of shares of any series of
preferred stock, but not below the number of shares of that series
then outstanding, without any further vote or action by our
stockholders. Our board of directors may authorize the issuance of
preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of
our common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect of
delaying, deferring, or preventing a change in our control and
might adversely affect the market price of our common stock and the
voting and other rights of the holders of our common stock. We have
no current plan to issue any shares of preferred
stock.
89
Series A Cumulative Convertible Redeemable Preferred Stock of
Novume
The
following is a summary of certain material terms and provisions of
the Series A Preferred Stock. The following summary is subject to,
and qualified in its entirety by, the Certificate of Designations
of Series A Cumulative Convertible Redeemable Preferred Stock (the
“Novume Series A Preferred Stock Certificate of
Designations”). You should review a copy of the Novume Series
A Preferred Stock Certificate of Designations for a complete
description of the terms and conditions applicable to the Series A
Preferred Stock.
Voting Rights
The
holders of the Series A Preferred Stock shall not have any voting
rights except as expressly set forth below or as otherwise from
time to time required by law.
So long
as any shares of Series A Preferred Stock are outstanding, in
addition to any other vote or consent of stockholders required by
law or by the our Charter, the vote or consent of the holders of a
majority of the outstanding shares of Series A Preferred Stock at
the time outstanding and entitled to vote thereon shall be
necessary for effecting or validating, either directly or
indirectly by amendment, merger, consolidation or
otherwise:
●
any amendment,
alteration or repeal to the our Charter or Bylaws which have an
adverse effect on the rights, preferences, privileges or voting
powers of the Series A Preferred Stock;
●
at any time until
November 8, 2018, (a) any declaration or payment of cash
dividends on any of our common stock or other stock that is
specifically designated as junior to the Series A Preferred Stock;
(b) any purchase, redemption or other acquisition for
consideration of any of our common stock or other junior stock,
whether directly or indirectly; or (c) if and only if Novume
is delinquent in the payment of dividends on Series A Preferred
Stock, any declaration or payment of cash dividends or purchase,
redemption or other acquisition for consideration of any class of
securities hereafter authorized that is specifically designated as
ranking pari passu with the Series A Preferred Stock, whether
directly or indirectly; provided, further, however, that the
consent of the holders of the Series A Preferred Stock shall not be
required in connection with any repurchase of any junior stock held
by any of our employee or consultant (x) upon any termination
of such employee’s or consultant’s employment or
consultancy pursuant to any agreement providing for such repurchase
or (y) otherwise permitted pursuant to an agreement between us
and an employee or consultant thereof; or
●
any consummation of
a binding share exchange or reclassification involving the Series A
Preferred Stock, or of a merger or consolidation of Novume with
another corporation or other entity, unless in each case
(a) the shares of Series A Preferred Stock remain outstanding
or, in the case of any such merger or consolidation with respect to
which we are not the surviving or resulting entity, are converted
into or exchanged for preference securities of the surviving or
resulting entity or its ultimate parent, in each case, that is an
entity organized and existing under the laws of the United States
of America, any state thereof or the District of Columbia and
(b) such shares of Series A Preferred Stock remaining
outstanding or such preference securities, as the case may be, have
such rights, preferences, privileges and voting powers, and
limitations and restrictions thereof, taken as a whole, as are not
less favorable to the holders thereof than the rights, preferences,
privileges and voting powers, and limitations and restrictions
thereof, of the Series A Preferred Stock immediately prior to such
consummation, taken as a whole; provided, further, that no vote by
the holders of Series A Preferred Stock under the foregoing shall
be required to the extent a plan of merger, binding share exchange
or similar event otherwise provides that the holders of Series A
Preferred Stock would receive an amount of cash in such merger,
share exchange or similar event equal to the liquidation preference
as of the consummation of such merger, share exchange or similar
event.
Dividends
The
Series A Preferred Stock is entitled to quarterly dividends of
$0.175 (7% per annum) per share.
90
Conversion Rights
At any
time after November 8, 2019, each holder of the Series A Preferred
Stock will have the right to convert each share of Series A
Preferred Stock into such number of fully paid and nonassessable
shares of Novume common stock as is determined by dividing
(i) the sum of (x) $10.00 (the “Series A Original
Issue Price” (as adjusted pursuant hereto for stock splits,
stock dividends, reclassifications and the like)) plus (y) the
amount of any accrued but unpaid dividends on such Shares being
converted, if any, whether or not declared, to and including the
date immediately prior to such date of conversion, by (ii) the
conversion price (the “Conversion Price”) applicable to
such share of Series A Preferred Stock, in effect on the date the
certificate is surrendered for conversion. The number of shares of
common stock into which each Share is convertible, after taking
into account any such adjustments, is hereinafter referred to as
the “Conversion Ratio.” The Conversion Price shall be
(a) $7.22, from November 8, 2019 to November 7, 2020 or
(b) $7.74, from and after November 8, 2020.
The
Series A Preferred Stock will automatically be converted at the
then effective conversion price (i) except as provided below,
immediately prior to the closing of Novume’s sale of its
common stock in a firm commitment underwritten public offering
pursuant to an effective registration statement under the
Securities Act of 1933, as amended (the “Securities
Act”), (A) which results in aggregate cash proceeds to
us of not less than $30,000,000 (net of underwriting discounts and
commissions), (B) is made at an offering price per share of at
least the then applicable conversion price (as adjusted) and
(C) following such offering, the Novume common stock is listed
for trading on a national securities exchange, and (ii) on the
date specified by written consent or agreement of the holders of at
least 662/3% of the then
outstanding shares of Series A Preferred Stock (a “Qualified
IPO”). If such closing occurs prior to November 8, 2019,
the Conversion Price per share shall be (i) $5.68 per share
from November 8, 2016 to November 7, 2017;
(ii) $6.19 per share from November 8, 2017 to
November 7, 2018; and (iii) $6.71 per share from
November 8, 2018 to November 7, 2019.
Redemption by Novume
At any
time from and after November 8, 2019, we may, upon thirty
(30) days’ notice, redeem all or any portion of the then
outstanding shares of Series A Preferred Stock for cash at a
redemption price per share equal to the sum of (i) the
corresponding redemption price below (the “Base Redemption
Price”) plus (ii) the amount of any accrued but unpaid
dividends on such Shares being redeemed, if any, whether or not
declared, to and including the date immediately prior to such date
of redemption. The Base Redemption Price shall be (a)(i) $14.00,
from November 8, 2019 to November 7, 2020 or
(ii) $15.00, from and after November 8,
2020.
Redemption by Holder
At any
time after November 8, 2021, each holder of the Series A Preferred
Stock will have the right to require us to redeem all, but not less
than all, of such holder’s Series A Preferred Stock for a
redemption price of $15.00 per share plus the amount of any
accrued but unpaid dividends thereof, if any, whether or not
declared, to and including the date immediately prior to such date
of redemption.
Liquidation Rights
In the
event of a “Liquidation Event” (as defined below), the
holders of Series A Preferred Stock are entitled to be paid out of
our assets available for distribution to stockholders an amount
equal to $10.00 per share plus the amount of any
accrued but unpaid dividends thereof, if any, whether or not
declared, to and including such date of liquidation.
“Liquidation Event” means a liquidation, dissolution or
winding up of Novume in a single transaction or series of
transactions. The sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or
substantially all of our property and assets shall not be deemed a
Liquidation Event, nor shall the merger, consolidation or any other
business combination transaction of with any other corporation or
person or the merger, consolidation or any other business
combination transaction with any other corporation or person be
deemed to be a Liquidation Event.
91
Series B Cumulative Convertible Preferred Stock of
Novume
The
following is a summary of certain material terms and provisions of
the Series B Preferred Stock. The following summary is subject to,
and qualified in its entirety by, the Certificate of Designations
of Series B Cumulative Convertible Preferred Stock (the
“Novume Series B Preferred Stock Certificate of
Designations”). You should review a copy of our Series B
Preferred Stock Certificate of Designations for a complete
description of the terms and conditions applicable to the Series B
Preferred Stock.
Voting Rights
The
holders of Series B Preferred Stock shall not have any voting
rights except as expressly set forth below or as otherwise from
time to time required by law.
So long
as any shares of Series B Preferred Stock are outstanding, in
addition to any other vote or consent of stockholders required by
law or by our Charter, the vote or consent of the holders of a
majority of the outstanding shares of Series B Preferred Stock at
the time outstanding and entitled to vote thereon shall be
necessary for effecting or validating, either directly or
indirectly by amendment, merger, consolidation or
otherwise:
●
any amendment,
alteration or repeal to our Charter or Bylaws which have an adverse
effect on the rights, preferences, privileges or voting powers of
the Series B Preferred Stock;
●
at any time until
November 8, 2018, (a) any declaration or payment of cash
dividends on any of our common stock or other stock that is
specifically designated as junior to the Series B Preferred Stock;
(b) any purchase, redemption or other acquisition for
consideration of any of our common stock or other junior stock,
whether directly or indirectly; or (c) if and only if we are
delinquent in the payment of dividends on Series B Preferred Stock,
any declaration or payment of cash dividends or purchase,
redemption or other acquisition for consideration of any class of
securities hereafter authorized that is specifically designated as
ranking pari passu with the Series B Preferred Stock, whether
directly or indirectly; provided, further, however, that the
consent of the holders of the Series B Preferred Stock shall not be
required in connection with any repurchase of any junior stock held
by any employee or consultant of the Company (x) upon any
termination of such employee’s or consultant’s
employment or consultancy pursuant to any agreement providing for
such repurchase or (y) otherwise permitted pursuant to an
agreement between the Company and an employee or consultant
thereof; or
●
any consummation of
a binding share exchange or reclassification involving the Series B
Preferred Stock, or of a merger or consolidation of the Company
with another corporation or other entity, unless in each case
(x) the shares of Series B Preferred Stock remain outstanding
or, in the case of any such merger or consolidation with respect to
which we are not the surviving or resulting entity, are converted
into or exchanged for preference securities of the surviving or
resulting entity or its ultimate parent, in each case, that is an
entity organized and existing under the laws of the United States
of America, any state thereof or the District of Columbia and
(y) such shares of Series B Preferred Stock remaining
outstanding or such preference securities, as the case may be, have
such rights, preferences, privileges and voting powers, and
limitations and restrictions thereof, taken as a whole, as are not
less favorable to the holders thereof than the rights, preferences,
privileges and voting powers, and limitations and restrictions
thereof, of the Series B Preferred Stock immediately prior to such
consummation, taken as a whole; provided, further, that no vote by
the holders of Series B Preferred Stock under the foregoing shall
be required to the extent a plan of merger, binding share exchange
or similar event otherwise provides that the holders of Series B
Preferred Stock would receive an amount of cash in such merger,
share exchange or similar event equal to the liquidation preference
as of the consummation of such merger, share exchange or similar
event.
Dividends
Dividends
shall be paid in arrears at a rate of four and four hundred
eighty-four thousandths percent (4.484%) on the Liquidation
Preference as defined in the Series B Preferred Stock Certificate
of Designations or $0.448 per share.
92
Conversion Rights
At any
time, each holder of the Series B Preferred Stock will have the
right to convert each share of Series B Preferred Stock into such
number of fully paid and nonassessable shares of our common stock
as is determined by dividing (i) the sum of (x) $10.00
(the “Series B Original Issue Price” (as adjusted
pursuant hereto for stock splits, stock dividends,
reclassifications and the like)) plus (y) the
amount of any accrued but unpaid dividends on such Shares being
converted, if any, whether or not declared, to and including the
date immediately prior to such date of conversion, by
(ii) $5.00 (the “Conversion Price”) applicable to
such share of Series B Preferred Stock, in effect on the date the
certificate is surrendered for conversion. The number of shares of
common stock into which each Share is convertible, after taking
into account any such adjustments, is hereinafter referred to as
the “Conversion Ratio.”
The Series B Preferred Stock will automatically be converted at the
then effective Conversion Ratio on the last day of any
period of thirty (30) consecutive trading days, in which, during a
period of twenty (20) trading days (whether consecutive or not),
the volume weighted average of the daily Current Market Price per
share of common stock equals or exceeds $7.50 (after taking into
account any adjustments as set forth in the Novume Series B Preferred Stock Certificate of
Designations.)
Liquidation Rights.
In the
event of a “Liquidation Event” (as defined below), the
holders of Series B Preferred Stock are entitled to be paid out of
the assets of Novume available for distribution to stockholders an
amount equal to $10 per share plus the amount of any
accrued but unpaid dividends thereof, if any, whether or not
declared, to and including such date of liquidation.
“Liquidation Event” means a liquidation, dissolution or
winding up of Novume in a single transaction or series of
transactions. The sale, conveyance, exchange or transfer (for cash,
shares of stock, securities or other consideration) of all or
substantially all of the property and assets of Novume shall not be
deemed a Liquidation Event, nor shall the merger, consolidation or
any other business combination transaction of Novume into or with
any other corporation or person or the merger, consolidation or any
other business combination transaction with any other corporation
or person be deemed to be a Liquidation Event.
Novume Unit Warrants
For
each share of Series A Preferred Stock issued in the Brekford
mergers, a Unit Warrant to purchase 0.48498862 shares of common
stock was also issued. As of January 24, 2018, we had
outstanding Unit Warrants to purchase an aggregate of
243,655 shares of our common stock at an exercise
price of $1.03 per share.
Novume Common Stock Warrants
As of
January 24, 2018, we also have outstanding warrants to
purchase an aggregate of 820,586 shares of our common
stock.
Stock Options
As
of January
24, 2018, we had outstanding options to
purchase an aggregate of 1,695,375 shares of our common stock, with
a weighted-average exercise price of $2.19 per share, pursuant to
our 2017 Equity Incentive Plan.
Piggyback Registration Rights
The
holders of an aggregate of 375,000 shares of our common stock,
including 481,722 shares of common stock issuable upon conversion
of our Series B Preferred Stock, or their permitted transferees,
will be entitled to rights with respect to the registration of
these shares under the Securities Act. These shares are referred to
as registrable securities. These rights are provided under the
terms of our Registration Rights Agreement dated as of October 1,
2017, as amended, or RRA, between us and the holders of these
registrable securities, providing piggyback registration rights.
All fees, costs, and expenses incurred in connection with the
registration of registrable securities, including reasonable fees
and disbursements of one counsel to the selling
stockholders.
93
If we
register any of our securities for public sale, each holder of
registrable securities has a right to request the inclusion of any
then-outstanding registrable securities held by them on our
registration statement. However, this right does not apply to a
registration relating solely to employee benefit plans, a corporate
reorganization or stock issuable upon conversion of debt
securities. If the underwriters of any underwritten offering
determine in good faith that marketing factors require a limitation
on the number of shares, the number of shares to be registered will
be apportioned, first, to the company for its own account and,
second, pro rata among these holders, based on the number of
registrable securities held by each holder.
The
registration rights terminate upon the earliest of third
anniversary of the RRA years following the completion of this
offering.
Anti-Takeover Provisions
The
provisions of Delaware law, our amended and restated certificate of
incorporation, and our amended and restated bylaws, could have the
effect of delaying, deferring, or discouraging another person from
acquiring control of our company. These provisions, which are
summarized below, may have the effect of discouraging takeover
bids. They are also designed, in part, to encourage persons seeking
to acquire control of us to negotiate first with our board of
directors. We believe that the benefits of increased protection of
our potential ability to negotiate with an unfriendly or
unsolicited acquirer outweigh the disadvantages of discouraging a
proposal to acquire us because negotiation of these proposals could
result in an improvement of their terms.
Delaware Law
We are
subject to the provisions of Section 203 of the Delaware
General Corporation Law, or DGCL, regulating corporate takeovers.
In general, DGCL Section 203 prohibits a publicly held
Delaware corporation from engaging in a business combination with
an interested stockholder for a period of three years following the
date on which the person became an interested stockholder
unless:
●
prior to the date
of the transaction, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested
stockholder;
●
the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock outstanding,
but not the outstanding voting stock owned by the interested
stockholder, (1) shares owned by persons who are directors and
also officers and (2) shares owned by employee stock plans in
which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
●
at or subsequent to
the date of the transaction, the business combination is approved
by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66.67% of the
outstanding voting stock that is not owned by the interested
stockholder.
Generally,
a business combination includes a merger, asset or stock sale, or
other transaction or series of transactions together resulting in a
financial benefit to the interested stockholder. An interested
stockholder is a person who, together with affiliates and
associates, owns or, within three years prior to the determination
of interested stockholder status, did own 15% or more of a
corporation’s outstanding voting stock. We expect the
existence of this provision to have an anti-takeover effect with
respect to transactions our board of directors does not approve in
advance. We also anticipate that DGCL Section 203 may also
discourage attempts that might result in a premium over the market
price for the shares of common stock held by
stockholders.
94
Anti-Takeover Effects of Provisions of Amended and Restated
Certificate of Incorporation and Amended and Restated
Bylaws
Certain
anti-takeover provisions have been incorporated into our Amended
and Restated Certificate of Incorporation and Bylaws,
including:
●
the vote of 66 2/3
of the voting power of the corporation entitled to vote at an
election of directors is required for the removal of a member of
our Board;
●
the vote of 66 2/3
of the voting power of the corporation entitled to vote at an
election of directors is required before any of our Bylaws may, at
any annual meeting or at any special meeting called for that
purpose, be altered, amended, rescinded or repealed;
and
●
the request of one
or more stockholders holding shares in the aggregate entitled to
cast not less than 35% of the vote at a meeting is required to call
a stockholder meeting.
Listing of Common Shares
Our
common stock is listed on the
Nasdaq Capital Market under the symbol
“NVMM."
Transfer Agent and Registrar
The
transfer agent and registrar for our common stock is Issuer Direct
Corporation The transfer agent’s address is 500 Perimeter
Park Dr, Suite D, Morrisville, NC 27560 and its telephone number is
(919) 481-4000.
We
are offering
units, each consisting of one share of our common
stock and a warrant to purchase one share of our
common stock. The units are being offered at a price of $
per unit.
The units will not be issued or certificated. The shares of common
stock and warrants comprising the units are immediately separable
and will be issued separately. The
warrants will be exercisable immediately at an exercise
price per share of not less than the
last reported sale price of our common stock on the trading day
immediately preceding the pricing of this
offering and
will expire five years
from the date of issuance. We are also registering
the shares of common stock issuable from time to time upon exercise of the warrants
offered hereby.
Common Stock
The
material terms and provisions of our common stock and each other
class of our securities which qualifies or limits our common stock
are described under the caption "Description of Capital Stock" in
this prospectus.
Warrants
The
following summary of certain terms and provisions of warrants that
are included in the units being offered hereby is not complete and
is subject to, and qualified in its entirety by, the provisions of
the warrant, the form of which is filed as an exhibit to the
registration statement of which this prospectus forms a part.
Prospective investors should carefully review the terms and
provisions of the form of warrant for a complete description of the
terms and conditions of the warrants.
Form
The warrants will
be issued in book-entry form under a warrant agent agreement
between Issuer Direct Corporation, as warrant agent, and us, and
shall initially be represented by one or more book-entry
certificates deposited with DTC, and registered in the name of Cede
& Co., a nominee of DTC, or as otherwise directed by DTC. You
should review a copy of the form of warrant, which is attached as
an exhibit to the registration statement of which this prospectus
forms a part, for a complete description of the terms and
conditions of the warrants.
Duration
and
Exercise Price
Each
warrant will have an exercise price per share of not less
than the last reported sale price of our common stock on the
trading day immediately preceding the pricing of this
offering. The warrants will be immediately exercisable and
will expire on the fifth anniversary of the original
issuance date. The exercise price and number of shares of common
stock issuable upon exercise is subject to appropriate adjustment
in the event of stock dividends, stock splits, reorganizations or
similar events affecting our common stock and the exercise price.
The warrants will be issued separately from the common stock, and
may be transferred separately immediately thereafter. A warrant to
purchase one share of our common stock will be issued for every one
share purchased in this offering, which equates to
100% warrant coverage on the shares purchased in this
offering.
Exercisability
The
warrants will be exercisable, at the option of each holder, in
whole or in part, by delivering to us a duly executed exercise
notice accompanied by payment in full for the number of shares of
our common stock purchased upon such exercise (except in the case
of a cashless exercise as discussed below). A holder (together with
its affiliates) may not exercise any portion of the warrant to the
extent that the holder would own more than 4.99% of the outstanding
common stock after exercise, except that upon at least
61 days' prior notice from the holder to us, the holder may
increase the amount of ownership of outstanding stock after
exercising the holder's warrants up to 9.99% of the number of
shares of our common stock outstanding immediately after giving
effect to the exercise, as such percentage ownership is determined
in accordance with the terms of the warrants. No fractional shares
of common stock will be issued in connection with the exercise of a
warrant. In lieu of fractional shares, we will either pay the
holder an amount in cash equal to the fractional amount multiplied
by the exercise price or round up to the next whole
share.
95
Redemption
We may call the warrants for redemption as follows:
●
at
a price of $0.01 for each warrant at any time while the warrants
are exercisable, so long as a registration statement relating to
the common stock issuable upon exercise of the warrants is
effective and current;
●
upon
not less than 30 days prior written notice of redemption to each
warrant holder; and
●
if,
and only if, the reported last sale price of the common stock
equals or exceeds
$ per share
(175% of the public offering price per share and
warrant in this offering) for the 20-trading-day period ending on
the third business day prior to the notice of redemption to the
warrant holders.
If the foregoing conditions are satisfied and we call the warrants
for redemption, each warrant holder will then be entitled to
exercise his or her warrant prior to the date scheduled for
redemption. However, there can be no assurance that the price of
the common stock will exceed the call price or the warrant exercise
price after the redemption call is made.
Fundamental Transactions
If a fundamental
transaction occurs, then the successor entity will succeed to, and
be substituted for us, and may exercise every right and power that
we may exercise and will assume all of our obligations under the
warrants with the same effect as if such successor entity had been
named in the warrant itself. If holders of our common stock are
given a choice as to the securities, cash or property to be
received in a fundamental transaction, then the holder shall be
given the same choice as to the consideration it receives upon any
exercise of the warrant following such fundamental
transaction.
Transferability
Subject
to applicable laws and the restriction on transfer set forth in the
warrant, the warrant may be transferred at the option of the holder
upon surrender of the warrant to us together with the appropriate
instruments of transfer.
Exchange Listing
We intend to apply to have the warrants approved for listing on the
Nasdaq Capital Market, subject to notice of issuance, under the
symbol “NVMMZ.”
Right as a Stockholder
Except as otherwise provided in the warrants or by virtue of
such holder's ownership of shares of our common stock, the holders
of the warrants do not have the rights or privileges of holders of
our common stock, including any voting rights, until they exercise their
warrants.
We have
entered into an underwriting agreement with the several
underwriters listed in the table below. The Benchmark Company, LLC
and Northland Securities, Inc. are the representatives of the
underwriters. We refer to the several underwriters listed in the
table below as the "underwriters." Subject to the terms and
conditions of the underwriting agreement, we have agreed to sell to
the underwriters, and the underwriters have agreed to purchase the
units from us.
Pursuant
to the terms and subject to the conditions contained in the
underwriting agreement, we have agreed to sell to the underwriters
named below, and each underwriter severally has agreed to purchase
from us, the respective number of units set forth opposite its name
below:
Underwriters
|
Number of Units
|
The Benchmark Company, LLC
|
|
Northland Securities, Inc. (1)
|
|
Total
|
|
(1)
Northland Capital
Markets is the trade name for certain equity capital markets and
investment banking activities of Northland Securities, Inc., member
FINRA / SIPC.
96
The underwriters are committed to purchase units offered by us if
they purchase any such securities. The underwriters are not
obligated to purchase the units covered by the underwriters’
over-allotment option described below. The underwriters are
offering units, subject to prior sale, when, as and if issued to
and accepted by them, subject to approval of legal matters by their
counsel, and other conditions contained in the underwriting
agreement, such as the receipt by the underwriters of
officer’s certificates and legal opinions. The underwriters
reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
We have granted the
underwriters an option, exercisable one or more times in whole or
in part, to purchase up to additional shares of common stock and/or
warrants to purchase up to an aggregate of shares of common stock
at an exercise price of $ per
share, in any combinations thereof, from us at the public offering
price per security, less the underwriting discounts and
commissions, for 45 days after the date of this prospectus to cover
over-allotments, if any. We
will pay the expenses associated with the exercise of the
over-allotment option.
The
underwriters propose to offer the units purchased pursuant to the
underwriting agreement to the public at the public offering price
set forth on the cover page of this prospectus and to certain
dealers at that price less a concession not in excess of
$ per unit.
After this offering, the public offering price and concession may
be changed by the underwriters. No such change shall change the
amount of proceeds to be received by us as set forth on the cover
page of this prospectus.
The
factors considered in determining the public offering price
included the recent market price of our common stock, the general
condition of the securities market at the time of this offering,
the history of, and the prospects for, the industry in which we
compete, our past and present operations and our prospects for
future revenues.
The
following table shows the per unit and total underwriting discounts
and commissions we will pay in connection with the sale of the
shares and the warrants:
|
Per
Unit
|
Total
|
||
|
Without
Overallotment Option
|
With Overallotment
Option
|
Without
Overallotment Option
|
With Overallotment
Option
|
Public offering
price
|
$
|
$
|
$
|
$
|
Underwriting
discounts and commissions paid by us
|
|
|
|
|
Proceeds, before
expenses, to us
|
$
|
$
|
$
|
$
|
We have also agreed to reimburse the underwriters for their
expenses in connection with this offering, up to $115,000, and have
agreed to reimburse the underwriters for its “blue sky”
fees and expenses, of $25,000. We estimate the total expenses of
this offering which will be payable by us, excluding the
underwriting discount and the underwriter’s expenses payable
by us, will be approximately
$
. After deducting the underwriting discount and our estimated
offering expenses, we expect the net proceeds from this offering to
be approximately
$
.
Commencing one year after the effective date of this
offering, we have agreed to engage the underwriters as warrant
solicitation agent and to pay the underwriters a warrant
solicitation fee equal to 5% of the gross proceeds received by us
from the exercise of the warrants (provided such exercises are
solicited by the underwriters).
97
We have also agreed to issue to the underwriters a
warrant to purchase a number of our
shares equal to 5% of the
shares sold in this offering. The underwriters’
warrant will have an exercise price equal to
125% of the public offering price of the combination
of shares and warrants set forth on the cover of this prospectus
(or $ per
share) and may be exercised on a cashless basis. The
underwriters’ warrant is not redeemable by us.
This prospectus also covers the sale of the underwriters’
warrant and the shares of common stock issuable upon
the exercise of the underwriters’ warrant. The
underwriters’ warrant and the underlying
securities have been deemed compensation by FINRA, and are
therefore subject to FINRA Rule 5110(g)(1). In accordance with
FINRA Rule 5110(g)(1), neither the underwriters’
warrant nor
any securities issued upon exercise of the underwriters’
warrant may be sold, transferred, assigned, pledged,
or hypothecated, or be the subject of any hedging, short sale,
derivative, put, or call transaction that would result in the
effective economic disposition of such securities by any person for
a period of 180 days immediately following the date of
effectiveness or commencement of sales of the offering pursuant to
which the underwriters’ warrant is being issued,
except the transfer of any security:
●
by operation of law
or by reason of reorganization of our company;
●
to any FINRA member
firm participating in this offering and the officers or partners
thereof, if all securities so transferred remain subject to the
lock-up restriction described above for the remainder of the time
period;
●
if the aggregate
amount of our securities held by either an underwriter or a related
person do not exceed 1% of the securities being
offered;
●
that is
beneficially owned on a pro-rata basis by all equity owners of an
investment fund, provided that no participating member manages or
otherwise directs investments by the fund, and participating
members in the aggregate do not own more than 10% of the equity in
the fund; or
●
the exercise or
conversion of any security, if all securities received remain
subject to the lock-up restriction set forth above for the
remainder of the time period.
Indemnification
Pursuant
to the underwriting agreement, we have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments that the
underwriters or such other indemnified parties may be required to
make in respect of those liabilities.
Lock-Up Agreements
We have agreed not to (i) offer, sell, or otherwise
transfer or dispose of, directly or indirectly, any shares of
capital stock (including Depository Receipts) of the Company or any
securities convertible into or exercisable or exchangeable for
shares of capital stock (including Depository Receipts) of the
Company, except for shares issued in connection with strategic
acquisitions or employment arrangements executed with individuals
who previously were not in the employ of the Company; (ii) file or
caused to be filed any registration statement with the Commission
relating to the offering by the Company of any shares of capital
stock (including Depository Receipts) of the Company or any
securities convertible into or exercisable or exchangeable for
shares of capital stock (including Depository Receipts) of the
Company, without the prior
written consent of the Representatives, for a period of nine months
following the date of this prospectus (the "Lock-up
Period").
98
In addition, subject to certain limited circumstances, each of our
directors and executive officers, and certain of our principal
stockholders, has entered into a lock-up agreement with the
Representatives. Under the lock-up agreements, the directors,
executive officers and applicable stockholders may not, directly or
indirectly, sell, offer to sell, contract to sell, or grant any
option for the sale (including any short sale), grant any security
interest in, pledge, hypothecate, hedge, establish an open "put
equivalent position" (within the meaning of Rule 16a-1(h)
under the Securities Exchange Act of 1934, as amended, or the
Exchange Act), or otherwise dispose of, or enter into any
transaction which is designed to or could be expected to result in
the disposition of, any shares of our common stock or securities
convertible into or exchangeable for shares of our common stock, or
publicly announce any intention to do any of the foregoing, without
the prior written consent of the Representatives, for a period of
180 days from the date of this prospectus. This consent may be
given at any time without public notice.
Electronic Distribution
This
prospectus may be made available in electronic format on websites
or through other online services maintained by the underwriters or
by their affiliates. In those cases, prospective investors may view
offering terms online and prospective investors may be allowed to
place orders online. Other than this prospectus in electronic
format, the information on the underwriters' websites or our
website and any information contained in any other websites
maintained by the underwriters or by us is not part of this
prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or
the underwriter in its capacity as underwriter, and should not be
relied upon by investors.
Price Stabilization, Short Positions and Penalty Bids
In
connection with the offering the underwriters may engage in
stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the
Exchange Act:
●
Stabilizing
transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specified
maximum.
●
Sales by the
underwriters of securities in excess of the number of securities
the underwriters are obligated to purchase creates a syndicate
short position. The underwriters may close out any syndicate short
position by purchasing shares in the open market.
●
Syndicate
covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to
cover syndicate short positions.
●
Penalty bids permit
the underwriters to reclaim a selling concession from a syndicate
member when the common stock originally sold by the syndicate
member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the
market price of our common stock or preventing or retarding a
decline in the market price of the common stock. As a result, the
price of our common stock may be higher than the price that might otherwise exist in the open
market. These transactions may be discontinued at any
time.
Neither
we nor the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions
described above may have on the price of our shares of common
stock. In addition, neither we nor the underwriters make any
representation that the underwriter will engage in these
transactions or that any transaction, if commenced, will not be
discontinued without notice.
Other Relationships
From time to time, certain of the underwriters
and their affiliates have provided, and may provide in the future,
various advisory, investment and commercial banking and other
services to us in the ordinary course of business, for which they
have received and may continue to receive customary fees and
commissions. In connection with our merger with
KeyStone, KeyStone paid Benchmark cash compensation fees for
mergers and acquisitions advisory services. In addition, we have
retained Benchmark as a financial advisor for mergers and
acquisitions and Benchmark would receive cash compensation fees of
$417,000 if the acquisition of NeoSystems occurs.
However, except as disclosed in this
prospectus, we have no present arrangements with any of the
underwriters for any further services.
99
Selling Restrictions
European Economic Area
This prospectus does not constitute an approved prospectus
under Directive 2003/71/EC and no such prospectus is intended to be
prepared and approved in connection with this offering.
Accordingly, in relation to each Member State of the European
Economic Area which has implemented Directive 2003/71/EC (each, a
"Relevant Member State") an offer to the public of any securities
which are the subject of the offering contemplated by this
prospectus may not be made in that Relevant Member State except
that an offer to the public in that Relevant Member State of any
securities may be made at any time under the following exemptions
under the Prospectus Directive, if and to the extent that they
have
been implemented in that Relevant Member State:
(a) to
any legal entity which is a qualified investor as defined in the
Prospectus Directive;
(b) to
fewer than 100 or, if the Relevant Member State has implemented the
relevant provision of the 2010 PD Amending Directive, 150, natural
or legal persons (other than qualified investors as defined in the
Prospectus Directive), subject to obtaining the prior consent of
the representatives of the underwriter for any such offer;
or
(c) in
any other circumstances which do not require any person to publish
a prospectus pursuant to Article 3 of the Prospectus
Directive.
For the
purposes of this provision, the expression an "offer to the public"
in relation to any securities in any Relevant Member State means
the communication in any form and by any means of sufficient
information on the terms of the offer and any securities to be
offered so as to enable an investor to decide to purchase any
securities, as the expression may be varied in that Member State by
any measure implementing the Prospectus Directive in that Member
State and the expression "Prospectus Directive" means Directive
2003/71/EC (and any amendments thereto including the 2010 PD
Amending Directive to the extent implemented in each Relevant
Member State) and includes any relevant implementing measure in
each Relevant Member State and the expression "2010 PD Amending
Directive" means Directive 2010/73/EU.
United Kingdom
This
prospectus is not an approved prospectus for purposes of the UK
Prospectus Rules, as implemented under the EU Prospectus Directive
(2003/71/EC), and has not been approved under section 21 of
the Financial Services and Markets Act 2000 (as amended) (the
"FSMA") by a person authorized under FSMA. The financial promotions
contained in this prospectus is directed at, and this prospectus is
only being distributed to, (1) persons who receive this
prospectus outside of the United Kingdom, and (2) persons in
the United Kingdom who fall within the exemptions under
articles 19 (investment professionals) and 49(2)(a) to
(d) (high net worth companies, unincorporated associations,
etc.) of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005 (all such persons together being referred to
as "Relevant Persons"). This prospectus must not be acted upon or
relied upon by any person who is not a Relevant Person. Any
investment or investment activity to which this prospectus relates
is available only to Relevant Persons and will be engaged in only
with Relevant Persons. This prospectus and its contents are
confidential and should not be distributed, published or reproduced
(in whole or in part) or disclosed by recipients to any other
person that is not a Relevant Person.
Each of
the underwriters has represented, warranted and agreed
that:
(a) it
has only communicated or caused to be communicated and will only
communicate or cause to be communicated any invitation or
inducement to engage in investment activity (within the meaning of
section 21 of the FSMA in connection with the issue or sale of
any of the securities in circumstances in which section 21(1)
of the FSMA does not apply to the issuer;
and
(b) it
has complied with and will comply with all applicable provision of
the FSMA with respect to anything done by it in relation to the
securities in, from or otherwise involving the United
Kingdom.
100
Sichenzia
Ross Ference Kesner LLP, New York, NY, has acted as our counsel in
connection with this offering and will pass upon the validity of
the securities offered by this prospectus. Schiff Hardin LLP,
Washington, DC, is representing the underwriters.
The
consolidated financial statements of Brekford as of
December 31, 2016 and December 31, 2015, and for each of
the two years in the period ended December 31, 2016, included
elsewhere in this prospectus have been so included in reliance on
the reports of independent registered public accounting firms,
BD & Company, Inc. (“BD & Company”)
during fiscal 2016 and Stegman & Company during fiscal
year 2015, given on the authority of said firms as experts in
auditing and accounting.
BD &
Company, independent registered public accounting firm, has audited
the consolidated financial statements of KeyStone Solutions, Inc.
and Subsidiaries as of and for each of the years ended
December 31, 2016 and 2015, as set forth in their report. We
have included the consolidated financial statements of KeyStone
Solutions, Inc. and Subsidiaries elsewhere in this prospectus in
reliance on BD & Company’s report, given on their
authority as experts in accounting and auditing.
BD &
Company, independent registered public accounting firm, has audited
the combined financial statements of Firestorm Solutions, LLC and
Affiliate as of and for the years ended December 31, 2016 and
2015, as set forth in their report. We have included the combined
financial statements of Firestorm Solutions, LLC and Affiliate
elsewhere in this prospectus in reliance on BD &
Company’s report, given on their authority as experts in
accounting and auditing.
BD &
Company, independent registered public accounting firm, has audited
the financial statements of Global Technical Services, Inc. and
Global Contract Professionals, Inc. as of and for the years ended
December 31, 2016 and 2015, as set forth in their report. We
have included the financial statements of Global Technical
Services, Inc. and Global Contract Professionals, Inc. elsewhere in
this prospectus in reliance on BD & Company’s
report, given on their authority as experts in accounting and
auditing.
RSM US
LLP, independent registered public accounting firm, has audited the
financial statements of NeoSystems, Corp. as of and for the years
ended December 31, 2016 and 2015, as set forth in their
report. We have included the financial statements of NeoSystems,
Corp. elsewhere in this prospectus in reliance on RSM US
LLP’s report, given on their authority as experts in
accounting and auditing.
We have
filed with the SEC a registration statement on Form S-1 under
the Securities Act with respect to the shares of common stock
offered hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set
forth in the registration statement or the exhibits filed
therewith. For further information about us and our common stock
offered hereby, reference is made to the registration statement and
the exhibits filed therewith. Statements contained in this
prospectus regarding the contents of any contract or any other
document that is filed as an exhibit to the registration statement
are not necessarily complete, and in each instance we refer you to
the copy of such contract or other document filed as an exhibit to
the registration statement. We are
subject to the information and periodic reporting requirements of
the Exchange Act and, in accordance therewith, we file periodic
reports, proxy statements and other information with the
SEC. A copy of the registration statement and the
exhibits filed therewith may be inspected without charge at the
public reference room maintained by the SEC, located at 100 F
Street, NE, Washington, D.C. 20549, and copies of all or any part
of the registration statement may be obtained from that office.
Please call the SEC at 1-800-SEC-0330 for further information about
the public reference room. The SEC also maintains a website that
contains reports, proxy and information statements, and other
information regarding registrants that file electronically with the
SEC. The address of the website is www.sec.gov. We also maintain a
website at www.novume.com, at which you may access these materials
free of charge as soon as reasonably practicable after they are
electronically filed with, or furnished to, the SEC. Information
contained on our website is not a part of this prospectus and the
inclusion of our website address in this prospectus is an inactive
textual reference only.
101
INDEX TO FINANCIAL
STATEMENTS
Novume Solutions,
Inc. and Subsidiaries Financial Statements for the Three and Nine
Months Ended September 30, 2017 and 2016 (unaudited)
|
F-2
|
Global Technical
Services, Inc. Financial Statements for the Three and Nine Months
Ended September 30, 2017 and 2016 (unaudited)
|
F-29
|
Global Contract
Professional, Inc. Financial Statements for the Three and Nine
Months Ended September 30, 2017 and 2016 (unaudited)
|
F-40
|
NeoSystems, Corp.
Financial Statements for the Three and Nine Months Ended September
30, 2017 and 2016 (unaudited)
|
F-50
|
Novume Solutions,
Inc. and Subsidiaries Financial Statements for the Years Ended
December 31, 2016 and 2015
|
F-65
|
Brekford Traffic
Safety, Inc. Financial Statements for the Years Ended December 31,
2016 and 2015
|
F-88
|
Firestorm
Solutions, LLC and Affiliate Financial Statements for the Years
Ended December 31, 2016 and 2015
|
F-117
|
Global Technical
Services, Inc. Financial Statements for the Years Ended December
31, 2016 and 2015
|
F-127
|
Global Contract
Professionals, Inc. Financial Statements for the Years Ended
December 31, 2016 and 2015
|
F-139
|
NeoSystems, Corp.
Financial Statements for the Years Ended December 31, 2016 and
2015
|
F-150
|
F-1
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed
Consolidated Balance Sheets at September 30, 2017 and
December 31, 2016 (Unaudited)
|
F-3
|
Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2017 and 2016 (Unaudited)
|
F-4
|
Condensed
Consolidated Statement of Changes in Redeemable Convertible
Preferred Stock and Shareholders’ Deficit for the Period
Ended September 30, 2017 (Unaudited)
|
F-5
|
Condensed
Consolidated Statements of Cash Flows for the Three and Nine Months
Ended September 30, 2017 and 2016 (Unaudited)
|
F-6
|
Notes
to Unaudited Condensed Consolidated Financial
Statements
|
F-7
|
F-2
Novume Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
|
September
30,
2017
|
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
|
|
|
|
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
|
-
|
-
|
Total
Stockholders’ Equity
|
6,331,210
|
1,546,654
|
Total
Liabilities and Stockholders’ Equity
|
$15,415,054
|
$5,482,725
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-3
Novume Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(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
|
(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.
F-4
Novume Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’
Equity (Unaudited)
|
Shares
of Common Stock
|
Common
Stock
|
Additional
Paid-In Capital
|
Retained
Earnings
|
Total
Stockholders’ Equity (Accumulated
Deficit)
|
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.
F-5
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 liabilities
|
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.
F-6
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.
F-7
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.
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;
F-8
●
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.
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 acquisition,
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.
F-9
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.
|
For the three months
ended September 30,
|
For the nine months
ended September 30,
|
||
|
2017
|
2016
|
2017
|
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
|
F-10
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.
F-11
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.
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 facilities
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.
F-12
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.
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.
F-13
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.
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.
F-14
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. The Company has concluded that its Series A
Preferred Stock is a Level 3 financial instrument and that the fair
value approximates the carrying value due to the proximity of the
date of the sale of the Series A Preferred Stock to independent
third-parties as compared to September 30, 2017. There were no
changes in levels during the three or nine months ended September
30, 2017 and the Company did not have any financial instruments
prior to 2016.
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.
On August 28, 2017,
the Company issued a 1.9339-to-1 stock split related to its
acquisition of Brekford Traffic Safety, Inc. The per share counts
have been updated to show the effect of the splits on earnings per
share as if the split occurred at the beginning of both years for
the quarterly financial statements of the Company. The impact of
the stock split is also shown on the Company’s Statement of
Changes in Stockholders’ Equity.
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.
F-15
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.
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.
F-16
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. We
are 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.
F-17
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 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.
F-18
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.
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)
|
$-
|
F-19
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.
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 covenants 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 prospectus. 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.
F-20
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.
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
|
F-21
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.
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.The Company issued
a 1.9339-to-1 stock split related to its acquisition of Brekford
Traffic Safety, Inc. The per share counts have been updated to show
the effect of the splits on earnings per share as if the split
occurred at the beginning of both years for the quarterly financial
statements of the Company. The impact of the stock split is also
shown on the Company’s Statement of Changes in
Stockholders’ Equity.
F-22
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 Regulation A 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
Regulation A 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 Regulation A
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 Regulation A 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 Regulation A 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 Regulation A
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 recded through additional
paid in captial.
As of
September 30, 2017, 502,327 shares of Series A Preferred Stock were
issued and outstanding.
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.
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.
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
|
F-23
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.
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.
F-24
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:
|
Number of Shares
Subject to Option
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Term
|
Aggregate
Intrinsic 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.
F-25
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
|
2016
|
2017
|
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
|
-
|
On August 28, 2017,
the Company issued a 1.9339-to-1 stock split related to its
acquisition of Brekford Traffic Safety, Inc. The per share counts
have been updated to show the effect of the splits on earnings per
share as if the split occurred at the beginning of both years for
the quarterly financial statements of the Company. The impact of
the stock split is also shown on the Company’s Statement of
Changes in Stockholders’ Equity.
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.
F-26
(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.
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
|
2016
|
2017
|
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
|
-
|
473,174
|
-
|
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.
F-27
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.
F-28
GLOBAL TECHNICAL SERVICES, INC.
Index to Financial Statements
Condensed
Balance Sheets at September 30, 2017 and December 31,
2016
|
F-30
|
Condensed
Statements of Operations for the Three Month and Nine Month Ended
September 30, 2017 and 2016
|
F-31
|
Condensed
Statements of Members’ Deficit for the Nine Month Ended
September 30, 2017
|
F-32
|
Condensed
Statements of Cash Flows for the Nine Month Ended September 30,
2017 and 2016
|
F-33
|
Notes
to Condensed Financial Statements
|
F-34
|
F-29
GLOBAL TECHNICAL SERVICES, INC.
CONDENSED BALANCE SHEETS (UNAUDITED)
|
September 30, 2017
|
December 31, 2016
|
ASSETS
|
|
|
Current
assets
|
|
|
Cash
|
$ 14,447
|
$ 43,239
|
Accounts receivable
- trade
|
3,069,200
|
2,337,461
|
Accounts receivable
- other
|
34,092
|
12,295
|
Employee
advances
|
70,633
|
84,008
|
Notes
Receivable
|
645,505
|
564,537
|
Interest
Receivable
|
23,231
|
19,628
|
Prepaid
expenses
|
24,859
|
214,659
|
Total current
assets
|
3,881,967
|
3,275,827
|
|
|
|
Property and
equipment
|
|
|
Autos
|
41,687
|
41,687
|
Furniture and
Equipment
|
726,748
|
723,958
|
Leasehold
improvements
|
135,485
|
135,485
|
|
903,920
|
901,130
|
Less accumulated
depreciation
|
(813,462)
|
(778,382)
|
Total property and
equipment
|
90,458
|
122,748
|
|
|
|
Total
assets
|
$ 3,972,425
|
$ 3,398,575
|
|
|
|
LIABILITIES AND
STOCKHOLDERS' DEFICIT
|
|
|
Current
liabilities
|
|
|
Accounts
payable
|
$ 197,483
|
$ 91,173
|
Accrued
expenses
|
406,405
|
347,275
|
Accrued
interest
|
98,552
|
69,940
|
Note payable -
current portion
|
583,001
|
421,193
|
Line of
credit
|
2,431,539
|
2,074,115
|
Total current
liabilities
|
3,716,980
|
3,003,696
|
Long-term
liabilities
|
|
|
Note payable - net
of current portion
|
596,197
|
682,897
|
Total long-term
liabilities
|
596,197
|
682,897
|
|
|
|
Total
liabilities
|
4,313,177
|
3,686,593
|
|
|
|
Stockholders'
(deficit) equity
|
|
|
Capital Stock,
$0.10 par value; 1,000,000 shares authorized, 100,000 shares
issued, 44,050 shares outstanding at December 31, 2016 and
2015
|
10,000
|
10,000
|
Additional
paid-in-capital
|
565,984
|
565,984
|
Treasury stock,
55,950 shares as of December 31, 2016 and 2015
|
(4,464,860)
|
(4,464,860)
|
Retained
earnings
|
3,548,124
|
3,600,858
|
Total
stockholders’ deficit
|
(340,752)
|
(288,018)
|
|
|
|
Total liabilities
and stockholders' deficit
|
$ 3,972,425
|
$ 3,398,575
|
See accompanying notes to the financial statements
F-30
GLOBAL TECHNICAL SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
|
Three Months ended September 30,
|
Nine Months ended September 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Sales
|
$ 4,058,559
|
$ 4,242,285
|
$ 13,650,759
|
$ 13,632,070
|
Cost of
sales
|
3,611,311
|
3,744,276
|
12,193,454
|
12,127,648
|
Gross
profit
|
447,248
|
498,009
|
1,457,305
|
1,504,422
|
|
|
|
|
|
Selling, general
and administrative expenses
|
449,387
|
521,838
|
1,334,855
|
1,435,701
|
|
|
|
|
|
Operating
income/(loss)
|
(2,139)
|
(23,829)
|
122,450
|
68,721
|
|
|
|
|
|
Other
income/(expense)
|
|
|
|
|
Interest expense,
net
|
(91,038)
|
(23,308)
|
(186,166)
|
(65,697)
|
Other income,
net
|
8,530
|
1,173
|
10,982
|
2,583
|
Other expense,
net
|
(82,508)
|
(22,135)
|
(175,184)
|
(63,114)
|
Net
income/(loss)
|
$ (84,647)
|
$ (45,964)
|
$ (52,734)
|
$ 5,607
|
See accompanying notes to the financial statements
F-31
GLOBAL TECHNICAL SERVICES, INC.
CONDENSED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ DEFICIT (UNAUDITED)
|
Shares of Common Stock
|
Common Stock
|
Shares of Treasury Stock
|
Treasury Stock
|
Additional Paid-In Capital
|
Retained Earnings
|
Total Stockholders’ Deficit
|
Balance
as of January 1, 2017
|
44,050
|
$ 10,000
|
55,950
|
$ (4,464,860)
|
$ 565,984
|
$ 3,600,858
|
$ (288,018)
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(52,734)
|
(52,734)
|
Balance
as of September 30, 2017
|
44,050
|
$ 10,000
|
55,950
|
$ (4,464,860)
|
$ 565,984
|
$ 3,548,124
|
$ (340,752)
|
See accompanying notes to the financial statements
F-32
GLOBAL TECHNICAL SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
For
the Nine Months ended September 30, 2017
|
For
the Nine Months ended September 30, 2016
|
Cash flows from
operating activities
|
|
|
Net
income/(loss)
|
$ (52,734)
|
$ 5,607
|
Adjustments to
reconcile net income/(loss) to cash used in operating
activities
|
|
|
Depreciation and
amortization
|
35,080
|
50,294
|
(Increase) decrease
in:
|
|
|
Accounts
receivables - trade
|
(731,740)
|
(661,209)
|
Accounts
receivables - other
|
(20,654)
|
3,649
|
Employee
advances
|
12,232
|
30,712
|
Interest
receivable
|
(3,603)
|
(1,996)
|
Prepaid
expenses
|
189,801
|
(30,460)
|
Increase (decrease)
in:
|
|
|
Accounts
payable-trade
|
106,309
|
(45,528)
|
Accrued
expenses
|
59,129
|
194,555
|
Accrued
interest
|
28,612
|
(12,793)
|
Total
adjustments
|
(324,834)
|
(472,776)
|
Net cash used in
operating activities
|
(377,568)
|
(467,169)
|
Cash flows from
investing activities
|
|
|
Purchase of
property and equipment
|
(2,790)
|
(11,304)
|
Collections on
notes receivable
|
305,885
|
682,671
|
Advances on notes
receivable
|
(386,852)
|
(755,258)
|
Net cash used in
investing activities
|
(83,757)
|
(83,891)
|
Cash flows from
financing activities
|
|
|
Proceeds of
short-term borrowings
|
14,478,187
|
13,528,133
|
Repayment of
short-term borrowings
|
(14,120,763)
|
(13,032,144)
|
Proceeds of notes
payable
|
307,167
|
239,073
|
Repayment of notes
payable
|
(232,058)
|
(221,237)
|
Net cash provided
by financing activities
|
432,533
|
513,825
|
Net decrease in
cash
|
(28,792)
|
(37,235)
|
Cash, beginning of
year
|
43,239
|
60,369
|
Cash, end of
year
|
$ 14,447
|
$ 23,134
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
Cash paid for
income taxes
|
$ 6,632
|
$ 5,016
|
Cash paid for
interest
|
$ 186,157
|
$ 87,696
|
See accompanying notes to the financial statements
F-33
GLOBAL TECHNICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2017 and 2016
NOTE 1 – NATURE OF BUSINESS
Global
Technical Services, Inc. (the Company) was organized and chartered
in 1989, in the state of Texas, as a corporation for the purpose of
providing temporary contract professional and skilled labor to
businesses throughout the United States. Contracts to provide such
services vary in length, usually less than one year. The
Company’s corporate offices are located in Fort Worth,
Texas.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A
summary of the Company’s significant accounting policies
consistently applied in the preparation of the accompanying
financial statements follows:
Basis of accounting
The
accounts are maintained and the financial statements have been
prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles (GAAP).
Cash and cash equivalents
For
purposes of the statements of cash flows, the Company considers all
short-term investments purchased with an original maturity of three
months or less to be cash equivalents. At September 30, 2017 and
December 31, 2016, the Company had no such investments included in
cash.
Accounts receivable
The
Company performs ongoing credit evaluations of its customers’
financial conditions and extends credit to virtually all of its
customers on an uncollateralized basis. Customers are headquartered
throughout the United States and operate primarily within the
aerospace and defense industries.
Accounts receivable are stated at cost, net of any allowance for
doubtful accounts. The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the failure of
customers to make required payments. The Company reviews the
accounts receivable on a periodic basis and establishes allowances
where there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable
balances, the Company considers many factors including the age of
the balance, the customer’s payments history, its current
credit-worthiness, and current economic trends. As of September 30,
2017 and December 31, 2016 the Company deems all receivables as
collectible.
Accounts receivable at September 30, 2017 and December 31, 2016
include $286,868 and $188,415 in unbilled contracts respectively
related to work performed in the month in which the receivable was
recorded. These amounts were billed in the respective subsequent
months.
Revenue Recognition
The
Company recognizes revenues for the performance of services when
persuasive evidence of an arrangement exists, service 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 derives revenues from fees for services
generated on a project basis. Revenues are recognized based on the
number of hours worked by the employees or consultants at an
agreed-upon rate per hour per the Company’s contracts or
purchase orders.
Property and equipment
Property
and equipment is stated at cost. Depreciation of property and
equipment is provided on the double-declining balance method over
the estimated useful lives as follows:
Autos
|
5
Years
|
Furniture
and equipment
|
5-7
Years
|
Leasehold
improvements
|
15
Years
|
Repairs
and maintenance are expensed as incurred; expenditures for
additions, improvements and replacements are capitalized.
Depreciation expense for the three months ended September 30, 2017
and 2016 was $11,445 and $16,902, respectively, and for the nine
months ended September 30, 2017 and 2016 was $35,080 and $50,294,
respectively.
F-34
Treasury stock
Treasury
stock is shown at cost and consists of 55,950 shares of the Company
common stock at September 30, 2017 and December 31,
2016.
Income taxes
The
Company has adopted the liability method of accounting for income
taxes in accordance with Account Standards Codification (ASC) 740,
“Accounting for Income
Taxes”. Deferred income taxes are recognized for
temporary differences between financial statement and income tax
basis of assets and liabilities and net operating loss
carry-forwards for which tax benefits will be realized in future
years.
Profit sharing plan
The
Company has a 401(k) deferred compensation plan for all eligible
employees. Active participants may elect to have the Company make
salary reduction contributions on their behalf based on a
percentage of their earnings, not to exceed 25% in 2017 and 2016.
The Company has the option of making annual discretionary
contributions to the plan up to a predetermined limit. For the
three and nine month ended September 30, 2017, the Company made no
contributions to the plan. The Company terminated the 401(k) plan
January 31, 2017.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense
for the three months ended September 30, 2017 and 2016 was $11,813
and $8,408, respectively, and for the nine months ended September
30, 2017 and 2016 was $31,194 and $36,063,
respectively.
Use of estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
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 combined financial statements to
determine if there is sufficient cash on hand and working capital
to operate for a period of at least one year from the date the
combined financial statements are issued or available to be issued,
which is referred to as the “look-forward period”, as
defined in generally accepted accounting principles. As part of
this assessment, based on conditions that are known and reasonably
knowable, 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, and its ability to delay or curtail expenditures or
programs, 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
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 U.S. 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.
F-35
In
August 2015, the Financial Accounting Standards Board issued
Accounting Standards Update (“ASU”) 2015-14,
Revenue from Contracts with
Customers—Deferral of the Effective Date, which defers
by one year the mandatory effective date of its revenue recognition
standard, and provides entities the option to adopt the standard as
of the original effective date. The new standard is now effective
for annual reporting periods beginning after December 15,
2017, and interim periods within those annual periods. Early
adoption is now permitted, but not before the original effective
date. The Company is currently evaluating the impact, if any, this
new standard will have on its combined financial statements, when
the Company will adopt the new standard, and the method of
adoption.
In
August 2014, the Financial Accounting Standards Board 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.
Subsequent events
The
Company has evaluated subsequent events through December 13, 2017,
which is the date the combined financial statements were available
to be issued. See Note 10.
NOTE 3 -- LIQUIDITY
For the
three and nine months ended September 30, 2017, the Company
generated a net loss of $84,647 and $52,734, respectively. The
company used $377,568 of cash for continuing operations during the
nine month period ended September 30, 2017. Additionally, at
September 30, 2017 the company had cash available of $14,447 and
working capital of $164,987.
On
September 21, 2017, the Company entered into a Purchase Agreement
to be acquired by Novume Solutions Inc. Upon closing of the
acquisition, the Company will become a wholly-owned subsidiary of
Novume Solutions, Inc., a Delaware corporation
(“Novume”). For additional detail regarding this
transaction, refer to Subsequent Events (Note 10).
Management
believes that the Company’s current level of cash combined
with cash that it expects to generate in its operations during the
next 12 months including anticipated new customer contracts will be
sufficient to sustain the Company’s business initiatives
through at least December 31, 2018, but there can be no assurance
that these measures will be successful or adequate. In the event
that the Company’s cash reserves and cash flow from
operations are not sufficient to fund the Company’s future
operations, the Company may need to obtain additional capital and
rely on Novume Solutions, Inc.
NOTE 4 -- NOTES PAYABLE
Notes
payable as of September 30, 2017 and December 31, 2016, consisted
of the following:
|
September
30, 2017
|
December
31, 2016
|
G&W
Ventures
|
$ 953,722
|
$ 953,722
|
Ally
Financial
|
8,193
|
13,894
|
Bank
Direct
|
-
|
49,440
|
SBC Insurance
Agency
|
-
|
87,034
|
Fora
Financial
|
169,171
|
-
|
Legend
Bank
|
48,112
|
-
|
Total Current Notes
Payable
|
1,179,198
|
1,104,090
|
Less: Current
Maturities of Long-Term Debt
|
(583,001)
|
(421,193)
|
Notes Payable, Less
Current Maturities
|
$ 596,197
|
$ 682,897
|
F-36
The
Company has an outstanding notes payable to G&W Ventures, Inc.
that carries an interest rate of 4% per annum and requires monthly
interest payments of $11,137. The note payable is secured by
Company stock and a life insurance policy. The principal balance at
September 30, 2017 and December 31, 2016 totaled
$953,722.
On
September 26, 2013, the Company entered into a note agreement with
Ally Financial in the amount of $38,000 for the purchase of an
automobile. The note matures on October 11, 2018. Payments of
principal and interest at 0.00% are due and payable monthly
beginning November 11, 2013. The principal balance at September 30,
2017 and December 31, 2016 totaled $8,193 and $13,894,
respectively. Principal payments made in 2017 and 2016 totaled
$5,701 and $7,613.
On
October 1, 2015, the Company entered into a note agreement with
Bank Direct Capital Finance in the amount of $23,212. The note was
unsecured and matured on July 1, 2016. Payments of principal and
interest at 7.4% were due and payable monthly beginning November 1,
2015. Principal payments made in 2016 totaled $7,595.
On
October 1, 2015, the Company entered into a note agreement with SBC
Insurance Agency in the amount of $208,014. The note was unsecured
and matured on June 1, 2016. Payments of principal were due and
payable monthly beginning November 1, 2015. Principal payments made
in 2016 $145,612.
On
October 1, 2016, the Company entered into a note agreement with
Bank Direct Capital Finance in the amount of $74,022. The note
matured on July 1, 2017. Payments of principal and interest at 7.0%
were due and payable monthly beginning November 1, 2016. The
principal balance at December 31, 2016 totaled $49,440. Principal
payments made in 2017 and 2016 totaled $49,440 and $24,582,
respectively. Payment of the note payable is
unsecured.
On
October 1, 2016, the Company entered into a note agreement with SBC
Insurance Agency in the amount of $111,905. The note matures on
July 1, 2017. Payments of principal are due and payable monthly
beginning November 1, 2016. The principal balance at December 31,
2016 totaled $87,034. Principal payments made in 2017 and 2016
totaled $87,034 and $24,871.
The
future debt service requirements are as follows:
2017
|
$ 583,001
|
2018
|
114,839
|
2019
|
112,978
|
2020
|
117,580
|
2021 and
thereafter
|
250,800
|
|
$ 1,179,198
|
NOTE 5 -- LINE OF CREDIT – BANK
As of
December 31, 2016, the Company renewed a revolving line of credit
with Wells Fargo Capital Finance (WFCF). Advances from WFCF are due
on December 31, 2017 with interest at the LIBOR plus 3% payable
monthly. Payment of the revolving line of credit is secured by the
accounts receivable of the Company. The principal balance at
September 30, 2017 and December 31, 2016 totaled $2,431,539 and
$2,074,115, respectively.
As part
of the Line of Credit Agreement, the Company must maintain certain
financial covenants. The Company met all financial covenant
requirements during and as of the months ended September 30, 2017
and December 31, 2016.
NOTE 6 -- RELATED PARTY TRANSACTIONS
Employee advances
The
Company had outstanding employee advances to officers of $70,633
and $84,008 as of September 30, 2017 and December 31, 2016,
respectively.
Revolving line of credit
On
January 5, 2004, the Company granted a revolving line of credit in
the amount of $1,000,000 to Global Contract Professionals, Inc.
(“GCP”), a related party through common ownership.
Advances to GCP are due annually with interest at prime + ½%
payable monthly. The principal balance at September 30, 2017 and
December 31, 2016 was $645,505 and $564,537 respectively and was
recorded as notes receivable on the Company’s balance sheet.
The Company has recorded interest income receivable of $23,231 and
$19,628 as of September 30, 2017 and December 31, 2016,
respectively from GCP.
F-37
Reimbursement for expenses
The
Company received reimbursement from GCP for various expenses during
2017 and 2016 in the amounts of $83,333 and $134,744,
respectively.
NOTE 7 -- LEASES
The
Company conducts its operations from facilities that are leased
under a 24-month operating lease, with payments of $14,758 per
month through March 2016. In March of 2015 the company reduced
lease space and extended its lease through March 2018 with payments
of $12,559 per month. In June of 2016 the Company reduced lease
space and adjusted rent payment to $10,085.
In
March 2017 the Company renegotiated the lease for four months of
zero rent and extended the lease to expire March 31,
2021.
In
March 2015 the Company increased the sublease base rent with GCP to
$1,960 per month. An additional amount equal to the percentage of
total paychecks processed multiplied by $6,816 (the remaining
unallocated rent of $12,559) is due monthly.
In June
2016 the Company renegotiated the sublease with GCP for the
facilities to $3,516 per month. An additional amount equal to the
percentage of total paychecks processed multiplied by $3,054 (the
remaining unallocated rent of $10,085) is due monthly.
Rent
expense for the three months ended September 30, 2017 and 2016 was
$18,823 and $15,652, respectively, and for the nine months ended
September 30, 2017 and 2016 was $32,142 and $53,129,
respectively.
Rental
income from the sublease to GCP during the three months ended
September 30, 2017 and 2016 was $11,992 and $15,127, respectively
and for the nine months ended September 30, 2017 and 2016 was
$19,779 and $66,696, respectively.
Minimum
rental payments net of rental income required under the above
operating leases are as follows:
2017
|
$ 10,548
|
2018
|
42,192
|
2019
|
42,192
|
2020
|
42,192
|
2021
|
10,548
|
|
$ 147,672
|
NOTE 8 -- INCOME TAXES
The
Company has elected to be taxed under provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does
not pay federal corporate income taxes on its taxable income and is
not allowed a net operating loss carryover or carry back as a
deduction. Instead, the stockholders are liable for individual
federal income taxes on their respective shares of the
Company’s taxable income or include their respective shares
of the Company’s net operating loss in their individual
income tax returns.
Income
taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for differences
between the basis of assets and liabilities for financial statement
and income tax purposes. The differences relate primarily to
depreciable assets (use of different depreciation methods and lives
for financial statement and income tax purposes) and state income
taxes (which are accrued for book purposes but deducted for tax
purposes in the year paid) and contribution carryovers (which are
deducted for book purposes when paid but are limited to 10% of
taxable income for tax purposes). The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.
The Company did not provide any current or deferred income tax
provision or benefit for the current year because it has
experienced operating losses since its incorporation. The Company
provides a full valuation allowance on its net deferred tax asset,
consisting primarily of net operating loss carry-forwards because
management has not yet determined that it is more likely than not
that the Company will earn income sufficient to realize the
deferred tax asset during the carry-forward period.
The
differences between actual income tax expense and the tax provision
computed by applying the statutory federal income tax rate to
earnings before income taxes are attributable to the
following:
F-38
|
September
30, 2017
|
December
31, 2016
|
Deferred Tax
Assets
|
|
|
Charity
Carryforward
|
$ 89,277
|
$ 89,277
|
NOL
|
346,960
|
329,946
|
Deferred Tax
Liabilities
|
|
|
Fixed
Assets
|
20,320
|
18,700
|
Net Deferred Tax
Assets
|
456,557
|
437,923
|
Less: Valuation
Allowance
|
(456,557)
|
(437,923)
|
Net Deferred Tax
Asset
|
$ -
|
$ -
|
NOTE 9 -- CONCENTRATION OF CREDIT RISK
The
Company operates within the aerospace and defense industries.
Accordingly, the risk exists that the ability to collect amounts
due from customers could be affected by economic fluctuations in
these markets and industries. The Company does not believe,
however, that it is subject to any unusual credit risk beyond the
normal credit risk attendant to operating the business.
Historically, credit losses have not been significant.
The
Company has one customer in 2017 and in 2016, which combined,
accounted for approximately 9% and 59% of the Company’s total
sales during 2017 and 2016, respectively. The amount due from these
customers, included in accounts receivable, was $1,947,407 and
$1,535,128, or approximately 68% and 59% of the balances, at
September 30, 2017 and December 31, 2016,
respectively.
NOTE 10 -- SUBSEQUENT EVENTS
On
September 21, 2017 the Company entered into a Equity Purchase
Agreement with Novume Solutions, Inc. in the amount of
approximately $3,750,000. This purchase agreement closed on October
1, 2017.
F-39
GLOBAL CONTRACT PROFESSIONAL, INC.
Index to Financial Statements
Condensed
Balance Sheets at September 30, 2017 and December 31,
2016
|
F-41
|
Condensed
Statements of Operations for the Three Month and Nine Month Ended
September 30, 2017 and 2016
|
F-42
|
Condensed
Statements of Members’ Deficit for the Nine Month Ended
September 30, 2017
|
F-43
|
Condensed
Statements of Cash Flows for the Nine Month Ended September 30,
2017 and 2016
|
F-44
|
Notes
to Condensed Financial Statements
|
F-45
|
F-40
GLOBAL CONTRACT PROFESSIONALS, INC.
|
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
September
30, 2017
|
December
31, 2016
|
ASSETS
|
||
Current
assets
|
|
|
Cash
|
$ 6,487
|
$ 28,458
|
Accounts receivable
- trade
|
1,015,056
|
525,304
|
Accounts receivable
- other
|
118
|
1,750
|
Prepaid
expenses
|
3,545
|
3,525
|
Total current
assets
|
1,025,206
|
559,037
|
Property and
equipment
|
|
|
Furniture and
equipment
|
137,215
|
137,215
|
Leasehold
improvements
|
11,604
|
11,604
|
|
148,819
|
148,819
|
Less accumulated
depreciation
|
(125,516)
|
(115,867)
|
Total property and
equipment
|
23,303
|
32,952
|
Other
assets
|
|
|
Deposits
|
9,241
|
9,241
|
Total other
assets
|
9,241
|
9,241
|
Total
assets
|
$ 1,057,750
|
$ 601,230
|
LIABILITIES AND
STOCKHOLDERS' DEFICIT
|
||
Current
liabilities
|
|
|
Accounts
payable
|
$ 9,396
|
$ 2,024
|
Accrued
expenses
|
185,534
|
54,142
|
Accrued interest -
related party
|
23,230
|
19,628
|
Note payable -
related party
|
645,505
|
564,537
|
Line of
credit
|
756,826
|
434,587
|
Total current
liabilities
|
1,620,491
|
1,074,918
|
Total
liabilities
|
1,620,491
|
1,074,918
|
Stockholders'
deficit
|
|
|
Capital Stock, $.01
par value; 1,000,000 shares authorized 44,050 shares issued and
outstanding
|
441
|
441
|
Accumulated
deficit
|
(563,182)
|
(474,129)
|
Total stockholders'
equity
|
(562,741)
|
(473,688)
|
Total liabilities
and stockholders' deficit
|
$ 1,057,750
|
$ 601,230
|
See accompanying notes to the financial statements
F-41
GLOBAL CONTRACT PROFESSIONALS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
|
Three Months ended September 30,
|
Nine Months ended September 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Sales
|
$ 1,731,155
|
$ 1,377,587
|
$ 4,936,613
|
$ 4,869,127
|
Cost of
sales
|
1,544,296
|
1,237,678
|
4,408,811
|
4,357,918
|
Gross
profit
|
186,859
|
139,909
|
527,802
|
511,209
|
Selling, general
and administrative expenses
|
188,752
|
249,417
|
542,020
|
689,923
|
Operating
loss
|
(1,893)
|
(109,508)
|
(14,218)
|
(178,714)
|
Other
expense
|
|
|
|
|
Interest
expense
|
(24,756)
|
(17,018)
|
(72,323)
|
(53,355)
|
Other expense,
net
|
(101)
|
(280)
|
(2,512)
|
(752)
|
Net
loss
|
$ (26,750)
|
$ (126,806)
|
$ (89,053)
|
$ (232,821)
|
|
|
|
|
|
See accompanying notes to the financial statements
F-42
GLOBAL CONTRACT PROFESSIONALS, INC.
|
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(UNAUDITED)
|
For the nine months ended September 30, 2017
|
|
Shares of Common Stock
|
Common Stock
|
Accumulated Deficit
|
Total Stockholders’ Deficit
|
Balance
as of January 1, 2017
|
44,050
|
$ 441
|
$ (474,129)
|
$ (473,688)
|
Net
loss
|
-
|
-
|
(89,053)
|
(89,053)
|
Balance
as of September 30, 2017
|
44,050
|
$ 441
|
$ (563,182)
|
$ (562,741)
|
See accompanying notes to the financial statements
F-43
GLOBAL CONTRACT PROFESSIONALS, INC.
|
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
For
the Nine Months ended September 30, 2017
|
For
the Nine Months ended September 30, 2016
|
Cash flows from
operating activities
|
|
|
Net
loss
|
$ (89,053)
|
$ (232,821)
|
Adjustments to
reconcile net income to cash provided by operating
activities
|
|
|
Depreciation and
amortization
|
9,649
|
14,363
|
Bad debt
expense
|
-
|
35,224
|
(Increase) decrease
in:
|
|
|
Accounts
receivables - trade
|
(489,750)
|
249,778
|
Accounts
receivables - other
|
1,631
|
6,500
|
Employee
advances
|
-
|
4,363
|
Prepaid
expenses
|
(19)
|
15,375
|
Increase (decrease)
in:
|
|
|
Accounts
payable-trade
|
7,370
|
(19,285)
|
Accrued
expenses
|
131,392
|
62,922
|
Accrued
interest
|
3,604
|
1,996
|
Total
adjustments
|
(336,123)
|
371,236
|
Net cash provided
by operating activities
|
(425,176)
|
138,415
|
Cash flows from
investing activities
|
|
|
Purchase of
property and equipment
|
-
|
(7,992)
|
Net cash used in
investing activities
|
-
|
(7,992)
|
Cash flows from
financing activities
|
|
|
Proceeds of
short-term borrowings
|
4,827,745
|
4,908,369
|
Repayment of
short-term borrowings
|
(4,505,506)
|
(5,114,971)
|
Proceeds of notes
payable
|
372,437
|
317,553
|
Repayment of notes
payable
|
(291,471)
|
(239,892)
|
Net cash used in
financing activities
|
403,205
|
(128,941)
|
Net decrease in
cash
|
(21,971)
|
1,482
|
Cash, beginning of
year
|
28,458
|
21,793
|
Cash, end of
year
|
$ 6,487
|
$ 23,275
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
$ 2,531
|
$ 2,500
|
|
$ 64,251
|
$ 51,359
|
See accompanying notes to the financial statements
F-44
GLOBAL CONTRACT PROFESSIONALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2017 and 2016
NOTE 1 – NATURE OF BUSINESS
Global
Contract Professionals, Inc. (the Company) was organized and
chartered on December 29, 2003, in the state of Texas, as a
corporation for the purpose of providing temporary contract
professional and skilled labor to businesses throughout the United
States. Contracts to provide such services vary in length, usually
less than one year. The Company’s corporate offices are
located in Fort Worth, Texas.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A
summary of the Company’s significant accounting policies
consistently applied in the preparation of the accompanying
financial statements follows:
Basis of accounting
The
accounts are maintained and the financial statements have been
prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles (GAAP).
Cash and cash equivalents
For
purposes of the balance sheet and statement of cash flows, the
Company considers all short-term investments purchased with an
original maturity of three months or less to be cash equivalents.
At September 30, 2017 and December 31, 2016, the Company had no
such investments included in cash.
Accounts receivable
The
Company performs ongoing credit evaluations of its customers’
financial conditions and extends credit to virtually all of its
customers on an uncollateralized basis. Customers are headquartered
throughout the United States and operate primarily within the
aerospace and defense industries.
Accounts receivable are stated at cost, net of any allowance for
doubtful accounts. The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the failure of
customers to make required payments. The Company reviews the
accounts receivable on a periodic basis and establishes allowances
where there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable
balances, the Company considers many factors including the age of
the balance, the customer’s payments history, its current
credit-worthiness, and current economic trends. As of September 30,
2017 and December 31, 2016, the Company deems all receivables as
collectible.
Accounts receivable at September 30, 2017 and December 31, 2016
$155,225 and $16,445 in unbilled contracts respectively related to
work performed in the year in which the receivable was recorded.
These amounts were billed in the respective subsequent
years.
Revenue Recognition
The
Company recognizes revenues for the performance of services when
persuasive evidence of an arrangement exists, service 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 derives revenues from fees for services
generated on a project basis. Revenues are recognized based on the
number of hours worked by the employees or consultants at an
agreed-upon rate per hour per the Company’s contracts or
purchase orders.
Property and equipment
Property
and equipment is stated at cost. Depreciation of property and
equipment is provided on the double-declining balance method over
the estimated useful lives as follows:
Autos
|
5
Years
|
Furniture
and equipment
|
5-7
Years
|
Leasehold
improvements
|
15
Years
|
F-45
Repairs
and maintenance are expensed as incurred; expenditures for
additions, improvements and replacements are capitalized.
Depreciation expense for the three months ended September 30, 2017
and 2016 was $3,172 and $4,868, respectively, and for the nine
months ended September 30, 2017 and 2016 was $9,649 and $14,363
respectively.
Profit sharing plan
The
Company has a 401(k) deferred compensation plan for all eligible
employees. Active participants may elect to have the Company make
salary reduction contributions on their behalf based on a
percentage of their earnings, not to exceed 25%. The Company has
the option of making annual discretionary contributions to the plan
up to a predetermined limit. For the three and nine month periods
ended September 30, 2017, the Company made no contributions to the
plan.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense
for the three months ended September 30, 2017 and 2016 was $5,564
and $13,860, respectively, and for the nine months ended September
30, 2017 and 2016 was $18,684 and $47,198
respectively.
Use of estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
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 combined financial statements to
determine if there is sufficient cash on hand and working capital
to operate for a period of at least one year from the date the
combined financial statements are issued or available to be issued,
which is referred to as the “look-forward period”, as
defined in generally accepted accounting principles. As part of
this assessment, based on conditions that are known and reasonably
knowable, 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, and its ability to delay or curtail expenditures or
programs, 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
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 U.S. 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
August 2015, the Financial Accounting Standards Board issued
Accounting Standards Update (“ASU”) 2015-14,
Revenue from Contracts with
Customers—Deferral of the Effective Date, which defers
by one year the mandatory effective date of its revenue recognition
standard, and provides entities the option to adopt the standard as
of the original effective date. The new standard is now effective
for annual reporting periods beginning after December 15,
2017, and interim periods within those annual periods. Early
adoption is now permitted, but not before the original effective
date. The Company is currently evaluating the impact, if any, this
new standard will have on its combined financial statements, when
the Company will adopt the new standard, and the method of
adoption.
F-46
In
August 2014, the Financial Accounting Standards Board 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.
Subsequent events
The
Company has evaluated subsequent events through December 13, 2017,
which is the date the combined financial statements were available
to be issued. See Note 11.
NOTE 3. – LIQUIDITY
For the
three and nine months ended September 30, 2017, the Company
generated net loss of $26,750 and $89,053, respectively. The
company used $425,176 of cash for continuing operations during the
nine months ended September 30, 2017. Additionally, at September
30, 2017 the company had cash available of $6,487 and a working
capital deficit of $595,285.
On
September 21, 2017, the Company entered into a Purchase Agreement
to be acquired by Novume Solutions Inc. Upon closing of the
acquisition, the Company will become a wholly-owned subsidiary of
Novume Solutions, Inc., a Delaware corporation
(“Novume”). For additional detail regarding this
transaction, refer to Subsequent Events (Note 11).
Management
believes that the Company’s current level of cash combined
with cash that it expects to generate in its operations during the
next 12 months, including anticipated new customer contracts, will
be sufficient to sustain the Company’s business initiatives
through at least December 31, 2018, but there can be no assurance
that these measures will be successful or adequate. In the event
that the Company’s cash reserves and cash flow from
operations are not sufficient to fund the Company’s future
operations, the Company may need to obtain additional capital and
rely on Novume Solutions, Inc.
NOTE 4 – LINE OF CREDIT – BANK
As of
December 31, 2016, the Company renewed a revolving line of credit
with Wells Fargo Capital Finance (WFCF). Advances from WFCF are due
on December 31, 2017 with interest at the LIBOR plus 3% payable
monthly. Payment of the revolving line of credit is secured by the
accounts receivable of the Company. The principal balance at
September 30, 2017 and December 31, 2016 totaled $756,826 and
$434,587, respectively.
As part
of the Line of Credit Agreement, the Company must maintain certain
financial covenants. The Company met all financial covenant
requirements during and as of the months ended September 30, 2017
and December 31, 2016.
NOTE 5 – RELATED PARTY TRANSACTIONS
Reimbursement for expenses
The
Company reimbursed Global Technical Services, Inc.
(“GTS”), a elated party through common ownership, for
various expenses during 2017 and 2016 in the amounts of $83,333 and
$134,744, respectively.
Revolving line of credit
As of
January 5, 2004, the Company secured a revolving line of credit in
the amount of $1,000,000 from GTS. Advances from GTS are due
annually with interest at prime + 1/2% payable monthly. The
principal balance at September 30, 2017 and December 31, 2016 was
$645,505 and $564,537, respectively and was recorded as notes
payable – related party on the Company’s balance sheet.
The Company has recorded interest expense payable of $23,230 and
$19,628 as of September 30, 2017 and December 31, 2016,
respectively.
F-47
Employee advances
The
Company had outstanding employee advances to officers of $0 and
$1,750 as of September 30, 2017 and December 31, 2016,
respectively.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
The
Company is a guarantor on a line of credit to GTS from a bank in
the amount of $3,000,000, with a balance at September 30, 2017 and
December 31, 2016 of $2,431,539 and $2,074,115, respectively. This
guarantee would require the Company to make required loan payments
to the bank in the event GTS is unable to do so.
NOTE 7 – CONCENTRATION OF CREDIT RISK
The
Company operates within the aerospace and defense industries.
Accordingly, the risk exists that the ability to collect amounts
due from customers could be affected by economic fluctuations in
these markets and industries. The Company does not believe,
however, that it is subject to any unusual credit risk beyond the
normal credit risk attendant to operating the business.
Historically, credit losses have not been significant.
The
Company has three customers, which combined, accounted for
approximately 78% and 77% of the Company’s total sales during
2017 and 2016, respectively. The amount due from these customers,
included in accounts receivable, was $647,391 and $503,114 or
approximately 74% and 91% of the balances, at September 30, 2017
and December 31, 2016, respectively.
NOTE 8 – INCOME TAXES
The
Company has elected to be taxed under provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does
not pay federal corporate income taxes on its taxable income and is
not allowed a net operating loss carryover or carry back as a
deduction. Instead, the stockholders are liable for individual
federal income taxes on their respective shares of the
Company’s taxable income or include their respective shares
of the Company’s net operating loss in their individual
income tax returns.
NOTE 9 – EQUITY
The
Company has authorized a total of 1,000,000 shares of $.01 par
value common stock. The Company issued 44,050 shares of voting
stock to stockholders. The number of shares issued and outstanding
at September 30, 2017 and December 31, 2016 is 44,050.
NOTE 10 – LEASES
The
Company conducts its operations from facilities that are subleased
from Global Technical Services. In March 2015 the Company increased
the sublease base rent with GTS to $1,960 per month. An additional
amount equal to the percentage of total paychecks processed
multiplied by $6,816 (the remaining unallocated rent of $12,559) is
due monthly.
In June
2016 the Company renegotiated the sublease with GTS for the
facilities to $3,516 per month. An additional amount equal to the
percentage of total paychecks processed multiplied by $3,054 (the
remaining unallocated rent of $10,085) is due monthly.
Net
rent expense for the three months ended September 30, 2017 and 2016
was $11,996 and $15,127, respectively, and for the nine months
ended September 30, 2017 and 2016 was $19,782 and $51,568,
respectively.
F-48
Minimum
rental payments required under the above operating lease are as
follows:
2017
|
$ 10,548
|
2018
|
42,192
|
2019
|
42,192
|
2020
|
42,192
|
2021
|
10,548
|
|
$ 147,672
|
NOTE 11 –SUBSEQUENT EVENTS
On
September 21, 2017 the Company entered into a Equity Purchase
Agreement with Novume Solutions, Inc. in the amount of
approximately $3,750,000. This purchase agreement closed on October
1, 2017.
F-49
NEOSYSTEMS, CORP.
Index to Condensed Financial Statements
Condensed Balance
Sheets as of September 30, 2017 and December 31, 2016
(Unaudited)
|
F-51
|
Condensed
Statements of Operations for the Three and Nine Months Ended
September 30, 2017 and 2016 (Unaudited)
|
F-52
|
Condensed
Statements of Stockholders’ Equity for the Period Ended
September 30, 2017 (Unaudited)
|
F-53
|
Condensed
Statements of Cash Flows for the Nine Months Ended September 30,
2017 and 2016 (Unaudited)
|
F-54
|
Notes to Unaudited
Condensed Financial Statements
|
F-55
|
F-50
NeoSystems, Corp.
Balance Sheets
|
September
30, 2017
|
December
31, 2016
|
Assets
|
|
|
Current
assets:
|
|
|
Cash and cash
equivalents
|
$ 2,022,078
|
$ 2,662,891
|
Investments
|
561,780
|
-
|
Accounts
receivable, net
|
7,408,726
|
5,540,963
|
Other receivables,
net
|
165,742
|
206,930
|
Other current
assets
|
813,026
|
822,265
|
Total current
assets
|
10,971,352
|
9,233,049
|
Property and
equipment, net
|
3,272,326
|
3,643,631
|
Other
assets
|
-
|
614,184
|
Total
assets
|
$ 14,243,678
|
$ 13,490,864
|
Liabilities and
Stockholders’ Equity
|
|
|
Current
liabilities:
|
|
|
Debt
|
$ 4,979,404
|
$ 4,491,941
|
Accounts payable
and accrued expenses
|
3,485,655
|
2,805,214
|
Other current
liabilities
|
126,136
|
408,074
|
Total current
liabilities
|
8,591,195
|
7,705,229
|
Long-term
liabilities:
|
|
|
Debt, net of
current portion
|
-
|
177,352
|
Deferred
rent
|
1,834,249
|
2,032,189
|
Deferred
compensation liability
|
446,678
|
266,223
|
Deferred Tax
Liability
|
342,620
|
383,645
|
Derivative
liability
|
471,470
|
471,470
|
Total long-term
liabilities
|
3,095,017
|
3,330,879
|
Total
liabilities
|
11,686,212
|
11,036,108
|
Stockholders’
equity:
|
|
|
Series A preferred
stock, $.001 par value, 778,432 shares authorized,
|
|
|
521,962 shares
issued and outstanding
|
522
|
522
|
Common stock, no
par value, 7,000,000 shares authorized, 3,507,419
|
|
|
and 3,499,919
shares issued and outstanding in 2016 and 2015,
respectively
|
3,591,903
|
3,427,654
|
Additional paid-in
capital
|
1,250,383
|
1,250,383
|
Accumulated
deficit
|
(2,285,342)
|
(2,223,803)
|
Total
stockholders’ equity
|
2,557,466
|
2,454,756
|
Total liabilities
and stockholders’ equity
|
$ 14,243,678
|
$ 13,490,864
|
See notes to financial statements.
F-51
NeoSystems, Corp.
Statements of Operations
|
Three-Months Ended September 30,
|
Nine-Months Ended September 30,
|
||
|
2017
|
2016
|
2017
|
2016
|
Revenue
|
$ 7,919,456
|
$ 8,163,580
|
$ 23,383,655
|
$ 22,480,170
|
Cost of
Revenue
|
2,959,506
|
3,284,060
|
8,564,289
|
8,945,847
|
Gross
margin
|
4,959,950
|
4,879,520
|
14,819,366
|
13,534,323
|
Selling, general
and administrative expenses
|
4,716,778
|
4,902,905
|
14,259,102
|
15,683,076
|
Income (Loss) from
operations
|
243,172
|
(23,385)
|
560,264
|
(2,148,753)
|
Other
income
|
6,356
|
7,035
|
13,725
|
21,158
|
Interest
expense
|
(194,826)
|
(296,199)
|
(676,553)
|
(890,445)
|
Income (loss)
before income taxes
|
54,702
|
(312,549)
|
(102,564)
|
(3,018,040)
|
Fair value
adjustment
|
-
|
806,568
|
-
|
806,568
|
Income tax
(provision) benefit
|
(22,083)
|
(15,746)
|
41,025
|
1,066,451
|
Net income
(loss)
|
$ 32,619
|
$ 478,273
|
$ (61,539)
|
$ (1,145,021)
|
See notes to financial statements
F-52
NeoSystems, Corp.
Statements of Stockholders’ Equity
Nine Months Ended September 30, 2017
|
Series
A Preferred Stock
|
Common
Stock
|
|
|
|
||
|
Shares
|
Amount
|
Shares
|
Amount
|
Common
Stock Additional Paid-in Capital
|
Accumulated
Deficit
|
Total
Stockholders’ Equity
|
Balance, December
31, 2016
|
521,962
|
$ 522
|
3,506,919
|
$ 3,427,654
|
$ 1,250,383
|
$ (2,223,803)
|
$ 2,454,756
|
Stock based
compensation
|
-
|
-
|
-
|
164,249
|
-
|
-
|
164,249
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(61,539)
|
(61,539)
|
Balance, September
30, 2017
|
521,962
|
$ 522
|
3,506,919
|
$ 3,591,903
|
$ 1,250,383
|
$ (2,285,342)
|
$ 2,557,466
|
See notes to financial statements.
F-53
NeoSystems, Corp.
Statements of Cash Flows
Nine Months Ended September 30, 2017 and September 30,
2017
|
2017
|
2016
|
Cash flows from
operating activities:
|
|
|
Net (loss)
income
|
$ (61,539)
|
$ (1,145,021)
|
Adjustments to
reconcile net (loss) income to net cash
|
|
|
(used in) provided
by operating activities:
|
|
|
Gain on fair value
of derivative liability
|
-
|
(806,568)
|
Reduction of note
receivable in exchange for subscription services
|
41,188
|
31,836
|
Bad debt
(recoveries) expense
|
58,150
|
(34,178)
|
Paid-in-kind
interest
|
45,261
|
55,072
|
Amortization of
debt discount and deferred charges
|
252,736
|
391,959
|
Depreciation and
amortization
|
1,023,689
|
943,799
|
Deferred
rent
|
(197,940)
|
(124,087)
|
Deferred income
taxes
|
(41,025)
|
(1,066,451)
|
Stock based
compensation
|
164,249
|
150,000
|
Changes in
operating assets and liabilities:
|
|
|
(Increase) decrease
in assets:
|
|
|
Accounts
receivable
|
(1,925,913)
|
1,108,480
|
Other
assets
|
9,539
|
(684,041)
|
Increase (decrease)
in liabilities:
|
|
|
Accounts payable
and accrued expenses
|
680,441
|
(882,236)
|
Deferred
compensation liability
|
180,455
|
188,534
|
Deferred
revenue
|
(175,425)
|
(61,766)
|
Other
liabilities
|
3,714
|
119,619
|
Net cash (used in)
provided by operating activities
|
57,580
|
(1,815,049)
|
Cash flows from
investing activities:
|
|
|
Contributions to
life insurance policy assets
|
(29,446)
|
(30,232)
|
Purchase of
property and equipment
|
(570,834)
|
(484,434)
|
Net cash used in
investing activities
|
(600,280)
|
(514,666)
|
Cash flows from
financing activities:
|
|
|
Exercise of stock
options
|
$ -
|
$ 9,280
|
Proceeds from draws
on line of credit
|
2,488,636
|
-
|
Principal payments
on notes payable
|
(2,473,617)
|
(1,238,448)
|
Principal payments
on capital lease obligations
|
(113,132)
|
(128,434)
|
Net cash used in
financing activities
|
(98,113)
|
(1,357,602)
|
Net decrease in
cash
|
(640,813)
|
(3,687,317)
|
Cash and cash
equivalents:
|
|
|
Beginning
|
2,662,891
|
6,163,998
|
Ending
|
$ 2,022,078
|
$ 2,476,681
|
Supplemental
disclosures of cash flow information:
|
|
|
Cash paid during
year for interest
|
$ 341,045
|
$ 443,414
|
Supplemental
schedule of noncash investing and financing
activities:
|
|
|
Accretion of
redemption value on Series A preferred stock
|
$ -
|
$ 93,775
|
Noncash
Transactions
|
|
|
Assets acquired by
capital leases
|
$ -
|
$ -
|
See notes to financial statements.
F-54
NeoSystems, Corp.
Notes to Financial Statements
Note
1.
Nature
of Business and Significant Accounting Policies
Nature of organization: NeoSystems, Corp. (NeoSystems or the
Company) was incorporated in the Commonwealth of Virginia on
January 28, 2003, and provides full-scope, on-site, business
accounting services to companies contracting with the federal
government as well as companies within other industries. NeoSystems
is headquartered in Tysons Corner, Virginia.
A
summary of the Company’s significant accounting policies
follows:
Basis of Presentation:
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America and Securities and Exchange Commission
(SEC) rules and regulations for interim reporting periods. The
financial statements do not include all disclosures normally made
in annual financial statements. These consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements for the fiscal year ended
December 31, 2016.
In
management’s opinion, all adjustments necessary for a fair
presentation of the results of operations, financial position and
cash flows for the periods shown have been made. All other
adjustments are of a normal recurring nature.
Cash and cash equivalents: The Company considers highly
liquid debt investments with an original maturity of less than
three months to be cash equivalents.
The
Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation (FDIC) covers $250,000 for substantially all
depository accounts. The Company from time to time may have amounts
on deposit in excess of the insured limits.
Accounts receivable: Accounts receivable are stated at the
amount management expects to collect from balances outstanding at
year-end. Unbilled receivables are included in accounts receivable
and include invoices that were billed subsequent to
year-end.
The
Company bases its allowance for doubtful accounts on a review of
current outstanding receivables, historical collection information
on its receivables, and existing economic conditions. The Company
provides for the amounts of receivables estimated to become
uncollectible in the future by maintaining an allowance for
doubtful accounts. This allowance was $358,015 and $319,984 at
September 30, 2017 and 2016, respectively. Accounts receivable are
written off when deemed uncollectible.
Billed
accounts receivable are considered past due if the invoice has been
outstanding more than 30 days. The Company does not charge interest
on past due amounts.
Prepaid software licenses and maintenance: The Company
purchases software licenses and maintenance on behalf of their
clients as part of their service offerings. The costs associated
with these licenses and maintenance agreements are amortized to
direct costs over the license or maintenance period.
Property and equipment: Property and equipment is stated at
cost less accumulated depreciation and amortization. Depreciation
and amortization of property and equipment is computed using the
straight-line method over estimated useful lives ranging from three
to seven years. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the estimated
useful lives of the assets or the term of the related lease.
Amortization of equipment under capital lease obligations is
computed using the straight-line method over the lesser of the
lease term or the useful life of the equipment.
F-55
Deferred charges: Deferred charges are financing
fees being amortized using an effective interest rate method over
the life of the related loan. Amortization expense was $37,988 and
$74,722 for the three months ended September 30, 2017 and 2016 and
$129,009 and $215,206 for the nine months ended September 30, 2017
and 2016, respectively.
Life insurance policies: The Company is the beneficiary of
life insurance policies on certain executives. The cash surrender
value of these policies totaled $561,779 and $535,219 for the nine
months ended September 31, 2017 and 2016, respectively, and is
included in other assets on the balance sheets.
Deferred rent: The Company recognizes the total cost of its
operating leases ratably over the lease term. The difference
between rent payments and rent expense is reflected as deferred
rent on the balance sheets.
Income taxes: Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amount 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 in income.
Deferred tax assets are reduced by a valuation allowance if it is
more likely than not that the tax benefits will not be
realized.
Management
has evaluated all other tax positions that could have a significant
effect on the financial statements and determined the Company had
no uncertain income tax positions at September 30, 2017 The Company
is no longer subject to U.S. federal or state and local tax
examinations by tax authorities for years before 2013.
The
Company recognizes interest accrued related to unrecognized tax
benefits in interest expense and penalties in selling, general and
administrative expenses. During the three months ended and nine
months ended September 30, 2017, the Company did not recognize any
such amounts related to interest and penalties.
Revenue recognition: The Company recognizes revenue
when a contract has been executed, the contract price is fixed and
determinable, delivery of the product or service has occurred, and
collectability of the contract price is reasonably assured. The
Company performs work under time-and-material and cost plus fixed
fee (CPFF) contracts. Revenue on time-and-material contracts are
recognized based upon time (at established rates) and other direct
costs incurred. Revenue on CPFF contracts is recognized based on
actual allowable costs plus a fixed fee. Revenue recognized on
contracts in excess of related billings is reflected as unbilled
receivables.
Use of estimates: In preparing financial statements in
conformity with accounting principles generally accepted in the
United States of America, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenue and expenses
during the reporting period. These estimates include assessing the
collectability of accounts receivable, assessing the useful lives
and impairment of assets, and determining the fair value of stock
options issued during the year and the fair value of preferred
stock and the derivative liability as of year-end. Estimates and
assumptions are reviewed periodically and the effects of revisions
are reflected in the financial statements in the period they are
determined to be necessary. Actual results could differ from those
estimates.
Stock-based compensation expense: The Company accounts for
stock-based compensation in accordance with the Financial
Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic, Compensation – Stock Compensation, which
requires the recognition of the expense related to the fair value
of the stock-based compensation awards within the statements of
income. Stock-based compensation expense is recognized for
stock-based payments granted based on the grant date fair value
estimated in accordance with the provisions of this topic. The
expense is recognized using the straight-line method, over the
requisite service period, estimated to be three years for most
option grants. Stock-based compensation expense recognized in the
statements of operations is based on awards ultimately expected to
vest, which requires management to estimate forfeitures. This topic
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
F-56
The
Company uses the Black-Scholes Option-Pricing Model (Black-Scholes
model) to value stock-based awards granted. The Company’s
determination of the fair value of stock-based payments on the date
of grant using an option-pricing model is affected by the
Company’s stock price as well as assumptions regarding a
number of complex and subjective variables. Determining the fair
value of stock-based awards at the grant date requires judgment
about expected volatility, terms, and estimating the amount of
stock-based awards that are expected to be forfeited. If actual
results differ significantly from these estimates, stock-based
compensation expense and the Company’s results of operations
could be materially affected.
Fair value: The Company records certain liabilities and
equity instruments at their fair value. The carrying amounts of the
Company’s financial instruments, including cash, accounts
receivable, payables and other current assets approximate fair
value due to their short maturities.
In
accordance with ASC 820, the Company maximizes the use of
observable inputs and minimizes the use of unobservable inputs when
measuring fair value. In the absence of actively quoted market
prices, the Company uses observable market-based inputs or
independently sources parameters to measure fair value. The Company
classifies its assets and liabilities that are carried at fair
value in accordance with ASC 820’s three-level
hierarchy:
Level 1: Quoted prices (unadjusted) in
active markets for identical assets and liabilities
Level 2: Inputs other than quoted prices
that are either directly or indirectly observable for the asset or
liability
Level 3: Unobservable inputs for the
asset or liability, including situations where there is little, if
any, market activity for the asset or liability
Derivatives: The Company uses an option pricing model to
determine the fair value of the derivative liability related to the
conversion features included in the Series A Preferred stock. The
Company derives the fair value of the conversion feature using the
common stock price, the conversion price of the embedded stock, the
risk-free interest rate, the historical volatility and the
Company’s dividend yield. The expected volatility is based on
historical volatility of comparable public companies. The fair
value of the conversion feature is classified as Level 3 within the
Company’s fair value hierarchy.
Convertible equity: The Company accounts for hybrid
contracts that feature conversion options in accordance with ASC
815, Derivatives and Hedging Activities. ASC 815 requires companies
to bifurcate conversion options from their host instruments and
account for them as freestanding derivative instruments according
to certain criteria. The criteria includes circumstances in which
(a) the economic characteristics and risks of the embedded
derivative instrument are not clearly and closely related to the
economic characteristics of the host contract, (b) the hybrid
instrument that embodies both the embedded derivative and the host
contract is not re-measured at fair value under the applicable
generally accepted accounting principles (GAAP) with changes in
fair value reporting in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative
instrument would be considered a derivative
instrument.
Conversion
options that contain variable settlement features such as
provisions to adjust the conversion price upon subsequent issuances
of equity or equity linked securities at exercise prices more
favorable than the feature in the hybrid contract generally result
in their bifurcation from the host instrument. The Company accounts
for convertible instruments, when the Company has determined that
the embedded conversion options should be bifurcated from their
host instrument, in accordance with ASC 815. Under ASC 815, a
portion of the proceeds received upon the issuance of the hybrid
contracts are allocated to the fair value of the derivative. The
derivative is subsequently marked to market at each reporting date
based on current fair value with the changes in fair value reported
in results of operations.
F-57
Recent accounting pronouncements: In May 2014, the FASB
issued Accounting Standards Update (ASU) 2014-09, Revenue From Contracts With Customers (Topic
606), requiring an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised
goods or services to customers. Additionally, there have been
various updates issued in 2015 and 2016 to clarify the guidance in
ASC Topic 606. The updated standard will replace most existing
revenue recognition guidance in GAAP when it becomes effective and
permits the use of either a full retrospective or retrospective
with cumulative effect transition method. The updated standard
becomes effective for the Company in the first quarter of fiscal
year 2019. The Company has not yet selected a transition method and
is currently evaluating the effect that the updated standard will
have on the financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases (FASB Topic 842), which will
update the existing guidance on accounting for leases and require
new qualitative and quantitative disclosures about the
Company’s leasing activities. The new standard requires the
Company to recognize lease assets and lease liabilities on the
balance sheet for all leases under which the Company is the lessee,
including those classified as operating leases under previous
accounting guidance. The new standard allows the Company to make an
accounting policy election not to recognize on the balance sheet
lease assets and liabilities for leases with a term of 12 months or
less. The new standard will be effective for the Company for annual
reporting periods beginning on January 1, 2020, with early adoption
permitted. In transition, lessees are required to recognize and
measure leases at the beginning of the earliest period presented
using a modified retrospective approach. The modified retrospective
approach includes a number of optional practical expedients that
the Company may elect to apply. The Company is currently evaluating
the expected impact of the adoption of this standard on its
financial statements and related disclosures.
In
April 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718):
Improvements to Employee Share
Based Payment Accounting, to reduce the complexity of
certain aspects of the accounting for employee share-based payment
transaction. For private companies, the ASU is effective for annual
periods beginning after December 15, 2017. Early adoption is
permitted. The Company is currently evaluating the methods and
impact on the financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash
Payments. ASU 2016-15 provides
guidance on how certain cash receipts and cash payments should be
presented and classified in the statement of cash flows with the
objective of reducing existing diversity in practice with respect
to these items. ASU 2016-15 will be effective for the Company on
January 1, 2019. The Company is currently evaluating the impact the
adoption of this guidance will have on its statement of cash
flows.
Note
2.
Accounts
Receivable
Accounts
receivable consists of the following:
|
September
30, 2017
|
December
31, 2016
|
Billed trade
accounts receivable
|
$ 7,427,346
|
$ 3,732,872
|
Unbilled trade
accounts receivable
|
339,395
|
2,107,956
|
Allowance for
doubtful accounts
|
(358,015)
|
(299,865)
|
|
$ 7,408,726
|
$ 5,540,963
|
Note
3.
Note
Receivable
On June
30, 2010, the Company sold its interest in ProvatoHR, Inc.
(Provato), a previously consolidated subsidiary. Effective October
1, 2010, the Company reached an agreement with Provato to
consolidate receivables into a five-year term note, originally
maturing in October 2015. The note bears interest at a rate of 4.5%
per annum and required monthly payments of principal plus interest
in the amount of $7,386.
F-58
Effective
April 1, 2016, a subscription service agreement was entered into by
Provato and the Company to settle the balance on the note of
$254,683. Based on the terms of the agreement, the Company will
receive a 48-month software subscription. The monthly subscription
fee of $5,306 will reduce the amount outstanding on the note over
the term of the subscription and will reduce the note receivable to
zero. As a result of this modified agreement, management removed
the reserve of $50,000 that had previously been placed against the
note. The balance of the note receivable at September 30, 2017 was
$159,177 and at December 31, 2016 was $206,930.
Note
4.
Property
and Equipment
Property
and equipment consists of the following as of:
|
September
30, 2017
|
December
31, 2016
|
Equipment and
hardware
|
$ 3,772,170
|
$ 3,314,765
|
Computer
software
|
2,212,980
|
2,107,944
|
Vehicles
|
93,476
|
233,837
|
Leasehold
improvements
|
2,831,280
|
2,822,893
|
Furniture and
fixtures
|
1,531,118
|
1,531,118
|
|
10,441,024
|
10,010,557
|
Less accumulated
depreciation and amortization
|
7,168,698
|
6,366,926
|
|
$ 3,272,326
|
$ 3,643,631
|
Total
depreciation and amortization expense was $326,280 and $279,250 for
three months ended September 30, 2017 and 2016 and $942,128 and
$824,935 for the nine months ended September 30, 2017 and 2016,
respectively.
Assets
purchased under the terms of non-cancelable capital leases were
$1,160,919 at September 30, 2017 and 2016. Amortization expense for
capital leased assets was $17,195 and $37,702 for the three -months
ended September 30, 2017 and 2016 and $81,550 and $118,863 for the
nine months ended September 30, 2016 and 2017, respectively.
Accumulated amortization on these assets totaled $898,940 and
$847,657 at September 30, 2017 and December 31, 2016,
respectively.
Note
5.
Debt
The
Company entered into a business loan agreement with a financial
institution with a borrowing capacity of $6,000,000. The proceeds
of the revolving line of credit were used, in part, to pay down the
subordinated debt balance. The line requires the Company to
maintain certain fixed charge coverage ratios. The line of credit
had an outstanding balance of $2,488,636 and $0 at September 30,
2017 and 2016, respectively. The line bears interest at an annual
rate of prime plus 1.5%. Interest expense on the line of credit
totaled $32,858 and $1,008 for the three months ended September 30,
2017 and 2016 and $68,755 and $1,008 for the nine months ended
September 30, 2017 and 2016, respectively.
The
Company entered into a note payable effective August 14, 2014, for
a total principal amount of $2,500,000. Principal payments are due
monthly in the amount of $56,514, with the remaining principal
amount and any accrued interest due in full on August 14, 2018.
Interest is due monthly at a rate equal to the prime rate plus
0.75% (4.5% and 4.25% at September 30, 2017 and 2016,
respectively). Interest expense recorded on this note was $9,331
and $7,773 for the three months ended September 30, 2017 and 2016
and $32,108 and $42,295 for the nine months ended September 30,
2017 and 2016, respectively. The note is collateralized by
substantially all assets of the Company and is subject to certain
financial covenants. At September 30. 2017, the Company was in
default of these covenants and had obtained a waiver from the
lender. The balance on this note was $623,302 and $4,089,617 at
September 30, 2017 and December 31, 2016,
respectively.
F-59
Also on
August 14, 2014, the Company entered into a loan and securities
purchase agreement with a financial investor for a total of
$5,500,000 for 521,962 shares of Series A Preferred stock and a
note payable with an original principal amount of $4,500,000.
Additional principal is available for future borrowings up to
$2,000,000. Any additional borrowings would also result in
additional Series A Preferred shares being issued based on an
agreed upon formula. All principal and accrued but unpaid interest
is due in full on August 14, 2019. Payments were made in January
2017 in the amount of approximately $2,000,000 and September 2016
in the amount of $626,075. Interest accrues and is due monthly at a
rate of 13.25% and 13.75%, respectively, of which 2.75% at
September 30, 2017 and 2016 is considered paid-in-kind interest.
Total interest recorded on this note was $56,489 for the three
months ended September 30, 2017 and $242,200 for the nine months
ended September 30, 2017, respectively, of which $45,261 was
considered paid-in-kind and was accrued to the balance of principal
at September 30, 2017. Total interest recorded on this note in was
$177,604 for the three months ended September 30, 2017 and $379,079
for the nine months ended September 30, 2017, respectively, of
which $55,072 was considered paid-in-kind and was accrued to the
balance of principal. The note requires excess cash flow payments
when excess cash, as defined, exists and is subject to certain
financial covenants. As of September 30, 2017 and 2016, the Company
was in default of their covenants and was not able to obtain a
waiver from the lender. As such, the remaining balance at September
30, 2017 and 2016 is classified as a current liability on the
balance sheet. The balance on this note was $2,134,878 and
$4089,617 at September 30, 2017 and December 31, 2016,
respectively.
As
discussed in Note 6, the loan and securities purchase agreement was
considered a hybrid instrument and the various features of the
instrument, including the loan, Series A preferred stock and a
related conversion feature associated with the preferred stock. The
various features were recognized at their relative fair value,
resulting in the recording of a debt discount totaling $898,497,
which is being amortized and recorded as interest expense over the
related term of the note. Amortization expense was $36,823 and
$54,498 for the three months ended September 30, 2017 and 2016 and
$123,727 and $176,753 for the nine months ended September 30, 2017
and 2016, respectively, as interest expense in the statements of
operations.
Notes
payable, line of credit, deferred charges and issuance costs
consist of the following:
|
September
30, 2017
|
December
31, 2016
|
Line of
credit
|
$ 2,488,636
|
$ -
|
Notes
payable
|
623,302
|
1,099,824
|
Subordinated note
payable
|
2,134,878
|
4,089,617
|
Total line of
credit and notes payable
|
5,246,816
|
5,189,441
|
Less deferred
charges
|
(135,511)
|
(260,910)
|
Total line of
credit and notes payable, net of deferred charges
|
5,111,305
|
4,928,531
|
Less current
portion
|
(4,979,404)
|
(4,491,941)
|
Total debt, net
deferred charges and current maturities
|
131,901
|
436,590
|
Less unamortized
debt discount
|
(131,901)
|
(259,238)
|
Total
|
$ -
|
$ 177,352
|
Future
principal payments required on long-term and current debt are as
follows:
Years
ending December 31:
|
|
2017
|
$ 2,650,960
|
2018
|
460,924
|
2019
|
2,134,932
|
|
$ 5,246,816
|
F-60
Note
6.
Derivative
Liability
The
Company analyzed the loan and securities agreement referred to in
Note 5 based on the provisions of ASC 815 and determined that the
conversion options within the Series A Preferred stock qualify as
embedded derivatives. For derivative instruments that are accounted
for as liabilities, the derivative instrument is initially recorded
at its fair value and is then revalued at each reporting date. The
Company estimated the fair value of the embedded derivative using
an option pricing model as it was determined that the down-round
provisions were not probable of occurring. Based on the option
pricing model, the fair value at inception of the embedded
derivatives was determined to be $899,561 and the Company recorded
a related derivative liability. The embedded derivative is revalued
at the end of each reporting period and any resulting gain or loss
is recognized as a current period change to operations. The fair
value as of September 30, 2017 and December 31, 2016, was $471,470,
resulting in a gain on fair value adjustment of $0 and $806,568
recorded on the statements of operations,
respectively.
The
fair value of the embedded conversion feature was calculated using
the following factors and assumptions:
|
2017
|
2016
|
Expected dividend
yield
|
0%
|
0%
|
Risk-free interest
rate
|
1.1%
|
1.9%
|
Expected
term
|
5
|
5
|
Volatility
|
50.00%
|
50.00%
|
The
expected volatility of the underlying share price granted was
estimated using the historical volatility of companies in similar
industries as a substitute for the historical volatility of the
Company’s common shares, which is not determinable without an
active external or internal market. The expected dividends are
based on the Company’s historical issuance and
management’s expectations for dividend issuance in the
future. The expected term represents the period of time until
expected conversion. The risk-free interest rate for periods within
the expected term of the underlying security is based on the U.S.
Treasury yield curve in effect at September 30, 2017 and
2016.
Note
7.
Income
Taxes
The
Company applies an estimated annual effective tax rate to the
current period operating results related to ordinary income or loss
in order to determine the interim provision for income taxes and
recognizes tax effects outside of ordinary income discretely in the
interim period in which they occur.
The
Company’s effective tax rate
was 40% and 0% for the three months ended
September 30, 2017 and 2016, respectively. The Company’s
effective tax rate was 40% and 48% for the nine
months ended September 30, 2017 and 2016, respectively. The
effective tax rate differed from the U.S. federal statutory rate
primarily due to state taxes and permanently non-deductible
expenses.
Note
8.
Series
A Preferred Stock
The
Company has authorized 778,432 shares of preferred stock, all of
which have been designated as Series A shares. As discussed in Note
5, 521,962 shares were issued in conjunction with the loan and
securities purchase agreement and were recorded at their relative
fair value of $998,936 at the date of issuance. The Series A shares
accrue dividends cumulatively at a rate of 10% per annum on the
original issue price of $1,000,000 and are entitled to vote based
on the number of whole shares of common stock into which the shares
of preferred stock are convertible. Cumulative undeclared dividends
are $344,108 and $221,917 as of September 30, 2017 and 2016,
respectively. The Series A shares are convertible at any time and
are automatically converted at the earlier of (a) the consummation
of the sale of common stock in an underwritten public offering or
(b) the event or time specified by a majority of the holders of the
then outstanding preferred stock. The conversion price for the
Series A shares is $1.75. As discussed in Note 6, this conversion
feature was evaluated and determined to be a beneficial conversion
feature for which bifurcation and separate recognition at fair
value is required.
F-61
In the
event of a liquidation event, the Series A stockholders are
entitled to receive the original issue price plus all accrued and
unpaid dividends prior to any distributions to the common
stockholders. In addition, the holders of a majority of the then
outstanding shares of preferred stock have the right to demand
redemption by the Company by giving written notice any time after a
redemption event occurs. A redemption event is defined as (a) the
repayment in full of the outstanding principal on the related notes
discussed in Note 5; provided that, if repayment in full results
from a mandatory prepayment related to the sweep of excess cash
flow, then the redemption event will be the date that is six months
after the occurrence of such repayment, (b) the acceleration of the
related notes following an event of default as defined in loan and
securities purchase agreement, or (c) the occurrence of the
maturity date, which is August 14, 2019. The price per share paid
to redeem the preferred stock will be the greatest of (a) the
original issue price of the shares plus all accrued and unpaid
dividends as of the redemption date, (b) the fair market value of
such share, and (c) the 8 times EBITDA amount of such share, as
defined in the Amended and Restated Articles of Incorporation. The
Series A Preferred stock is being accreted up to its redemption
value each reporting period, which was determined to be $1,344,108
and $1250,333 as of September 30, 2017 and December 31, 2016,
respectively.
Note
9.
Stock
Option Plan
The
Company maintains a stock option plan (the Stock Option Plan) under
which the stockholders, directors, key employees, and consultants
of the Company may receive options to purchase shares of the
Company’s common stock at a specified price during specified
time periods. There are 2,250,000 shares reserved and available for
equity incentive plans. The option price is equal to the estimated
fair market value at the time the option is granted. Vested options
expire, if not exercised, by the earlier of ten years after the
date of grant or the period specifically provided for within the
plan. Options for the Stock Option Plan are granted at the Board of
Directors’ discretion. Options vest at a rate of 25% per year
on the first anniversary of the grant date and on a monthly basis
thereafter for three years.
The
fair market value of each stock option award is estimated on the
date of grant using the Black-Scholes model. The following
assumptions were used for options issued for the nine months ended
September 30, 2017 and 2016:
|
2017
|
2016
|
Expected dividend
yield
|
0%
|
0%
|
Risk-free interest
rate
|
1.8%
|
1.6%
|
Expected option
term
|
5.90
years
|
5.90
years
|
Volatility
|
29.53%
|
18.24%
|
Pursuant
to the Compensation topic of the FASB ASC, the expected volatility
of the options granted may be estimated using the historical
volatility of companies in similar industries as a substitute for
the historical volatility of the Company’s common shares,
which is not determinable without an active external or internal
market. The expected dividends are based on the Company’s
historical issuance and management’s expectations for
dividend issuance in the future.
The
expected term of options granted represents the period of time that
options granted are expected to be outstanding. The risk-free
interest rate for periods within the contractual life of the option
is based on the U.S. Treasury yield curve in effect at September
30, 2017 and 2016.
The
Company recognized compensation expense in the amounts of $64,249
and $55,000 for the three months ended September 30, 2017 and 2016
and $164,249 and $150,000 for the nine months ended September 30,
2017 and 2016, respectively.
F-62
The
following is a summary of stock option activity and related
information for the nine months ended September 30,
2017:
|
Options
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (Years)
|
Outstanding,
December 31, 2016
|
1,475,126
|
3.14
|
|
Granted
|
296,190
|
2.19
|
|
Exercised
|
-
|
-
|
|
Forfeited and
expired
|
(210,968)
|
3.27
|
|
Outstanding,
September 30, 2017
|
1,560,348
|
$ 2.94
|
5.75
|
|
|
|
|
Exercisable,
September 30, 2017
|
1,121,635
|
$ 3.03
|
4.65
|
The
weighted-average grant-date fair value of options granted during
the nine months ended September 30, 2017 was $0.71. The exercise
price range for outstanding options at September 30, 2017 was
$2.19.
There
was $280,459 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the
Stock Option Plan as of September 30, 2017. That cost was expected
to be recognized over a weighted-average remaining period of 1.1
years as of September 30, 2017.
Note
10.
Retirement
Plans
401(k) plan: The Company has a 401(k) profit sharing plan
(the Profit Sharing Plan) which is available to all employees who
are at least 18 years of age. The Profit Sharing Plan allows
eligible employees to defer up to 100% of their compensation
(subject to Internal Revenue Service Code limitations) through a
salary reduction agreement between the employee and the
Company.
The
Company may make discretionary contributions to the Plan, to be
determined during each plan year. The Company recorded
contributions to the Plan of $145,338 and $160,586 for the three
months ended September 30, 2017 and 2016 and $402,108 and $537,694
for the nine months ended September 30, 2017 and 2016,
respectively.
409(a) deferred compensation plan: The Company has a 409(a)
deferred compensation plan (the Deferred Compensation Plan) that
allows certain members of Management to defer up to 85% of their
annual salary and up to 100% of any bonus. Company matching
contributions were made on a dollar for dollar basis for the first
10% of compensation deferred until 2009 when matching was
discontinued at the discretion of management as permitted under the
Deferred Compensation Plan. The vesting of the Company match is
based on the employee’s years of service with 20% vesting for
each year of service beginning in year two.
Amounts
payable to participants in the Profit Sharing Plan and the Deferred
Compensation Plan, including the vested company match are recorded
as long-term liabilities in the accompanying balance sheets as a
deferred compensation liability and totaled $446,678 and $266,223
at September 30, 2017 and December 31, 2016,
respectively.
F-63
Note
11.
Leases
and Other Commitments
Leases: The Company leases equipment and office space under
various noncancelable capital and operating leases, which expire on
various dates through 2022. The future minimum lease payments under
capital and operating leases and service commitments are as
follows:
|
Operating
|
Years
ending December 31:
|
|
2018
|
$ 1,238,029
|
2019
|
1,268,979
|
2020
|
1,300,703
|
2021
|
1,333,221
|
2022
|
680,440
|
Total
minimum payments
|
$ 5,821,372
|
Rent
expense for the three months ended and nine months ended September
30, 2017, was $281,303 and $843,966, respectively. Rent expense for
the three months ended and nine months ended September 30, 2016,
was $282,820 and $811,959, respectively, net of sublease income of
$100,751. Rent expense is included in selling, general and
administrative expenses on the statements of operations. As of
September 30, 2016, there was one remaining sublease that rents
space on a month to month basis.
Letter of credit: The Company maintains a standby letter of
credit in the amount of $354,373 as a security deposit for its
office lease. This letter of credit is renewable by request of the
Company each March. There were no amounts drawn on the letter of
credit during the years ended September 30, 2017 or December 31,
2016.
Note
12.
Contingencies
The
Company is subject to legal proceedings and claims, which arise in
the ordinary course of its business. Although there can be no
assurance as to the ultimate disposition of these matters, it is
the opinion of the Company’s management, based upon the
information available at this time, that the expected outcome of
these matters, individually or in the aggregate, will not have a
material adverse effect on the results of operations and financial
position of the Company. It is also the opinion of the
Company’s management that the Company maintains an adequate
level of insurance to handle the legal claims in the ordinary
course of business.
Note
13.
Subsequent
Events
On November 16,
2017, the Company entered into an agreement and plan of merger (the
“Merger”) with Novume Solutions, Inc.
(“Novume”) in the amount of approximately $13,017,500.
The consummation of the Merger is subject to, among other things,
the completion of a firm commitment underwritten public offering of
Novume for an aggregate price to the public of at least $10 million
which results in the Company’s successful listing of Common
Stock on the Nasdaq Stock Market or the New York Stock Exchange. On
November 28, 2017, Novume filed with the Securities and Exchange
Commission a registration statement on Form S-1 for a public
offering, and Novume is approved for listing on the Nasdaq Capital
Market as of January 10, 2018.
Management
has reviewed subsequent events through January 24,
2018, the date the financial statements were available to be
issued.
F-64
NOVUME SOLUTIONS, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-66
|
Consolidated
Balance Sheets at December 31, 2016 and 2015
|
F-67
|
Consolidated
Statements of Operations for the Years Ended December 31, 2016
and 2015
|
F-68
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Years
Ended December 31, 2016 and 2015
|
F-69
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2016
and December 31, 2015
|
F-70
|
Notes
to Consolidated Financial Statements
|
F-71
|
F-65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
Board of Directors and
Stockholders
of KeyStone Solutions, Inc.
We have
audited the accompanying consolidated balance sheets of KeyStone
Solutions, Inc. (the Company) as of December 31, 2016 and
2015, and the related consolidated statements of operations,
changes in stockholders’ equity, and cash flows for the years
then ended. The Company’s management is responsible for these
consolidated financial statements. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
KeyStone Solutions, Inc. as of December 31, 2016 and 2015, and
the results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
/s/ BD
& Company, Inc.
Owings
Mills, Maryland
June 9,
2017
F-66
KeyStone Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
|
December 31,
|
|
|
2016
|
2015
|
ASSETS
|
|
|
CURRENT
ASSETS
|
|
|
Cash and cash
equivalents
|
$2,788,587
|
$567,866
|
Accounts
receivable
|
1,997,831
|
1,734,022
|
Other current
assets
|
81,011
|
73,753
|
Total current
assets
|
4,867,429
|
2,375,641
|
PROPERTY AND
EQUIPMENT:
|
|
|
Furniture and
fixtures
|
137,784
|
136,327
|
Office
equipment
|
463,937
|
434,037
|
Leasehold
improvements
|
33,259
|
33,259
|
|
634,980
|
603,623
|
Less: accumulated
depreciation
|
(515,911)
|
(469,517)
|
Net property and
equipment
|
119,069
|
134,106
|
|
|
|
OTHER
ASSETS
|
|
|
Deferred offering
and financing costs
|
236,963
|
—
|
Deferred tax
assets, net
|
219,982
|
—
|
Deposits
|
39,282
|
39,282
|
Total other
assets
|
496,227
|
39,282
|
Total
Assets
|
$5,482,725
|
$2,549,029
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable
|
$577,268
|
$419,482
|
Accrued expenses
and other current liabilities
|
575,203
|
547,131
|
Total current
liabilities
|
1,152,471
|
966,613
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
Note
payable
|
457,289
|
—
|
Deferred
rent
|
56,709
|
52,378
|
Total Long-term
liabilities
|
513,998
|
52,378
|
Total
Liabilities
|
1,666,469
|
1,018,991
|
Series A Cumulative
Convertible Redeemable Preferred stock, $0.0001 par value, 500,000
and zero shares authorized, 301,570 and zero shares issued and
outstanding as of December 31, 2016 and 2015,
respectively
|
2,269,602
|
—
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
Common stock,
$0.0001 par value, 25,000,000 and 1,500 shares authorized,
5,000,000 and 1,370 shares issued and outstanding as of
December 31, 2016 and 2015, respectively
|
500
|
—
|
Preferred stock,
$0.0001 par value, 7,500,000 and zero shares authorized, 500,000
and zero shares designated as of December 31, 2016 and 2015,
respectively
|
—
|
—
|
Additional paid-in
capital
|
1,976,549
|
597,704
|
(Accumulated
deficit) retained earnings
|
(430,395)
|
932,334
|
Total
Stockholders’ Equity
|
1,546,654
|
1,530,038
|
Total Liabilities
and Stockholders’ Equity
|
$5,482,725
|
$2,549,029
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-67
KeyStone Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
REVENUE
|
$12,128,406
|
$9,661,795
|
Cost of
revenue
|
6,959,514
|
5,496,722
|
Gross
profit
|
5,168,892
|
4,165,073
|
Selling, general,
and administrative expenses
|
5,262,768
|
3,795,678
|
(Loss) income from
operations
|
(93,876)
|
369,395
|
OTHER
EXPENSES
|
|
|
Interest
expense
|
(165,079)
|
—
|
Total other
expenses
|
(165,079)
|
—
|
(Loss) income
before taxes
|
(258,955)
|
369,395
|
Benefit from income
taxes
|
219,971
|
—
|
Net (loss)
income
|
$(38,984)
|
$369,395
|
(Loss) earnings per
common share - basic and diluted
|
$(0.01)
|
$269.63
|
Weighted average
shares outstanding - basic and diluted
|
3,958,619
|
1,370
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-68
KeyStone Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’
Equity
|
Shares of Common
Stock
|
Common
Stock
|
Additional Paid-In
Capital
|
Retained Earnings
(Accumulated Deficit)
|
Total
Stockholders’ Equity
|
Balance as of
January 1, 2015
|
1,370
|
$—
|
$597,704
|
$830,697
|
$1,428,401
|
Net
income
|
—
|
—
|
—
|
369,395
|
369,395
|
Stockholders’
distributions
|
—
|
—
|
—
|
(267,758)
|
(267,758)
|
Balance as of
December 31, 2015
|
1,370
|
—
|
597,704
|
932,334
|
1,530,038
|
Stockholders’
distributions
|
—
|
—
|
—
|
(125,615)
|
(125,615)
|
Net income of AOC
Key Solutions through March 14, 2016
|
—
|
—
|
—
|
386,125
|
386,125
|
Contribution of
undistributed earnings from AOC Key Solutions
|
—
|
—
|
1,192,844
|
(1,192,844)
|
—
|
Net common stock
issued in recapitalization
|
4,998,630
|
500
|
(500)
|
—
|
—
|
Share-based
compensation
|
—
|
—
|
26,844
|
—
|
26,844
|
Issuance of
warrants in connection with note payable
|
—
|
—
|
58,520
|
—
|
58,520
|
Issuance of
warrants in connection with preferred stock
|
—
|
—
|
101,137
|
—
|
101,137
|
Preferred stock
dividends
|
—
|
—
|
—
|
(5,286)
|
(5,286)
|
Net loss from
March 15, 2016 through December 31, 2016
|
—
|
—
|
—
|
(425,109)
|
(425,109)
|
Balance as of
December 31, 2016
|
5,000,000
|
$500
|
$1,976,549
|
$(430,395)
|
$1,546,654
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-69
KeyStone Solutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
Years
ended
December 31,
|
|
|
2016
|
2015
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net (loss)
income
|
$(38,984)
|
$369,395
|
Adjustments to
reconcile net (loss) income to net cash (used in) provided by
operating activities:
|
|
|
Depreciation and
amortization
|
51,870
|
70,268
|
Deferred income
taxes
|
(219,982)
|
—
|
Share-based
compensation
|
26,844
|
—
|
Amortization of
deferred financing costs
|
28,703
|
—
|
Deferred
rent
|
4,330
|
52,379
|
Warrant
expense
|
101,634
|
—
|
Changes in
operating assets and liabilities
|
|
|
Accounts
receivable
|
(263,809)
|
(106,948)
|
Other current
assets
|
(7,258)
|
23,191
|
Accounts
payable
|
157,786
|
(147,626)
|
Accrued expenses
and other current liabilities
|
22,787
|
—
|
Net cash (used in)
provided by operating activities
|
(136,079)
|
260,659
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
Capital
expenditures
|
(36,833)
|
(57,343)
|
Net cash (used in)
investing activities
|
(36,833)
|
(57,343)
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
Stockholders’
distributions
|
(125,615)
|
(267,758)
|
Proceeds from note
payable
|
500,000
|
—
|
Net proceeds from
issuance of preferred stock
|
2,269,602
|
—
|
Payment of deferred
offering costs
|
(216,842)
|
—
|
Payment of
financing costs
|
(33,512)
|
—
|
Net cash provided
by (used in) financing activities
|
2,393,633
|
(267,758)
|
Net increase
(decrease) in cash and cash equivalents
|
2,220,721
|
(64,442)
|
Cash and cash
equivalents at beginning of year
|
567,866
|
632,308
|
Cash and cash
equivalents at end of year
|
$2,788,587
|
$567,866
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-70
KeyStone Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
NOTE 1 – NATURE OF OPERATIONS AND
RECAPITALIZATION
Nature of Operations
KeyStone
Solutions, Inc. (the “Company” or
“KeyStone”) was formed in March 2016 as a holding
company for its wholly-owned subsidiary AOC Key Solutions, Inc.
(“KSI” or “Predecessor”). KSI provides
consulting and technical support services to assist clients seeking
U.S. Federal government contracts in the technology,
telecommunications, defense, and aerospace industries. Both the
Company and KSI are headquartered in Chantilly, Virginia and have
an office in New Orleans, Louisiana.
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
“Merger Agreement”) with KeyStone and KCS Merger Sub,
Inc. (“Merger Sub”), a wholly-owned subsidiary of
KeyStone with no activity. Pursuant to the Merger Agreement, on
March 15, 2016, Merger Sub was merged with and into KSI, and
thus KSI became a wholly-owned subsidiary of KeyStone. To complete
the 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 merger
transaction resulted in no gain or loss to either entity. The
stockholders’ proportionate ownership of KeyStone remains the
same as it was for KSI. KeyStone accounted for the merger
transaction as a recapitalization in the accompanying consolidated
financial statements.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation
The
consolidated financial statements include the accounts of KeyStone,
the parent company, and its wholly-owned subsidiaries AOC Key
Solutions, Inc., Novume Media, Inc. and Chantilly Petroleum,
LLC.
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“U.S. 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
KeyStone
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 provides its services primarily to clients seeking U.S.
Federal government contracts in the technology, communications,
defense and aerospace industries. 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.
F-71
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 concluded that an allowance was
not required at December 31, 2016 or 2015,
respectively.
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
|
5 - 10 years
|
Office
equipment
|
3 - 5 years
|
Leasehold
improvements
|
10 years
|
Depreciation
and amortization expense for the years ended December 31, 2016
and 2015 was $51,870 and $70,268, 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.
Advertising
The
Company expenses all non direct-response advertising costs as
incurred. Such costs were not material for the years ended
December 31, 2016 and 2015.
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
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.
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. Both KSI and KeyStone
are 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.
F-72
The
Company’s evaluation as of December 31, 2016 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 years ended December 31, 2016 and 2015
was $26,844 and $0, 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 year ended December 31,
2016:
|
2016
|
Risk-free interest
rate
|
1.14%
|
Expected
term
|
5 years
|
Volatility
|
70%
|
Dividend
yield
|
0%
|
Estimated annual
forfeiture rate at time of grant
|
0%
|
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 during the year ended December 31, 2016 was
determined based on management’s expectations of the options
granted which are expected to remain outstanding.
Expected Volatility – As the Company is a
private entity, there is not 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 requires an expected dividend yield as an input. The
Company has not issued regular dividends in the past nor does the
Company expect to issue 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.
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 December 31, 2016 and 2015
because of the relatively short-term maturity of these financial
instruments. The carrying amount reported for long-term debt
approximates fair value as of December 31, 2016, given
management’s evaluation of the instrument’s current
rate compared to market rates of interest and other
factors.
F-73
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—Quoted prices in
active markets for identical assets or liabilities.
Level 2—Inputs other than
Level 1 that are observable, either directly or indirectly,
such as quoted prices for similar assets or liabilities; quoted
prices in markets that are not active; or other inputs that 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.
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. The Company has concluded that its
Series A Preferred Stock is a Level 3 financial instrument and
that the fair value approximates the carrying value due to the
proximity of the date of the sale of the Series A Preferred Stock
to independent third-parties as compared to December 31, 2016.
There were no changes in levels during 2016 and the Company did not
have any financial instruments prior to 2016.
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 December 31, 2016 and 2015, the Company had
$2,632,340 and $375,972, 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.
F-74
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 U.S. 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, and its ability to delay or curtail expenditures or
programs, 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
March 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standard Update
(“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 believes
that when adopted, this ASU will have minimal impact on its
consolidated financial statements and related
disclosures.
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 U.S. 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, 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.
F-75
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. Thus far the Company does not believe the adoption of
this standards update will have a material effect on its
consolidated financial statements and related disclosures. However,
the Company will continue its evaluation of the standards update
through the date of adoption. The standard update, as amended, will
be effective for annual periods beginning after December 15,
2017.
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 financial position, results of operations or cash
flows upon adoption.
Recently Adopted
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 (ASU 2015-03). 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 3 — SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental
disclosures of cash flow information for the years ended
December 31, 2016 and 2015 was as follows:
Cash
paid for interest during the year ended December 31, 2016 was
$48,957. No interest was paid in 2015.
F-76
Non-cash Financing Activities
As more
fully disclosed in Note 1, on March 16, 2016, the stockholders
exchanged 100% of their outstanding shares of common stock in KSI
for proportionate shares of KeyStone’s outstanding common
stock and undistributed earnings of $1,192,844 were contributed to
Keystone.
Dividends
on the Series A Preferred Stock totaling $5,286 were approved and
declared in 2016.
Warrants issued in
connection with note payable
|
$58,520
|
Warrants issued in
connection with issuance of Series A Preferred Stock
|
$101,634
|
NOTE 4 — DEBT
Line of Credit
AOC Key
Solutions was a party to a business loan agreement (the “2015
Loan Agreement”) with Sandy Spring Bank (the
“Lender”) 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, AOC
Key Solutions had granted to the Lender a security interest in its
accounts receivable. The Lender was required to advance funds to
AOC Key Solutions up to the lesser of (1) $1,000,000 or
(2) eighty percent (80%) of the aggregate amount of all
of AOC Key Solutions’ accounts receivable aged 90-days or
less which contained selling terms and conditions acceptable to the
Lender. AOC Key Solutions’ obligations under the 2015 Loan
Agreement were guaranteed by James McCarthy, Chairman of the Board
of AOC Key Solutions, and his wife. AOC Key Solutions 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, the Lender had waived the restrictions in the
2015 Loan Agreement on AOC Key Solutions’ ability to make
dividends to the Company. There was no outstanding balance on the
2015 Loan Agreement at December 31, 2015.
On
August 11, 2016, KeyStone entered into Loan and Security
Agreement (the “2016 Line of Credit”) with Sandy Spring
Bank that replaces the 2015 Loan Agreement with KSI. 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 is 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
KeyStone’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
KeyStone’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 does not require
any personal guarantees.
The
borrowing base for the 2016 Line of Credit is up to the lesser of
(1) $1,000,000 or (2) eighty percent (80%) of the
aggregate amount of all of KeyStone’s eligible accounts
receivable as defined by Sandy Spring Bank. The borrowing base for
the $100,000 term loan is fully reserved under the borrowing base
for the revolving line of credit. The 2016 Line of Credit has
periodic reporting requirements, balance sheet and profitability
covenants, as well as affirmative and negative operational and
ownership covenants. KeyStone was in compliance with all 2016 Line
of Credit covenants at December 31, 2016. There was no
outstanding balance on the 2016 Line of Credit at December 31,
2016.
F-77
Long-Term Debt
On
March 16, 2016, KeyStone entered into a Subordinated Note and
Warrant Purchase Agreement (the “Note Purchase
Agreement”) pursuant to which KeyStone agreed to issue up to
$1,000,000 in subordinated debt and warrants to purchase up to
125,000 shares of KeyStone’s common stock
(“Subordinated Note Warrants”). The exercise price for
the Subordinated Note Warrants is equal to $2.00 per share of
common stock. As of December 31, 2016, subordinated notes with
a face amount of $500,000 and Subordinated Note Warrants to
purchase 62,500 shares of KeyStone’s common stock have been
issued pursuant to the Note Purchase Agreement to Avon Road
Partners, L.P. (“Avon Road”), an affiliate of Robert
Berman, KeyStone’s CEO and a member of KeyStone’s Board
of Directors. The warrant 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 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 will be 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 KeyStone’s current financing
facility with Sandy Spring Bank 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. The note matures on March 16, 2019. KeyStone
was in compliance with the terms of the Avon Road note payable at
December 31, 2016.
NOTE 5 — 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 with 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.
The
benefit from income taxes for the year ended December 31, 2016
consists of the following:
Current:
|
|
State
|
$11
|
Deferred:
|
|
Federal
|
(196,826)
|
State
|
(23,156)
|
Benefit from income
taxes
|
$(219,971)
|
The
components of deferred income tax assets and liabilities are as
follows at December 31, 2016:
Deferred tax
assets:
|
|
Amortizable
start-up costs
|
$117,340
|
Accrued
bonuses
|
52,345
|
Net operating loss
carryforward
|
89,944
|
|
$259,629
|
Deferred tax
liabilities:
|
|
Fixed
assets
|
(39,647)
|
Total deferred tax
assets, net
|
$219,982
|
F-78
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 year ended December 31, 2016:
U.S. statutory
federal rate
|
34.0%
|
(Decrease) increase
in taxes resulting from:
|
|
State income tax
rate, net of U.S. Federal benefit
|
4.0%
|
Other temporary and
permanent arising from S Corp years
|
(13.2)%
|
S Corp income prior
to merger
|
62.8%
|
Other
|
(2.7)%
|
Effective tax
rate
|
84.9%
|
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 December 31,
2016.
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,
2015, KSI did not have any provision for income taxes.
There
was no valuation allowance for deferred tax assets at
December 31, 2016, as management believes that the deferred
tax assets will be realized through future operations. At
December 31, 2016, KeyStone had net operating loss
carryforwards of approximately $237,000 which begin to expire in
2036.
For the
year ended December 31, 2016 and 2015, KeyStone 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.
NOTE 6 — STOCKHOLDERS’ EQUITY
Common Stock
As of
December 31, 2015, the authorized, issued and outstanding
common shares of KSI were 1,370.
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
Merger Agreement, the stockholders exchanged 100% of the
outstanding common stock of KSI for 5,000,000 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 shares of KeyStone common stock
were issued and outstanding.
Series A Cumulative Convertible Redeemable Preferred
Stock
The
formation of KeyStone provided for 7,500,000 shares of $.0001 par
value KeyStone Series A Cumulative Convertible Redeemable Preferred
Stock (the “Series A Preferred Stock”).
In
November 2016, KeyStone commenced its Reg A Offering (the
“Offering”) of up to 3,000,000 Units. Each Unit
consisted of one share of Series A Preferred Stock and a warrant to
purchase 0.25 shares of the KeyStone’s common stock at an
exercise price of $2 per share. The Series A Preferred Stock
holders are entitled to quarterly dividends of 7.0% per annum
per share.
The
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
(See Note 12). The proceeds, which KeyStone deemed to be fair value
from the December 23, 2016 closing (the “First
Offering”) totaled $3,015,700 with the issuance of 301,570
preferred shares and 301,570 warrants. The second and third
closings occurred on January 23, 2017 and March 21, 2017,
respectively (See Note 12). KeyStone will adjust the value of the
Series A Preferred Stock to fair (redemption) value at the end of
the reporting period. The adjustment to the redemption value will
be recorded through equity.
F-79
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 Preferred Stock at a redemption price of
$15 per share plus any accrued but unpaid dividends. KeyStone 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 December 31,
2016.
As of
December 31, 2016, 301,570 shares of preferred stock were
issued and outstanding.
The
KeyStone Series A Preferred Stock is entitled to quarterly cash
dividends of $0.175 (7% per annum) per share. On April 7,
2017, KeyStone paid cash dividends of $75,695 to shareholders of
record as of March 30, 2017
The
expiration date of the warrant is seven years from the date of
issuance. The 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 $141,980.
NOTE 7 — COMMON STOCK OPTION AGREEMENT
On
March 16, 2016, two stockholders of KeyStone entered into an
option agreement with Avon Road. 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 2,226,278 shares of KeyStone’s common stock owned by those
two shareholders at $1 per share, which was determined to be the
fair value. The option agreement has a two-year term which expires
on March 16, 2018.
NOTE 8 — COMMITMENTS
Operating Leases
KeyStone
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%.
KeyStone
also leases office space in New Orleans, Louisiana. The lease is a
three-year lease expiring May 31, 2018.
Rent
expense for the years ended December 31, 2016 and 2015 was
$507,815 and $552,794, respectively, and is included in selling,
general and administrative expenses.
As of
December 31, 2016, the future obligations over the primary
terms of the KeyStone’s long-term leases expiring through
2019 are as follows:
2017
|
$522,150
|
2018
|
489,536
|
2019
|
364,390
|
Total
|
$1,376,076
|
KeyStone
is the lessor in an agreement to sub-lease 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 KeyStone
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 years ended December 31, 2016 and 2015 was
$182,534 and $156,375, respectively, and is included in selling,
general and administrative expenses as an offset to rent expense in
the accompanying consolidated statements of
operations.
F-80
NOTE 9 — EQUITY INCENTIVE PLAN
In
2016, the Company approved and adopted the 2016 Equity Award Plan
(the “2016 Plan”). The 2016 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 2016 Plan were initially set at 870,000
shares. To date, only stock options have been issued under the 2016
Plan.
Stock Options
Stock
options granted under the 2016 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
2016 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 2016 Award Plan, to determine all matters relating to awards
under the 2016 Plan, including the selection of individuals to be
granted an award, the type of award, the number of shares of
KeyStone 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.
KeyStone
has also designed the 2016 Plan to include a number of provisions
that KeyStone’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. KeyStone cannot, without stockholder approval,
reduce the exercise price of an award (except for adjustments in
connection with a KeyStone recapitalization), and at any time when
the exercise price of an award is above the market value of
KeyStone common stock, KeyStone 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 2016 Plan can be automatically
replenished.
No Automatic Grants. The 2016 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.
No Tax Gross-Ups. The 2016 Plan does
not provide for any tax gross-ups.
No Liberal Change-in-Control
Definition. The change-in-control definition contained in
the 2016 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 2016 Plan are
assumed by a successor in connection with a change in control of
KeyStone, 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 2016 Plan prohibits the current payment of
dividends or dividend equivalent rights on unearned
performance-based awards.
Limitation on Amendments. No
amendments to the 2016 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 2016 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 KeyStone’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.
F-81
When
making an award under the 2016 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 2016 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 for the year ended December 31, 2016 is as
follows:
|
Number of
Shares Subject to Option
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Term
|
Balance at
January 1, 2016
|
—
|
$—
|
—
|
Granted
|
25,000
|
2.50
|
9.45
|
Exercised
|
—
|
—
|
—
|
Cancelled
|
—
|
—
|
—
|
Balance at
December 31, 2016
|
25,000
|
$2.50
|
9.45
|
Exercisable at
December 31, 2016
|
25,000
|
$2.50
|
9.45
|
Vested and expected
to vest at December 31, 2016
|
25,000
|
$2.50
|
9.45
|
The
Company recorded $26,844 of compensation expense relating to the
option grant for the year ended December 31, 2016. The
intrinsic value of the stock options granted in fiscal year 2016
was zero because the market price of the common stock underlying
the options did not exceed the exercise price at grant date or at
December 31, 2016. No stock options were granted or
outstanding prior to 2016. The total fair value of shares that
became vested after grant during the year ended December 31,
2016 was zero.
As of
December 31, 2016, there was no unrecognized compensation cost
related to unvested stock options granted under the 2016
Plan.
NOTE 10 — EMPLOYEE BENEFIT PLAN
KeyStone
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,
KeyStone 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 KeyStone in 2016 and 2015 was $140,612
and $114,741, respectively.
F-82
NOTE 11 — EARNINGS (LOSS) PER SHARE
The
following table provides information relating to the calculation of
earnings (loss) per common share:
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
Basic and diluted
(loss) earnings per share
|
|
|
Net (loss)
earnings
|
$(38,984)
|
$369,395
|
Less: preferred
stock dividends
|
(5,286)
|
—
|
Net (loss) income
attributable to common shareholders
|
$(44,270)
|
$369,395
|
Weighted average
common shares outstanding - basic and diluted
|
3,958,619
|
1,370
|
Basic and diluted
(loss) earnings per share
|
$(0.01)
|
$269.63
|
Potentially
dilutive securities excluded due to anti-dilutive
effect
|
70,875
|
—
|
For the
year ended December 31, 2016, the following potentially
dilutive securities were excluded from diluted (loss) earnings per
share as the Company had a net loss for the year: 25,000
outstanding stock options, 6,283 for outstanding warrants and
13,542 related to the Series A Preferred Stock. There were no
potentially dilutive securities during the year ended
December 31, 2015.
(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.
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 year ended December 31,
2016 (there were no outstanding participating securities in
2015):
|
Year Ended
December 31,
2016
|
Numerator:
|
|
Net (loss) earnings
from continuing operations
|
$(38,984)
|
Less: preferred
stock dividends
|
(5,286)
|
Net income (loss)
attributable to shareholders
|
$(44,270)
|
Denominator:
|
|
Weighted average
common shares outstanding
|
3,958,619
|
Participating
securities - Series A preferred stock and warrants
|
6,283
|
Weighted average
shares outstanding
|
3,964,902
|
Loss per common
share - basic and diluted under two-class method
|
$(0.01)
|
(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.
F-83
NOTE 12 — SUBSEQUENT EVENTS
Second Offering Closing
On
January 23, 2017, KeyStone completed its second closing of the
Series A Preferred Stock offering (the “Offering”). The
second closing of the Offering was for the sale of 119,757 Units
with each Unit consisting of one share of the Company’s
Series A Preferred Stock and a warrant to purchase 0.25 KeyStone
Common Shares, exercisable at any time for seven years, at an
exercise price of $2.00 per KeyStone Common Share. KeyStone
received aggregate gross proceeds of $1,197,570 in the second
closing.
Increase of Series A Preferred Stock Designated Shares
On
March 20, 2017, KeyStone increased the total number of
designated shares of the Series A Preferred Stock from 500,000 to
505,000 shares.
Third and Final Offering Closing
On
March 21, 2017, KeyStone completed its third and final closing
of the Offering. The third and final sale of 81,000 Units with each
Unit consisting of one share of Series A Preferred Stock, and a
warrant to purchase 0.25 shares of KeyStone Common Shares,
exercisable at any time for seven years, at an exercise price of
$2.00 per KeyStone Common Share. KeyStone received aggregate gross
proceeds of $810,000 in the third and final closing.
The
aggregate total sold in the Offering through and including the
third and final closing was 502,327 Units for total gross proceeds
to the Company of $5,023,270. The Offering is now
closed.
Firestorm Acquisition
On
January 25, 2017 (the “Closing Date”), KeyStone
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 KeyStone, each of the Firestorm
Entities, each of the Members of the Firestorm Entities, and a
newly created acquisition subsidiary of KeyStone, Firestorm
Holdings, LLC, a Delaware limited liability company
(“Firestorm Holdings”), KeyStone has 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 KeyStone as of the Closing Date to the three
principals (Harry W. Rhulen, Suzanne Loughlin, and James W.
Satterfield, collectively the “Firestorm Principals”)
of the 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 KeyStone payable over five years after the Closing
Date, to all the members (consisting of the Firestorm Principals
and Lancer Financial Group, Inc. (“Lancer”)) of the
Firestorm Entities. 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%. The Lancer Note also has a
capped subordination of $7,000,000, subject to the consent of
Lancer;
●
Each of the
Firestorm Principals were issued 162,698 shares of the common
stock, par value $0.0001 per share, of KeyStone (“KeyStone
Common Shares”), for an aggregate issuance of 488,094
KeyStone Common Shares;
●
Each of the
Firestorm Principals received warrants to purchase 54,233 KeyStone
Common Shares, exercisable over a period of five years after the
Closing Date, at an exercise price of $5.00 per share. The form of
$5.00 Common Stock Purchase Warrant (the “$5.00
Warrant”); and
●
Each of the
Firestorm Principals received warrants to purchase 54,233 KeyStone
Common Shares, exercisable over a period of five years after the
Closing Date, at an exercise price of $7.00 per share. The form of
$7.00 Common Stock Purchase Warrant (the “$7.00
Warrant”).
F-84
As the
Firestorm acquisition has recently been completed, the Company is
currently in the process of completing the purchase price
allocation. As a result, the purchase price allocation for
Firestorm will be included in the Company’s consolidated
financial statements in future periods in 2017.
The
following unaudited pro-forma combined financial information gives
effect to the acquisition of Firestorm as if it was consummated
January 1, 2015. 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, 2015 (the
beginning of the earliest period presented) or to project potential
operating results as of any future date or for any future
periods.
|
For the
year
ended
December 31,
|
|
|
2016
|
2015
|
Revenues
|
$13,323,880
|
$10,584,626
|
Net income
(loss)
|
$(142,052)
|
$223,140
|
Basic earnings
(loss) per share
|
$(0.03)
|
$0.46
|
Diluted earnings
(loss) per share
|
$(0.03)
|
$0.46
|
In
connection with the MIPA, KeyStone 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 Closing Date his
employment agreement will become effective for an initial five-year
term as President of KeyStone Solutions, Inc. His base salary will
be $275,000 per annum, and he will be eligible for a bonus as
determined by the KeyStone’s compensation committee.
Mr. Rhulen will also be eligible to receive all such other
benefits as are provided by the KeyStone to other management
employees that are consistent with the KeyStone’s fringe
benefits available to any other officer or executive of the
KeyStone. Mr. Rhulen has been granted options to purchase
80,000 KeyStone Common Shares, which shall begin vesting on the one
year anniversary of the Closing Date and continue vesting monthly
over the following two years, at an exercise price of $3.00 per
share.
Suzanne Loughlin Employment Agreement
The
Loughlin Employment Agreement provides that upon the Closing Date
her employment agreement will become effective for an initial
five-year term as General Counsel and Chief Administrative Officer
of KeyStone Solutions, Inc. Her base salary will be $225,000 per
annum, and she will be eligible for a bonus as determined by the
KeyStone’s compensation committee. Ms. Loughlin will
also be eligible to receive all such other benefits as are provided
by the KeyStone to other management employees that are consistent
with the KeyStone’s fringe benefits available to any other
officer or executive of the KeyStone. Ms. Loughlin has been
granted options to purchase 80,000 KeyStone Common Shares, which
shall begin vesting on the one year anniversary of the Closing Date
and continue vesting monthly over the following two years, at an
exercise price of $3.00 per share.
James W. Satterfield Employment Agreement
The
Satterfield Employment Agreement provides that upon the 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 the
KeyStone’s compensation committee. Mr. Satterfield will
also be eligible to receive all such other benefits as are provided
by the KeyStone to other management employees that are consistent
with the KeyStone’s fringe benefits available to any other
officer or executive of the KeyStone or its subsidiaries.
Mr. Satterfield has been granted options to purchase 50,000
KeyStone Common Shares, which shall begin vesting on the one year
anniversary of the Closing Date and continue vesting monthly over
the following two years, at an exercise price of $3.00 per share,
in connection with the Acquisition.
F-85
Brekford Corp. Definitive Agreement
On
February 10, 2017, KeyStone and Brekford, Inc.
(“Brekford”) entered into an Agreement and Plan of
Merger (the “Merger Agreement”) to combine the
businesses of Brekford and KeyStone. The Merger Agreement provides
for Brekford and KeyStone to each engage in merger transactions
(the “Mergers”) with separate wholly-owned subsidiaries
of Novume Solutions, Inc., a Delaware corporation
(“Novume”) and a wholly-owned subsidiary of KeyStone
established in 2017. One wholly-owned subsidiary of Novume will
merge with and into Brekford, leaving Brekford as a wholly-owned
subsidiary of Novume, and KeyStone will merge with and into another
wholly-owned subsidiary of Novume (“KeyStone Merger
Sub”), with KeyStone Merger Sub surviving such
merger.
If the
Mergers are completed: (1) each share of Brekford Common Stock
issued and outstanding immediately prior to the Mergers and all
rights in respect thereof, shall, without any action on the part of
any holder thereof, cease to exist and be converted into and become
exchangeable for the right to receive 1/15th of a share (the
“Brekford Exchange Ratio”) of Novume Common Stock,
(2) each share of KeyStone Common Stock issued and outstanding
immediately prior to the Mergers and all rights in respect thereof,
shall, without any action on the part of any holder thereof, cease
to exist and be converted into and become exchangeable for 1.9399
shares of Novume Common Stock (the “KeyStone Common Exchange
Ratio”), and (3) each share of KeyStone Preferred Stock
and all rights in respect thereof, shall, without any action on the
part of any holder thereof, cease to exist and be converted into
and become exchangeable for 1 share of Novume Preferred Stock (the
“KeyStone Preferred Exchange Ratio”). The Brekford
Exchange Ratio, the KeyStone Common Exchange Ratio and the KeyStone
Preferred Exchange Ratio have been determined with intent that
immediately after the Mergers, the pre-merger stockholders of
Brekford will own that such portion of the capital stock of Novume
as shall be equal to approximately 20% of the issued and
outstanding Novume Common Stock, on a fully-diluted basis, and the
pre-merger stockholders of KeyStone will own that portion of the
capital stock of Novume as is equal to approximately 80% of the
issued and outstanding Novume Common Stock, on a fully-diluted
basis.
The
number of issued and outstanding shares of Brekford Common Stock
and the number of shares of Brekford Common Stock underlying
outstanding derivative securities of Brekford, and the number of
issued and outstanding shares of KeyStone Common Stock and the
number of shares of KeyStone Common Stock underlying outstanding
equity instruments of KeyStone, at the time of the Mergers, cannot
be determined until the Mergers are completed.
Paul de Bary Stock Option Grant
On
January 11, 2017 the Board of Directors (the
“Board”) of KeyStone, voted to expand the size of the
Board from five members to six members, and to appoint
Mr. Paul A. de Bary as an independent director of the
Company.
In
connection with his appointment as an independent director
Mr. de Bary was granted an option to purchase 25,000 shares of
KeyStone common stock at an exercise price of $3.00 per share all
of which are immediately exercisable.
Employee Stock Option Grant
On
January 1, 2017 and February 1, 2017, the Company granted
to employees options to purchase an aggregate total of 240,900
shares of KeyStone common stock at exercise prices with ranging
from $2.75 to $3.00 per share. The options to purchase 150,900
shares of KeyStone common stock have an exercise price of $3.00 per
share and vest annually in equal amounts over a period of three
years. The options to purchase 90,000 shares of KeyStone common
stock have an exercise price of $2.75 per share with one-third of
the options vesting on March 1, 2017 and the balance vesting
monthly over the following two years. These options expire ten
years from the grant date.
2016 Annual Report Filing Delayed
The
Company did not file its 2016 Annual Report on Form 1-K due on
May 1, 2017. Despite using its best efforts to prepare the
filing in advance of the due date, the Company was unable to timely
file its audited consolidated financial statements for the years
ended December 31, 2016 and 2015, which are required in the
annual report, for the reasons stated above with respect to the
changes in the Company’s certifying auditors. The Company is
filing its 2016 Annual Report on Form 1-K contemporaneously with
this registration statement.
F-86
Amending the Merger Termination Date
On
May 9, 2017, the Company, together with Brekford Corp.
(“Brekford”), Novume Solutions, Inc., KeyStone Merger
Sub, LLC (formerly KeyStone Merger Sub, Inc.), and Brekford Merger
Sub, Inc., entered into Amendment No. 1 (the
“Amendment”) to that certain Merger Agreement
previously entered into by such parties on February 10, 2017
(the “Merger Agreement”). The original terms of the
Merger Agreement authorized each of the Company and Brekford to
terminate the Merger Agreement if closing of the transactions
contemplated under the Merger Agreement did not occur by
June 1, 2017 (the “Termination Date”). The
Amendment extends the Termination Date until July 31,
2017.
Changes in Issuer’s Certifying Accountant
On
May 9, 2017, the Company appointed BD & Company, Inc.
(“BD & Company”) as the Company’s
independent registered public accounting firm for the
Company’s fiscal years ended December 31, 2015 and
2016.
During
the fiscal years ended December 31, 2015 and 2016, and during
both the Company’s first quarter of 2017, which ended on
March 31, 2017, and the interim period from March 31,
2017 through May 9, 2017, neither the Company nor anyone
acting on its behalf consulted with BD & Company regarding
(i) the application of accounting principles to a specified
transaction either completed or proposed or the type of audit
opinion that might be rendered on the Company’s financial
statements, and neither a written report nor oral advice was
provided that BD & Company concluded was an important
factor considered by the Company in reaching a decision as to the
accounting, auditing or financial reporting issue, or (ii) any
matter that was either the subject of a disagreement between the
Company and its predecessor auditor as described in
Item 304(a)(1)(iv) of Regulation S-K or a reportable event as
described in Item 304(a)(1)(v) of Regulation S-K.
KeyStone Units Available for Trading on the OTCQB
On
June 6, 2017, KeyStone’s aggregate of 502,327 Units were
accepted for quotation on the OTCQB under the trading symbol
“KSSNU” and the Units were available for trading on
June 7, 2017.
F-87
BREKFORD TRAFFIC SAFETY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
Index to Financial Statements
|
Page
|
Reports
of Independent Registered Public Accounting Firms
|
F-89
|
Consolidated
Balance Sheets at December 31, 2016 and 2015
|
F-91
|
Consolidated
Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2016 and 2015
|
F-92
|
Consolidated
Statements of Changes in Stockholders’ Equity (Deficit) for
the Years Ended December 31, 2016 and 2015
|
F-93
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2016
and 2015
|
F-94
|
Notes
to Consolidated Financial Statements
|
F-95
|
F-88
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Brekford Traffic Safety, Inc., fka Brekford Corp.
We have
audited the accompanying consolidated balance sheet of Brekford
Traffic Safety, Inc., fka Brekford Corp. (the “Company”) as of
December 31, 2016, and the related consolidated statements of
operations and comprehensive loss, changes in stockholders’
equity (deficit), and cash flows for the year ended
December 31, 2016. The Company’s management is
responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Brekford Traffic Safety, Inc., fka Brekford Corp. as of
December 31, 2016, and the results of its operations and its
cash flows for the year ended December 31, 2016, in conformity
with accounting principles generally accepted in the United States
of America.
As
discussed in Note 18 to the consolidated financial statements, the
Company entered into an agreement and plan of merger as well as a
contribution and unit purchase agreement in February
2017.
We have
also audited the adjustments to the 2015 consolidated financial
statements to retrospectively apply the change in accounting for
discontinued operations, as described in Note 4. In our opinion,
such adjustments are appropriate and have been properly applied. We
were not engaged to audit, review, or apply any procedures to the
2015 consolidated financial statements of the Company other than
with respect to the adjustments and, accordingly, we do not express
an opinion or any other form of assurance on the 2015 consolidated
financial statements taken as a whole.
/s/
BD & Company, Inc.
BD
& Company, Inc.
Owings
Mills, MD
March 28,
2017
F-89
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Brekford Traffic Safety, Inc., fka Brekford Corp.
We have
audited, before the effects of the adjustments to retrospectively
apply the presentation of discontinued operations, the accompanying
consolidated balance sheet of Brekford Traffic Safety, Inc., fka
Brekford Corp. (the “Company”) as of December 31,
2015, and the related consolidated statements of operations and
comprehensive loss, changes in stockholders’ (deficit)
equity, and cash flows for the year then ended. The Company’s
management is responsible for the 2015 financial statements. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the 2015 consolidated financial statements, before the
effects of the adjustments to retrospectively apply the
presentation of discontinued operations described in Note 4,
referred to above present fairly, in all material respects, the
financial position of Brekford Traffic Safety, Inc., fka Brekford
Corp. as of December 31, 2015, and the results of its
operations and its cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States
of America.
We were
not engaged to audit, review, or apply any procedures to the
adjustments to retrospectively apply the presentation of
discontinued operations described in Note 4 and, accordingly, we do
not express an opinion or any other form of assurance about whether
such adjustments are appropriate and have been properly applied.
Those adjustments were audited by BD & Company,
Inc.
/s/
Stegman & Company
Stegman &
Company
Baltimore,
Maryland
March 24,
2016
F-90
BREKFORD TRAFFIC SAFETY, INC.
CONSOLIDATED BALANCE SHEETS
|
December 31,
2016
|
December 31,
2015
|
ASSETS
|
|
|
CURRENT
ASSETS
|
|
|
Cash
|
$591,618
|
$580,400
|
Accounts
receivable, net of allowance $0 at December 31, 2016 and 2015,
respectively
|
115,106
|
131,839
|
Unbilled
receivables
|
314,262
|
304,470
|
Prepaid
expenses
|
53,211
|
49,912
|
Inventory
|
221,186
|
316,775
|
Current
assets—discontinued operations
|
1,069,511
|
3,960,950
|
Total current
assets
|
2,364,894
|
5,344,346
|
Property and
equipment, net
|
208,310
|
176,300
|
Other non-current
assets
|
9,877
|
83,478
|
Non-current
assets—discontinued operations
|
40,387
|
142,777
|
TOTAL
ASSETS
|
$2,623,468
|
$5,746,901
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts payable
and accrued expenses
|
$721,880
|
$638,117
|
Accrued payroll and
related expenses
|
17,062
|
13,840
|
Obligations under
other notes payable – current portion
|
20,150
|
29,277
|
Derivative
liability
|
24,360
|
99,036
|
Other
liabilities
|
55,408
|
46,979
|
Current
liabilities—discontinued operations
|
971,466
|
4,125,526
|
Total current
liabilities
|
1,810,326
|
4,952,775
|
|
|
|
LONG—TERM
LIABILITIES
|
|
|
Other notes
payable—net of current portion
|
—
|
21,660
|
Deferred rent, net
of current portion
|
6,520
|
6,739
|
Convertible
promissory notes, net of debt discounts of $40,853 and $418,730 at
December 31, 2016 and 2015, respectively
|
299,147
|
221,269
|
Long term
liabilities—discontinued operations
|
989,520
|
538,184
|
Total long-term
liabilities
|
1,295,187
|
787,852
|
TOTAL
LIABILITIES
|
3,105,513
|
5,740,627
|
|
|
|
STOCKHOLDERS’
(DEFICIT) EQUITY
|
|
|
Preferred stock,
par value $0.0001 per share; 20,000,000 shares authorized; none
issued and outstanding
|
—
|
—
|
Common stock, par
value $0.0001 per share; 150,000,000 shares authorized; 49,311,264
and 45,151,254 issued and outstanding, at December 31, 2016
and 2015, respectively
|
4,931
|
4,515
|
Additional paid-in
capital
|
11,515,472
|
10,951,491
|
Treasury Stock, at
cost 10,600 shares at December 31, 2016 and 2015
respectively
|
(5,890)
|
(5,890)
|
Accumulated
deficit
|
(11,996,783)
|
(10,942,380)
|
Other comprehensive
income (loss)
|
225
|
(1,462)
|
TOTAL
STOCKHOLDERS’ (DEFICIT) EQUITY
|
(482,045)
|
6,274
|
TOTAL LIABILITIES
AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
$2,623,468
|
$5,746,901
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-91
BREKFORD TRAFFIC SAFETY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
Net
Revenue
|
$2,534,264
|
$2,811,929
|
Cost of
Revenue
|
827,304
|
804,171
|
Gross
profit
|
1,706,960
|
2,007,758
|
Operating
expenses:
|
|
|
Salaries and
related expenses
|
1,645,073
|
1,628,150
|
Selling, general
and administrative expenses
|
1,071,272
|
1,213,864
|
Total operating
expenses
|
2,716,345
|
2,842,014
|
Loss from
operations
|
(1,009,385)
|
(834,256)
|
Other (expense)
income:
|
|
|
Interest
expense
|
(402,168)
|
(455,937)
|
Change in fair
value of derivative liability
|
74,676
|
14,784
|
Loss on
extinguishment of debt
|
(291,911)
|
(55,021)
|
Total other
(expense) income
|
(619,403)
|
(496,174)
|
Loss before income
taxes
|
(1,628,788)
|
(1,330,430)
|
Income tax
benefit
|
230,900
|
385,600
|
Net loss from
continuing operations
|
(1,397,888)
|
(944,830)
|
Net income from
discontinued operations
|
343,485
|
573,659
|
Net
loss
|
(1,054,403)
|
(371,171)
|
Other comprehensive
income (loss) – foreign currency translation
|
1,687
|
(1,462)
|
Comprehensive
loss
|
$(1,052,716)
|
$(372,633)
|
|
|
|
Net loss per share
from continuing operations – basic
|
$(0.03)
|
$(0.02)
|
Net income per
share from discontinued operations – basic
|
$0.01
|
$0.01
|
Net loss per share
– basic
|
$(0.02)
|
$(0.01)
|
|
|
|
Net loss per share
from continuing operations – diluted
|
$(0.03)
|
$(0.02)
|
Net income per
share from discontinued operations – diluted
|
$0.01
|
$0.01
|
Net loss per share
– diluted
|
$(0.02)
|
$(0.01)
|
Weighted average
shares outstanding used in computing per share
amounts:
|
|
|
Basic
|
47,357,787
|
44,690,550
|
Diluted
|
53,154,216
|
52,201,684
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-92
BREKFORD TRAFFIC SAFETY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
(DEFICIT) EQUITY
For the Years Ended December 31, 2016 and 2015
|
Common Stock
|
Treasury Stock
|
|
|
|
|
||
|
Shares
|
Par Value
|
Shares
|
Par Value
|
Additional
Paid-In Capital
|
Accumulated
Deficit
|
Other
comprehensive income (loss)
|
Total
|
BALANCE –
January 1, 2015
|
44,500,569
|
$4,450
|
(10,600)
|
$(5,890)
|
$10,204,479
|
$(10,571,209)
|
$—
|
$(368,170)
|
Restricted shares
issues to employees
|
132,000
|
13
|
—
|
—
|
44,867
|
—
|
—
|
44,880
|
Convertible debt
exchanged for common shares
|
518,685
|
52
|
—
|
—
|
133,010
|
—
|
—
|
133,062
|
Debt discount
feature related to issuance of convertible note
payable
|
—
|
—
|
—
|
—
|
557,921
|
—
|
—
|
557,921
|
Stock options to
non-employees
|
—
|
—
|
—
|
—
|
11,214
|
—
|
—
|
11,214
|
Other comprehensive
loss
|
—
|
—
|
—
|
—
|
—
|
|
(1,462)
|
(1,462)
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(371,171)
|
—
|
(371,171)
|
BALANCE-December 31,
2015
|
45,151,254
|
$4,515
|
(10,600)
|
$(5,890)
|
$10,951,491
|
$(10,942,380)
|
$(1,462)
|
$6,274
|
Restricted shares
issues to employees
|
332,000
|
33
|
—
|
—
|
52,967
|
—
|
—
|
53,000
|
Convertible debt
exchanged for common shares
|
3,828,010
|
383
|
—
|
—
|
496,510
|
—
|
—
|
496,893
|
Stock options to
non-employees
|
—
|
—
|
—
|
—
|
14,504
|
—
|
—
|
14,504
|
Other comprehensive
income
|
—
|
—
|
—
|
—
|
—
|
|
1,687
|
1,687
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(1,054,403)
|
|
(1,054,403)
|
BALANCE –
December 31, 2016
|
49,311,264
|
$4,931
|
(10,600)
|
$(5,890)
|
$11,515,472
|
$(11,996,783)
|
$225
|
$(482,045)
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-93
BREKFORD TRAFFIC SAFETY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
Cash flows from
operating activities:
|
|
|
Net
loss
|
$(1,054,403)
|
$(371,171)
|
Adjustments to
reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation and
amortization
|
101,564
|
149,232
|
Share-based
compensation
|
67,504
|
56,094
|
Amortization of
debt discount and warrant features
|
234,664
|
328,021
|
Amortization of
financing cost
|
48,195
|
21,741
|
Change in fair
value of derivative liability
|
(74,676)
|
(14,784)
|
Loss on
extinguishment of debt
|
291,911
|
55,021
|
Changes in
operating assets and liabilities including assets and liabilities
held for sale:
|
|
|
Accounts
receivable
|
16,733
|
83,095
|
Unbilled
receivables
|
(9,792)
|
(105,745)
|
Prepaid expenses
and other non-current assets
|
(3,299)
|
40,446
|
Inventory
|
95,589
|
(65,929)
|
Accounts payable
and accrued expenses
|
83,763
|
(105,147)
|
Accrued payroll and
related expenses
|
3,222
|
8,552
|
Customer
deposits
|
—
|
(137,827)
|
Deferred
rent
|
(218)
|
6,738
|
Other
liabilities
|
82,030
|
19,055
|
Net cash used in
operating activities from continuing operations
|
(117,213)
|
(32,608)
|
Net cash provided
by (used in) operating activities from discontinued
operations
|
1,211,871
|
(783,852)
|
Net cash provided
by (used in) operating activities
|
1,094,658
|
(816,460)
|
Cash flows from
investing activities including non-current assets held for
sale:
|
|
|
Purchases of
property and equipment
|
(133,574)
|
(128,638)
|
Net cash used in
investing activities from continuing operations
|
(133,574)
|
(128,638)
|
Net cash used in
investing activities from discontinued operations
|
(7,000)
|
—
|
Net cash used in
investing activities
|
(140,574)
|
(128,638)
|
Cash flows from
financing activities:
|
|
|
Net change in line
of credit
|
—
|
21,795
|
Principal payments
on lease obligation
|
—
|
(140,209)
|
Payments on other
notes payable
|
(30,787)
|
(14,369)
|
Borrowings on term
notes
|
—
|
650,000
|
Deferred financing
cost
|
—
|
(52,499)
|
Net cash provided
by (used in) financing activities from continuing
operations
|
(30,787)
|
464,718
|
Net cash used in
discontinued operations financing activities
|
(913,766)
|
(50,639)
|
Net cash provided
by (used in) financing activities
|
(944,553)
|
414,079
|
Effect of foreign
currency translation
|
1,687
|
(1,462)
|
Net change in
cash
|
11,218
|
(532,481)
|
Cash –
beginning of year
|
580,400
|
1,112,881
|
Cash –
end of year
|
$591,618
|
$580,400
|
Supplemental
disclosures of cash flow information:
|
|
|
Cash paid for
interest
|
$292,292
|
$236,355
|
Cash paid for
income taxes
|
$(8,429)
|
$1,690
|
Conversion of notes
payable in exchange for common stock
|
$300,000
|
$75,000
|
The accompanying notes are an integral part of these consolidated
financial statements.
F-94
BREKFORD TRAFFIC SAFETY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2016 and 2015
NOTE 1 – DESCRIPTION OF THE BUSINESS
Brekford
Traffic Safety, Inc., fka Brekford Corp., (“the
Company”) (OTCBB; OTCQB; BFDI), 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. The Company’s core values
of integrity, accountability, respect, and teamwork drive our
employees to achieve excellence and deliver industry leading
technology and services, thereby enabling a superior level of
reliability to our clients.
Prior
to March 1, 2017, part of Brekford’s business included
sales of products and services focusing on law enforcement
vehicles. These products and services included rugged information
technology solutions, mobile data, digital video, electronic
ticketing, and vehicle upfitting. Rugged information technology
solutions included both ruggedized laptops and in-car video
solutions, among other technology offerings, in addition to vehicle
mounting systems, docking stations, and custom-built packages.
Vehicle upfitting solutions included the turnkey installation of
various components including rugged technology, as well as sirens,
lights, radios, gun racks, and decals. Subsequent to the Closing on
February 28, 2017, Brekford will continue to retain a 19.9%
ownership interest in this business, which continues to operate
under the name Global Public Safety (See Subsequent Event Note
18).
As used
in these notes, the terms “Brekford”, “the
Company”, “we”, “our”, and
“us” refer to Brekford Traffic Safety, Inc. fka
Brekford Corp. and, unless the context clearly indicates otherwise,
its consolidated subsidiary.
NOTE 2 – LIQUIDITY
For the
year ended December 31, 2016 the Company incurred a net loss
of approximately $1,054,403, and provided $1,094,658 of cash for
operations. Additionally, at December 31, 2016 the
company has cash available of $591,618, a working capital surplus
of $554,568 and availability under the established credit
facility (See Note 5) of approximately
$2.7 million.
On
February 28, 2017, as presented elsewhere in this Annual
Report, the Company completed a transaction to sell substantially
all assets and certain liabilities related to its vehicle services
business. From the approximately $4.0 million in cash
proceeds, all outstanding debt of the Company was retired,
including the Loan Agreement, the Investor Note, and the two of its
directors, Messrs. C.B. Brechin and Scott Rutherford.
Management
believes that the Company’s current level of cash combined
with cash that it expects to generate in its operations during the
next 12 months including anticipated new customer contracts will be
sufficient to sustain the Company’s business initiatives
through at least March 28, 2018, but there can be no assurance
that these measures will be successful or adequate. In the
event that the Company’s cash reserves and cash flow from
operations are not sufficient to fund the Company’s future
operations, it may need to obtain additional capital.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICES
Principles of Consolidation and Basis of Presentation
The
Company’s consolidated financial statements include the
accounts of Brekford Traffic Safety, Inc. and its wholly-owned
subsidiary, Municipal Recovery Agency, LLC. Intercompany
transactions and balances are eliminated in
consolidation.
F-95
Use of Estimates
The
preparation of financial statements in conformity with U.S.
generally accepted accounting principles (“GAAP”)
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during
the reporting period. In the accompanying unaudited consolidated
financial statements, estimates are used for, but not limited to,
stock-based compensation, allowance for doubtful accounts, sales
returns, allowance for inventory obsolescence, fair value of
long-lived assets, deferred taxes and valuation allowance, and the
depreciable lives of fixed assets. Actual results could differ from
those estimates.
Reclassifications
Certain
amounts in prior-year financial statements have been reclassified
for comparative purposes to conform to the presentation in the
current year financial statements.
Concentration of Credit Risk
The
Company maintains cash accounts with major financial
institutions. From time to time, amounts deposited may exceed
the FDIC insured limits.
Accounts Receivable
Accounts
receivable are carried at estimated net realizable value. The
Company has a policy of reserving for uncollectable accounts based
on its best estimate of the amount of probable credit losses in its
existing accounts receivable. The Company calculates the allowance
based on a specific analysis of past due balances. Past due status
for a particular customer is based on how recently payments have
been received from that customer. Historically, the Company’s
actual collection experience has not differed significantly from
its estimates, due primarily to credit and collections practices
and the financial strength of its customers.
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.
Property and Equipment
Property
and equipment is stated at cost. Depreciation of furniture,
vehicles, computer equipment and software and phone equipment is
calculated using the straight-line method over the estimated useful
lives (two to ten years), and leasehold improvements are amortized
on a straight-line basis over the shorter of their estimated useful
lives or the lease term (which is three to five
years).
Management
reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of the long-lived
asset is measured by a comparison of the carrying amount of the
asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the estimated
fair value of the assets.
Revenue Recognition
For
automated traffic safety enforcement revenue, the Company
recognizes the revenue when the required collection efforts are
completed and the respective municipality is billed depending on
the terms of the respective contract. The Company records revenue
related to automated traffic violations for the Company’s
share of the violation amount.
F-96
Shipping and Handling Costs
All
amounts billed to customers related to shipping and handling are
included in products revenues and all costs of shipping and
handling are included in cost of sales in the accompanying
consolidated statements of operations. The Company incurred
shipping and handling costs of $15,525 and $45,255 for continuing
operations for the years ended December 31, 2016 and 2015,
respectively. The Company incurred shipping and handling costs of
$59,094 and $58,120 for discontinued operations for the years ended
December 31, 2016 and 2015, respectively.
Advertising Costs
The
Company expenses advertising costs as incurred. These expenses are
included in selling, general and administrative expenses in the
accompanying statements of operations. Advertising expense were
insignificant for the years ended December 31, 2016 and
2015, respectively.
Share-Based Compensation
The
Company complies with the provisions of Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 718, Compensation-Stock Compensation, in measuring and
disclosing stock based compensation cost. The measurement objective
in ASC Paragraph 718-10-30-6 requires public companies to measure
the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the award.
The cost is recognized in expense over the period in which an
employee is required to provide service in exchange for the award
(the vesting period). Performance-based awards are expensed ratably
from the date that the likelihood of meeting the performance
measures is probable through the end of the vesting
period.
Treasury Stock
The
Company accounts for treasury stock using the cost method. As of
December 31, 2016, 10,600 shares of our common stock were held
in treasury at an aggregate cost of $5,890.
Income Taxes
The
Company uses the liability method to account for income taxes.
Income tax expense includes income taxes currently payable and
deferred taxes arising from temporary differences between financial
reporting and income tax bases of assets and liabilities. Deferred
income taxes are measured using the enacted tax rates and laws that
are expected to be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Income tax expense, if any, consists of the taxes payable for the
current period. Valuation allowances are established when the
realization of deferred tax assets are not considered more likely
than not. Due to the Company’s continued losses 100%
valuation allowance has been established on all deferred tax
assets.
The
Company files income tax returns with the U.S. Internal Revenue
Service and with the revenue services of various states. The
Company’s policy is to recognize interest related to
unrecognized tax benefits as income tax expense. The Company
believes that it has appropriate support for the income tax
positions it takes and expects to take on its tax returns, and that
its accruals for tax liabilities are adequate for all open years
based on an assessment of many factors including past experience
and interpretations of tax law applied to the facts of each
matter.
In the
years ended December 31, 2016 and 2015, we reported financial
results for both operations and discontinued operations. ASC
740-20-45 sets down the general rule for allocating income tax
expense or benefit between operations and discontinued operations.
The general rule requires the computation of tax expense or benefit
by entity taking into consideration all items of income, expense,
and tax credits. Next, a computation is made taking into
consideration only those items related to continuing operations.
Any difference is allocated to items other than continuing
operations e.g. discontinued operations. Under these general rules,
no tax expense or benefit would be allocated to discontinued
operations.
F-97
An
exception to these rules apply under ASC 740-20-45-7 where an
entity has 1) a loss from continuing operations and income related
to other items such as discontinued operations and 2) the entity
would not otherwise recognize a benefit for the loss from
continuing operations under the approach described in ASC
740-20-45. This fact pattern applies for the year ended
December 31, 2016 and 2015. Application of this rule exception
results in the allocation of tax expense to discontinued operations
with an offsetting amount of tax benefit reported by the continuing
operations.
Overall,
we allocated $230,900 and $385,600 of tax expense to net income
from discontinued operations and an offsetting tax benefit to net
loss from continuing operations in the years ended
December 31, 2016 and 2015, respectively.
Loss per Share
Basic
loss per share is calculated by dividing net loss available to
common stockholders by the weighted-average number of common shares
outstanding and does not include the effect of any potentially
dilutive common stock equivalents. Diluted loss per share is
calculated by dividing net loss by the weighted-average number of
shares outstanding, adjusted for the effect of any potentially
dilutive common stock equivalents. There is no dilutive effect
on the loss per share during loss periods. See Note 11 for the
calculation of basic and diluted loss earnings per
share.
Fair Value of Financial Instruments
The
carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued expenses approximate their
fair values based on the short-term maturity of these instruments.
The carrying amount of the Company’s promissory note
obligations approximate fair value, as the terms of these notes are
consistent with terms available in the market for instruments with
similar risk.
We
account for our derivative financial instruments, consisting solely
of certain stock purchase warrants that contain non-standard
anti-dilutions provisions and/or cash settlement features, and
certain conversion options embedded in our convertible instruments,
at fair value using Level 3 inputs, which are discussed in
Note 14 to these consolidated financial statements. We determine
the fair value of these derivative liabilities using the
Black-Scholes option-pricing model when appropriate, and in certain
circumstances using binomial lattice models or other accepted
valuation practices.
When
determining the fair value of our financial assets and liabilities
using the Black-Scholes option-pricing model, we are required to
use various estimates and unobservable inputs, including, among
other things, contractual terms of the instruments, expected
volatility of our stock price, expected dividends, and the
risk-free interest rate. Changes in any of the assumptions related
to the unobservable inputs identified above may change the fair
value of the instrument. Increases in expected term, anticipated
volatility and expected dividends generally result in increases in
fair value, while decreases in the unobservable inputs generally
result in decreases in fair value.
Foreign Currency Transactions
The
Company 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.
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
FASB
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 current analysis,
management has determined that the Company has only one operating
segment, which is Traffic Safety Solutions.
F-98
Recent Accounting Pronouncements
In May
2014, the FASB issued ASU 2014-09, Revenue from contracts with
Customers (Topic 606) (May 2014). The topic of Revenue Recognition
had become broad with several other regulatory agencies issuing
standards, which lacked cohesion. The new guidance established a
“comprehensive framework” and “reduces the number
of requirements to which an entity must consider in recognizing
revenue” and yet provides improved disclosures to assist
stakeholders reviewing financial statements. The amendments in this
Update are effective for annual reporting periods beginning after
December 15, 2017. Early adoption is not permitted. The
Company will adopt the methodologies prescribed by this ASU by the
date required. Adoption of the ASU is not expected to have a
significant effect on the Company’s consolidated financial
statements.
The
FASB has issued ASU No. 2014-15, Presentation of Financial
Statements-Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern. ASU 2014-15 is intended to define management’s
responsibility to evaluate whether there is substantial doubt about
an organization’s ability to continue as a going concern and
to provide related footnote disclosures. Under Generally Accepted
Accounting Principles (GAAP), financial statements are prepared
under the presumption that the reporting organization will continue
to operate as a going concern, except in limited circumstances.
Financial reporting under this presumption is commonly referred to
as the going concern basis of accounting. The going concern basis
of accounting is critical to financial reporting because it
established the fundamental basis for measuring and classifying
assets and liabilities. Currently, GAAP lacks guidance about
management’s responsibility to evaluate whether there is
substantial doubt the organization’s ability to continue as a
going concern or to provide footnote disclosures. The ASU provides
guidance to an organization’s management, with principles and
definition that are intended to reduce diversity in the timing and
content of disclosures that are commonly provided by organizations
today in the financial statement footnotes. The amendments in this
update are effective for the annual period ending after
December 31, 2016, and for annual periods and interim periods
thereafter. Early application is permitted. The Company has the
adopted the methodologies prescribed by this ASU by the date
required and there is no material impact on the Company’s
consolidated financial statements.
In
April 2015, the FASB issued ASU No. 2015-03,
“Interest-Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of the Debt Issuance Cost.” To
simplify the presentation of the debt issuance costs, the
amendments in this ASU require that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement
guidance for debt issuance costs are not affected by the amendments
in this ASU. The amendments in this ASU are effective for financial
statements issued for fiscal years beginning after
December 15, 2015 and interim periods within those years. By
adopting this standard, we have reclassified certain of our assets
and liabilities.
In
February 2016, FASB issued ASU-2016-02, “Leases (Topic
842).” The guidance requires that a lessee recognize in the
statement of financial position a liability to make lease payments
(the lease liability) and a right of use asset representing its
right to use the underlying asset for the lease term. For finance
leases: the right-of-use asset and a lease liability will be
initially measured at the present value of the lease payments, in
the statement of financial position; interest on the lease
liability will be recognized separately from amortization of the
right-of-use asset in the statement of comprehensive income; and
repayments of the principal portion of the lease liability will be
classified within financing activities and payments of interest on
the lease liability and variable lease payments within operating
activities in the statement of cash flows. For operating leases:
the right-of-use asset and a lease liability will be initially
measured at the present value of the lease payments, in the
statement of financial position; a single lease cost will be
recognized, calculated so that the cost of the lease is allocated
over the lease term on a generally straight-line basis; and all
cash payments will be classified within operating activities in the
statement of cash flows. Under Topic 842 the accounting applied by
a lessor is largely unchanged from that applied under previous
GAAP. The amendments in Topic 842 are effective for the Company
beginning January 1, 2019, including interim periods within
that fiscal year. We are currently evaluating the impact of
adopting the new guidance of the consolidated financial
statements.
F-99
In
January 2016, the Financial Accounting Standards Board
(“FASB”), issued Accounting Standards Update
(“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
November 2015, the FASB issued ASU 2015-17, “Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes,”
which simplifies the presentation of deferred income taxes by
requiring that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. This
ASU is effective for financial statements issued for annual periods
beginning after December 16, 2016, and interim periods within
those annual periods. The adoption of this standard will not have
any impact on the Company’s financial position, results of
operations and disclosures.
In July
2015, FASB issued ASU 2015-11, Simplifying the Measurement of
Inventory (“ASU 2015-11”), to simplify the guidance on
the subsequent measurement of inventory, excluding inventory
measured using last-in, first out or the retail inventory method.
Under the new standard, inventory should be at the lower of cost
and net realizable value. The new accounting guidance is effective
for interim and annual periods beginning after December 15,
2016 with early adoption permitted. The adoption of this standard
will not have any impact on the Company’s financial position,
results of operations and disclosures.
In
March 2016, the FASB issued ASU 2016-09, Compensation—Stock
Compensation: Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”), which simplifies several
aspects of the accounting for employee share-based payment
transactions for both public and nonpublic entities, including the
accounting for income taxes, forfeitures, and statutory tax
withholding requirements, as well as classification in the
statement of cash flows. ASU 2016-09 is effective for annual
periods beginning after December 15, 2016, and interim periods
within annual periods beginning after December 15, 2018. Early
adoption is permitted. The adoption of this standard will not have
any impact on the Company’s financial position, results of
operations and disclosures.
4
– DISCONTINUED OPERATIONS
On
February 6, 2017, the Company entered into a Contribution and
Unit Purchase Agreement (the “Agreement”) with LB&B
Associates Inc. (the “Purchaser”) and Global Public
Safety, LLC (“GPS”).
The
closing for the transaction set forth in the Agreement occurred on
February 28, 2017 (the “Closing”) and on such date
the Company contributed substantially all of the assets and certain
liabilities related to its vehicle services business (the
“Business”) to GPS. After the Closing, the Company will
continue to own and run other business operations that are not
related to the Business.
On the
Closing, GPS sold units representing 80.1% of the units of GPS to
the Purchaser 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 Purchaser
issuing the Company a promissory note (the “Promissory
Note”). After the Closing, the Company continues to own 19.9%
of the units of GPS. (See Subsequent Event footnote – Note
17).
F-100
ASC
360-10-45-9 requires that a long-lived asset (disposal group) to be
sold shall be classified as held for sale in the period in which a
set of criteria have been met, including criteria that the sale of
the asset (disposal group) is probable and actions required to
complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be
withdrawn. This criteria was achieved on December 21, 2016 as
the Company entered into a letter of intent with the purchaser.
Additionally, the discontinued operations are comprised of the
entirety of the vehicle services business, excluding corporate
services expenses. Lastly, for comparability purposes certain prior
period line items relating to the assets held for sale have been
reclassified and presented as discontinued operations for all
periods presented in the accompanying consolidated statements of
operations, consolidated statements of cash flows, and the
consolidated balance sheets.
In
accordance with ASC 205-20-S99, “Allocation of Interest to
Discontinued Operations”, the Company elected to not allocate
consolidated interest expense to discontinued operations where the
debt is not directly attributable to or related to discontinued
operations.
The
following information presents the major classes of line item of
assets and liabilities included as part of discontinued operations
in the consolidated balance sheet:
|
December 31,
|
December 31,
|
|
2016
|
2015
|
Current
assets—discontinued operations:
|
|
|
Accounts
receivable
|
$776,715
|
$3,649,425
|
Inventory
|
272,679
|
289,696
|
Prepaid
expenses
|
20,117
|
21,829
|
Total current
assets—discontinued operations
|
$1,069,511
|
$3,960,950
|
Noncurrent
assets—discontinued operations:
|
|
|
Property and
equipment, net
|
$27,362
|
$47,047
|
Other non-current
assets
|
13,025
|
95,730
|
Total noncurrent
assets—discontinued operations
|
$40,387
|
$142,777
|
Current
liabilities—discontinued operations:
|
|
|
Accounts payable
and accrued liabilities
|
$664,569
|
$2,341,016
|
Accrued payroll and
related expenses
|
15,386
|
84,159
|
Customer
deposits
|
34,219
|
36,070
|
Deferred
revenue
|
54,581
|
95,233
|
Term loan –
current
|
—
|
166,667
|
Line of
credit
|
202,711
|
1,402,381
|
Total current
liabilities—discontinued operations:
|
$971,466
|
$4,125,526
|
Long term
liabilities—discontinued operations:
|
|
|
Note
payable—long term portion
|
$452,572
|
$—
|
Deferred
rent
|
36,948
|
38,184
|
Notes
payable—related parties, long term portion
|
500,000
|
500,000
|
Total long term
liabilities—discontinued operations
|
$989,520
|
$538,184
|
F-101
The
following information presents the major classes of line items
constituting the after-tax loss from discontinued operations in the
consolidated statements of operations for the years ended
December 31, 2016 and 2015:
|
Year Ended
December 31,
|
|
|
2016
|
2015
|
Revenue
|
$10,311,558
|
$17,021,752
|
Cost of goods
sold
|
8,727,310
|
14,969,013
|
Gross
margin
|
1,584,248
|
2,052,739
|
Salaries and
related expenses
|
338,031
|
410,494
|
Selling, general
and administrative expenses
|
403,165
|
461,966
|
Total operating
expenses
|
741,196
|
872,460
|
Operating
income
|
843,052
|
1,180,279
|
Other
expense:
|
|
|
Interest expense,
net
|
268,667
|
221,020
|
Total other
expense
|
268,667
|
221,020
|
Income from
discontinued operations before tax
|
574,385
|
959,259
|
Income tax
expense
|
230,900
|
385,600
|
Income from
discontinued operations, net of tax
|
$343,485
|
$573,659
|
The
following information presents the major classes of line items
constituting significant operating and investing cash flow
activities in the consolidated statements of cash flows relating to
discontinued operations:
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
Cash flows from
operating activities of discontinued operations:
|
|
|
Adjustments to
reconcile net loss to net cash used in operating activities of
discontinued operations:
|
|
|
Depreciation and
amortization
|
$26,685
|
$40,382
|
Changes in
operating assets and liabilities including assets and liabilities
held for sale:
|
|
|
Accounts
receivable
|
2,872,709
|
(2,157,654)
|
Prepaid expenses
and other non-current assets
|
84,417
|
(32,693)
|
Inventory
|
17,017
|
141,406
|
Accounts payable
and accrued expenses
|
(1,676,445)
|
1,244,430
|
Deferred
revenue
|
(40,652)
|
(160,172)
|
Other
liabilities
|
(71,860)
|
140,449
|
Net cash provided
by (used in) operating activities from discontinued
operations
|
1,211,871
|
(783,852)
|
Cash flows from
investing activities in discontinued operations:
|
|
|
Purchases of
property and equipment
|
(7,000)
|
—
|
Net cash used in
investing activities in discontinued operations
|
(7,000)
|
—
|
Cash flows from
financing activities in discontinued operations:
|
|
|
Net change in line
of credit
|
(1,199,670)
|
230,449
|
Payments on other
notes payable
|
—
|
(11,668)
|
Borrowings on term
notes
|
452,571
|
—
|
Deferred financing
cost
|
—
|
(19,420)
|
Payments on term
notes
|
(166,667)
|
(250,000)
|
Net cash used in
financing activities in discontinued operations
|
$(913,766)
|
$(50,639)
|
F-102
NOTE 5—PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
December 31,
|
|
|
2016
|
2015
|
Leasehold
improvements
|
$25,792
|
$25,792
|
Computer equipment
and software
|
420,569
|
420,569
|
Vehicles
|
215,358
|
206,702
|
Furniture
|
22,965
|
22,965
|
Cameras
|
819,466
|
703,392
|
Phone
equipment
|
16,811
|
16,811
|
Handheld ticketing
system
|
30,293
|
30,293
|
|
1,551,254
|
1,426,524
|
Accumulated
depreciation and amortization
|
(1,342,944)
|
(1,250,224)
|
|
$208,310
|
$176,300
|
Depreciation
and amortization of property and equipment from continuing
operations the years ended December 31, 2016 and 2015 was
$101,564 and $149,231, respectively. Depreciation and amortization
of property and equipment for discontinued operations the years
ended December 31, 2016 and 2015 was $26,685 and $40,382,
respectively.
NOTE 6 – LINE OF CREDIT AND OTHER NOTES PAYABLE
Line of Credit
On
July 12, 2016 (the “Closing Date”), Brekford
entered into a loan and security agreement (the “Loan
Agreement”) with Fundamental Funding LLC (the
“Lender”). The Loan Agreement provides for a
multi-draw loan to Brekford for (i) Brekford’s accounts
receivable, the lesser of (y) $2,500,000 or (z) 85%
of Brekford’s eligible accounts and
(ii) Brekford’s inventory advances, the lesser of
(y) $500,000 or (z) 50% of the eligible inventory (the
“Revolving Loans”). The maximum amount available to the
Company under the Loan Agreement for the Revolving Loans is
$3,500,000 (the “Credit Limit”). In addition, the
Lender agreed to provide Brekford with an accommodation loan in an
amount not to exceed $500,000, which shall be repaid in thirty-six
(36) equal monthly installments of principal and interest (the
“Accommodation Loan” and together with the Revolving
Loans, the “Loans”).
On the
Closing Date, the Lender advanced Brekford $533,670. The
amounts advanced under the Loan Agreement are due and payable on
the three (3) year anniversary of the Closing Date (the
“Maturity Date”), and thereafter, the Maturity Date
shall automatically be extended for successive periods of one year
unless Brekford shall give lender written notice of termination not
less than ninety (90) days prior to the end of such term or
renewal term, as applicable. Lender may terminate the Loan
Agreement at any time in its sole discretion by giving Brekford
ninety (90) days prior written notice, provided that upon an
Event of Default (as defined in the Loan Agreement), Lender may
terminate the Loan Agreement without notice to Brekford, effective
immediately. Upon termination by the Lender, Brekford shall be
required to pay certain termination fees based on a percentage of
the Credit Limit as set forth in the Loan Agreement.
The
outstanding principal balance under the Note for the Revolving
Loans shall bear interest at a rate per annum equal to the
“prime rate” published from time to time in
the Wall Street
Journal (the “Prime Rate”), plus
1.75% per annum, accruing daily and payable monthly. The
outstanding principal balance under the Accommodation Loan shall
bear interest at a rate per annum equal to the Prime Rate in effect
from time to time, plus 12.75% per annum, accruing daily and
payable monthly. Notwithstanding any other provision in the Loan
Agreement, interest on Loans shall be calculated on the higher of:
(i) the actual average monthly balance of all Loans from the
prior month, or (ii) $1,350,000. In addition Brekford will be
subject to certain monthly or annual fees on the Loans as set forth
in the Loan Agreement.
F-103
The
remaining portion of Credit Limit may be advanced to Brekford upon
written notice provided to the Lender during the period beginning
from the Closing Date through the Maturity Date provided no default
has occurred under the Loan Agreement. Brekford may prepay any
portion of the Accommodation Loan, in whole or in part, to Lender
on or prior to the Maturity Date.
Initial
borrowings under the Loan Agreement were subject to, among other
things, the substantially concurrent repayment by the Company of
all amounts due and owing under the Company’s credit
facility, dated May 24, 2014, with Rosenthal &
Rosenthal, Inc. and the satisfaction and termination of such
borrowing and all liens thereunder (collectively, the
“Rosenthal Loan”). All amounts owed under the
Rosenthal Loan, which were $2,253,617, were satisfied and
terminated by the Company on the Closing Date.
In
addition, on the Closing Date, the Company entered into a
subordination agreement with each of C.B. Brechin and Scott
Rutherford, the Company’s chief executive officer and chief
strategy officer, respectively, as well as with the Investor
described in Note 8 pursuant to which each of the parties agreed to
subordinate all present and future indebtedness held by each of
them to the obligations of the Lender.
On the
Closing Date, as part of the Loan Agreement and to secure the
payment and performance of all of the obligations owed to Lender
under the Loan Agreement when due, the Company granted to Lender a
security interest in all right, title and interest to all assets of
the Borrower, whether now owned or hereafter arising or acquired
and wherever located.
The
Loan Agreement contains customary affirmative and negative
covenants for loan agreements of its type, including but not
limited to, limiting the Company’s ability to pay dividends
or make any distributions, incur additional indebtedness, grant
additional liens, engage in any other lime of business, make
investments, merge, consolidate or sell all or substantially all of
its assets and enter into transactions with related
parties. The Loan Agreement also contains certain financial
covenants, including, but not limited to, a debt service coverage
ratio.
The
Loan Agreement includes customary events of default, including but
not limited to, failure to pay principal, interest or fees when
due, failure to comply with covenants, default under certain other
indebtedness, certain insolvency or bankruptcy events, the
occurrence of certain material judgments the institution of any
proceeding by a government agency or a change of control of the
Company.
All
borrowings under the Loan Agreement are due upon a default under
the terms of the Loan Agreement. The Company’s obligations
under the Loan Agreement are guaranteed by C.B. Brechin, the
Company’s chief executive officer pursuant to the terms of a
surety agreement.
At
December 31, 2016, the Company had $274,795 in outstanding
indebtedness under the Revolving Facility and $452,571 in
outstanding indebtedness under the Term Loan, and the Company could
have borrowed up to an additional $2,725,205 under the Revolving
Facility. As of December 31, 2016, we were out of compliance
with one of the financial covenants contained in the Credit
Facility as a result of the loss recorded for the year ended
December 31, 2016. The Company did not request a waiver for
the year ended December 31, 2016 and the Revolving Facility
and Term Loan were repaid in full on February 28,
2017.
Other Notes Payable
The
Company financed certain vehicles and equipment under finance
agreements. The agreements mature at various dates through December
2017. Principal maturities in 2017 are $20,150. The agreements
require various monthly payments of principal and interest until
maturity. As of December 31, 2016 and 2015, financed assets of
$19,475 and $47,732, respectively, net of accumulated amortization
of $122,441 and $98,184, respectively, are included in property and
equipment on the balance sheets. The weighted average interest rate
was 3.75% at December 31, 2016 and December 31,
2015.
F-104
NOTE 7 – NOTES PAYABLE – STOCKHOLDERS
Brekford
financed the repurchase of shares of its common stock and warrants
from the proceeds of convertible promissory notes that were issued
by Brekford on November 9, 2009 in favor of a lender group
that included two of its directors, Messrs. C.B. Brechin and Scott
Rutherford, in the principal amounts of $250,000 each (each, a
“Promissory Note” and together, the “Promissory
Notes”). Each Promissory Note bears interest at the rate of
12% per annum and at the time of issuance was to be
convertible into shares of Brekford common stock, at the option of
the holder, at an original conversion price of $.07 per share. At
the time of issuance, Brekford agreed to pay the unpaid principal
balance of the Promissory Notes and all accrued but unpaid interest
on the date that was the earlier of (i) two years from the
issuance date or (ii) 10 business days after the date on which
Brekford closes an equity financing that generates gross proceeds
in the aggregate amount of not less than $5,000,000.
On
April 1, 2010, Brekford and each member of the lender group
executed a First Amendment to each Promissory Note, which amended
the respective Promissory Note as follows:
●
Revise the
conversion price in the provision that allows the holder of the
Promissory Note to elect to convert any outstanding and unpaid
principal portion of the Promissory Note and any accrued but unpaid
interest into shares of the common stock at a price of fourteen
cents ($0.14) per share, and
●
Each Promissory
Note’s maturity date was extended to the earlier of
(i) four years from the issuance date or (ii) 10 business
days after the date on which Brekford closes an equity financing
that generates gross proceeds in the aggregate amount of not less
than $5,000,000.
On
November 8, 2013, Brekford and each member of the lender group
agreed to extend the maturity dates of the Promissory Notes to the
earlier of (i) November 9, 2014 or (ii) 10 business
days after the date on which Brekford closes an equity financing
that generates gross proceeds in the aggregate amount of not less
than $5,000,000.
On
November 4, 2014, Brekford and each member of the lender group
agreed to further extend the maturity dates of the Promissory Notes
to the earlier of (i) November 9, 2015 or (ii) 10
business days after the date on which Brekford closes an equity
financing that generates gross proceeds in the aggregate amount of
not less than $5,000,000.
On
November 9, 2015, the maturity dates of the Promissory Notes
were extended to the earlier of (i) November 9, 2016 or
(ii) 10 business days from the date on which Brekford closes
an equity financing that generates gross proceeds in the aggregate
amount of not less than $5,000,000.
On
November 4, 2016, the maturity dates of the Promissory Notes
were extended to the earlier of (i) November 9, 2017 or
(ii) 10 business days from the date on which Brekford closes
an equity financing that generates gross proceeds in the aggregate
amount of not less than $5,000,000. Mr. Brechin and
Mr. Rutherford have indicated that they will not exercise
their right of repayment prior to September 30,
2017.
The
Company anticipates the maturity date of the Promissory Notes will
continue to be extended for the foreseeable future; thus, they are
classified as long-term liabilities in Discontinued Operations
– Long Term Liabilities (Note 4). As of December 31,
2016 and 2015, the amounts outstanding under the Promissory Notes
totaled $500,000.
F-105
NOTE 8 – CONVERTIBLE PROMISSORY NOTES
PAYABLE—INVESTOR
On
March 17, 2015, the Company entered into a note and warrant
purchase agreement (the “Agreement”) with an accredited
investor (the “Investor”) pursuant to which the
Investor purchased an aggregate principal amount of $715,000 of a
6% convertible promissory note issued by the Company for an
aggregate purchase price of $650,000 (the “Investor
Note”). The Investor Note bears interest at a rate of
6% per annum and the principal amount is due on March 17,
2017. The note and accrued interest was repaid on February 28,
2017. Any interest that accrues under the Investor Note is payable
either upon maturity or upon any principal being converted on any
voluntary conversion date (as to that principal amount then being
converted). The Investor Note is convertible at the option of the
Investor at any time into shares of Common Stock at a conversion
price equal to the lesser of (i) $0.25 per share and
(ii) 70% of the average of the lowest three volume weighted
average prices for the twelve (12) trading days prior to such
conversion (the “Conversion Price”). In no event can
the Conversion Price be less than $0.10; provided, however, that if
on or after the date of the Agreement the Company sells any Common
Stock or Common Stock Equivalents (as defined in the Agreement) at
an effective price per share that is less than $0.10 per share,
then the Conversion Price shall be equal to the par value of the
Common Stock then in effect. In connection with the Agreement, the
Investor received a warrant to purchase 780,000 shares of Common
Stock (the “Warrant”). The Warrant is exercisable for a
period of five years from the date of issuance at an exercise price
of $0.50 per share, subject to adjustment (the “Exercise
Price”).
On
October 23, 2015, the Investor converted $25,000 of principal
and $904 of accrued interest due under the Investor Note into
169,530 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $19,861.
On
December 2, 2015, the Investor converted $50,000 of principal
and $2,129 of accrued interest due under the Investor Note into
349,155 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $35,160.
On
February 26, 2016, the Investor converted $50,000 of principal
and $2,844 of accrued interest due under the Investor Note into
476,500 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $49,525.
On
March 31, 2016, the Investor converted $50,000 of principal
and $3,123 of accrued interest due under the Investor Note into
510,310 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $72,947.
On
May 31, 2016, the Investor converted $50,000 of principal and
$3,625 of accrued interest due under the Investor Note into 605,928
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $38,923.
On
July 1, 2016, the Investor converted $50,000 of principal and
$3,880 of accrued interest due under the Investor Note into 699,733
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $40,875.
On
July 27, 2016, the Investor converted $50,000 of principal and
$4,093 of accrued interest due under the Investor Note into 758,670
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $45,024.
On
August 31, 2016, the Investor converted $50,000 of principal
and $4,381 of accrued interest due under the Investor Note into
776,869 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $44,617.
F-106
The
following table provides information relating to the Investor Note
at December 31, 2016 and:
|
December 31,
2016
|
December 31,
2015
|
Convertible
promissory note payable
|
$340,000
|
$640,000
|
Original issuance
discount, net of amortization of the $61,786 and $23,002 as of
December 31, 2016 and 2015
|
(3,214)
|
(35,180)
|
Beneficial
conversion feature, net of amortization of $530,338 and $197,437 as
of December 31, 2016 and 2015
|
(27,583)
|
(301,959)
|
Warrant feature,
net of amortization of the $87,527 and $32,585 as of
December 31, 2016 and 2015
|
(4,552)
|
(49,835)
|
Original issuance
cost, net of amortization of $46,996 and $20,744 as of
December 31, 2016 and 2015
|
(5,504)
|
(31,757)
|
Convertible
promissory note payable, net
|
$299,147
|
$221,269
|
We
evaluated the financing transactions in accordance with ASC Topic
470, Debt with Conversion and
Other Options, and determined that the conversion feature of
the Investor Note was afforded the exemption for conventional
convertible instruments due to its fixed conversion rate. The
Investor Note has an explicit limit on the number of shares
issuable so it did meet the conditions set forth in current
accounting standards for equity classification. The debt was issued
with non-detachable conversion options that are beneficial to the
investors at inception, because the conversion option has an
effective strike price that is less than the market price of the
underlying stock at the commitment date. The accounting for the
beneficial conversion feature requires that the beneficial
conversion feature be recognized by allocating the intrinsic value
of the conversion option to additional paid-in-capital, resulting
in a discount on the convertible notes, which will be amortized and
recognized as interest expense.
Accordingly,
a portion of the proceeds was allocated to the Warrant based on its
relative fair value, which totaled $92,079 using the Black Scholes
option-pricing model. Further, the Company attributed a beneficial
conversion feature of $557,921 to the shares of Common Stock
issuable under the Investor Note based upon the difference between
the effective Conversion Price and the closing price of the Common
Stock on the date on which the Investor Note was issued. The
assumptions used in the Black-Scholes model are as
follows: (i) dividend yield of 0%; (ii) expected
volatility of 80.5%, (iii) weighted average risk-free
interest rate of 1.56%, (iv) expected life of five years,
and (v) estimated fair value of the Common Stock of $0.26 per
share. The expected term of the Warrant represents the estimated
period of time until exercise and is based on historical experience
of similar awards giving consideration to the contractual terms.
The Company recorded amortization of the beneficial conversion
feature and warrant feature of the Investor Note in other expense
in the amount of $274,377 and $45,284 during the year ended
December 31, 2016 and $255,961 and $42,243, during the year
ended December 31, 2015 which also includes the unamortized
beneficial conversion feature and warrant feature attributable to
the $375,000 principal converted to equity.
The
Company recorded an original issue discount of $65,000 to be
amortized over the term of the Agreement as interest expense. The
Company recognized $31,966 and $29,820 of interest expense as a
result of the amortization during the nine months ended
December 31, 2016 and the year ended December 31, 2015
respectively, which also includes the unamortized original issue
discount attributable to the $375,000 principal converted to
equity.
NOTE 9 – WARRANT DERIVATIVE LIABILITY
On
March 17, 2015, in conjunction with the issuance of the
Investor Note (See Note 7), the Company issued the Warrant, which
permits the Investor to purchase 840,000 shares of Common Stock,
including 60,000 related to the financing costs, with an exercise
price of $0.50 per share and a life of five years.
F-107
The
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 $0.50 a share. The
Company accounted for the conversion option of the 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 Warrant has been measured at fair
value at March 17, 2015 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
December 31, 2016 and 2015, the outstanding fair value of the
derivative liability was $24,360 and $99,036,
respectively.
NOTE 10 – LEASES
Operating Leases
Brekford
rents office space under separate non-cancelable operating
leases expiring in April 2020. Rent expense under our main
headquarters lease, expiring on April 30, 2020 amounted to
$171,243 and $169,297 for the years ended December 31, 2016
and 2015, respectively.
Future
minimum lease payments under these lease agreements, exclusive of
the Company’s share of operating costs at December 31,
2016 and 2015 are as follows:
2017
|
$177,878
|
2018
|
183,214
|
2019
|
188,711
|
2020
|
64,475
|
Total
|
614,278
|
Discontinued
operations
|
522,136
|
Total minimum lease
payment under continuing operations
|
$92,142
|
|
|
The
Company also leases approximately 2,500 square feet of office space
from a related party under a non-cancelable operating lease
expiring on June 30, 2017. Rent expense under this lease
amounted to $49,200 for the years ended December 31, 2016 and
2015, respectively.
Future
minimum lease payments under these lease agreements, exclusive of
the Company’s share of operating costs at December 31,
2016 are $24,600 during 2017.
NOTE 11 – INVENTORY
As of
December 31, 2016 and 2015 inventory consisted entirely of raw
materials of $221,816 and $316,775, respectively.
F-108
NOTE 12 – LOSS PER SHARE
The
following table provides information relating to the calculation of
loss earnings per common share for continuing
operations:
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
Basic loss earnings
per share
|
|
|
Net loss from
continuing operations
|
$(1,397,888)
|
$(944,830)
|
Weighted average
common shares outstanding—basic
|
47,357,787
|
44,690,550
|
Basic loss per
share
|
$(0.03)
|
$(0.02)
|
|
|
|
Diluted loss per
share
|
|
|
Net loss from
continuing operations
|
$(1,397,888)
|
$(944,830)
|
Weighted average
common shares outstanding
|
47,357,787
|
44,690,550
|
Potential dilutive
securities
|
—
|
—
|
Weighted average
common shares outstanding – diluted
|
44,357,787
|
44,499,610
|
Diluted loss per
share
|
$(0.03)
|
$(0.02)
|
Common stock
equivalents excluded due to anti-dilutive effect
|
6,961,429
|
8,576,134
|
The
following table provides information relating to the calculation of
net income per common share for discontinued
operations:
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
Basic net income
per share
|
|
|
Net income from
discontinued operations
|
$343,485
|
$573,659
|
Weighted average
common shares outstanding—basic
|
47,357,787
|
44,690,550
|
Basic loss per
share
|
$0.01
|
$0.01
|
|
|
|
Diluted net income
per share
|
|
|
Net income from
discontinued operations
|
$343,485
|
$573,659
|
Weighted average
common shares outstanding
|
47,357,787
|
44,690,550
|
Potential dilutive
securities
|
5,796,429
|
7,511,134
|
Weighted average
common shares outstanding – diluted
|
53,154,216
|
52,201,684
|
Diluted loss per
share
|
$0.01
|
$0.01
|
Common stock
equivalents excluded due to anti-dilutive effect
|
1,165,000
|
1,065,000
|
NOTE 13—STOCKHOLDERS’ EQUITY
At
December 31, 2016 and 2015, the Company’s authorized
stock consists of 20,000,000 shares of $.0001 par value preferred
stock and 150,000,000 shares of $.0001 par value common
stock.
The
following common stock transactions occurred during the
period:
During
the period ended December 31, 2016 the
Company granted an aggregate of 332,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.16 per share based upon the closing price of shares
of Common Stock on the date of the grant. These shares were
fully vested on the date of the grant. The Company recorded $53,000
in share-based compensation expense related to restricted stock
grants.
F-109
During
the period ended December 31, 2016 the Company issued
3,828,010 shares at an average valued of $0.13 per share to convert
$300,000 of principal and $21,945 of accrued interest due under the
Convertible Note Agreement and recognized a loss on extinguishment
of debt of $291,911.
During
the period ended December 31, 2015 the
Company granted an aggregate of 132,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.34 per share based upon the closing price of shares
of Common Stock on the date of the grant. These shares were
fully vested on the date of the grant. The Company recorded $44,880
in share-based compensation expense related to restricted stock
grants.
During
the period ended December 31, 2015 the Company issued 518,685
shares at an average valued of $0.26 per share to convert $75,000
of principal and $3,033 of accrued interest due under the
Convertible Note Agreement and recognized a loss on extinguishment
of debt of $55,021.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
On
September 7, 2010, Brekford issued a press release announcing
that its board of directors authorized a stock repurchase program
permitting the Company to repurchase up to $500,000 in outstanding
shares of the Common Stock from time to time over a period of 12
months in open market transactions or in privately negotiated
transactions at the Company’s discretion. The stock
repurchase program was subsequently extended for an additional 12
months until September 7, 2012. On September 28,
2012, the Company adopted a new stock repurchase program which
permits the Company to repurchase the $363,280 in shares that
remained available for repurchase under the old program, with the
same terms and conditions except that the term of the new stock
repurchase program was 24 months. The repurchase plan expired in
September 2014.
Warrants
The
assumptions used to value warrant grants during the year ended
December 31, 2015, which consisted solely of the Warrant, were
as follows:
|
Year
ended
December 31, 2015
|
Expected life (in
years)
|
5.00
|
Volatility
|
80.50%
|
Risk
free interest rate
|
1.56%
|
Expected Dividend
Rate
|
0%
|
Summary
of the warrant activity for year ended December 31, 2016 is as
follows:
|
Number of
Warrants
|
Weighted
Average Exercise Price
|
Weighted Average
Remaining Contractual Life (Years)
|
Aggregate
Intrinsic Value
|
Outstanding at
January 1, 2015
|
—
|
$—
|
—
|
$0.00
|
Granted
|
840,000
|
0.50
|
4.21
|
0.00
|
Forfeited or
expired
|
—
|
—
|
—
|
0.00
|
Exercised
|
—
|
—
|
—
|
0.00
|
Outstanding at
December 31, 2015
|
840,000
|
0.50
|
4.21
|
0.00
|
Granted
|
—
|
—
|
—
|
0.00
|
Forfeited or
expired
|
—
|
—
|
—
|
0.00
|
Exercised
|
—
|
—
|
—
|
|
Outstanding at
December 31, 2016
|
840,000
|
0.50
|
3.21
|
0.00
|
Exercisable at
December 31, 2016
|
840,000
|
0.50
|
3.21
|
0.00
|
F-110
The
weighted average remaining contractual life of warrants outstanding
as of December 31, 2016 was as follows:
Exercisable
Prices
|
Stock Warrants
Outstandin
|
Stock Warrants
Exercisable
|
Weighted Average
Remaining Contractual Life (years)
|
$0.50
|
840,000
|
840,000
|
3.21
|
Total
|
840,000
|
840,000
|
3.21
|
NOTE 14 – SHARE-BASED COMPENSATION
The
Company has issued shares of restricted common stock and warrants
to purchase shares of common stock and has granted non-qualified
stock options to certain employees and non-employees. On
April 25, 2008, the Company’s stockholders approved the
2008 Stock Incentive Plan (the “2008 Incentive Plan”).
During the year ended December 31, 2016, Traffic Safety, Inc.
granted stock options under the 2008 Incentive Plan to its
non-employee directors. These options have exercise prices
equal to the fair market value of a share of Common Stock as of the
date of grant and have terms of ten years.
Stock Options
Option
grants during the year ended December 31, 2016 were made to
non-employee directors who elected to receive options during the
annual equity grant period in the first quarter of each fiscal
year. The options had a grant date fair value of $0.12 per share
and will vest and become exercisable with respect to option shares
over a three-year period commencing from the date of grant at a
rate of 33.33% per year.
Option
grants during the year ended December 31, 2015 were made to
non-employee directors who elected to receive options during the
annual equity grant period in the first quarter of each fiscal
year. The options had a grant date fair value of $0.24 per share
and will vest and become exercisable with respect to option shares
over a three-year period commencing from the date of grant at a
rate of 33.33% per year.
The
Company recorded $14,504 and $11,214 in stock option compensation
expense during the period ended December 31, 2016 and 2015,
respectively, related to the stock option grants.
The
Company uses the Black-Scholes option pricing model to determine
the fair value of stock options granted to employees and recognizes
the compensation cost of employee share-based awards in its
statement of operations using the straight-line method over the
vesting period of the award, net of estimated
forfeitures.
The use
of the Black-Scholes option pricing model to estimate the fair
value of share-based awards requires that the Company make certain
assumptions and estimates for required inputs to the model,
including (1) the fair value of the Company’s common
stock at each grant date, (ii) the expected volatility of the
Company’s common stock value based on industry comparisons,
(iii) the expected life of the share-based award,
(iv) the risk-free interest rate, and (v) the dividend
yield.
F-111
The
following are the assumptions made in computing the fair value of
share-based awards granted in the years ended December 31,
2016 and 2015:
|
Year ended
December 31,
2016
|
Year ended
December 31,
2015
|
Expected life (in
years)
|
3.50
|
3.50
|
Volatility
|
78.8%
|
80.5%
|
Risk free interest
rate
|
0.88%
|
0.95%
|
Expected Dividend
Rate
|
0
|
0
|
Summary
of the option activity for the period ended December 31, 2016
is as follows:
|
Number of
Options
|
Weighted
Average Exercise Price
|
Weighted Average
Remaining Contractual Life (Years)
|
Aggregate
Intrinsic Value
|
Outstanding at
January 1, 2015
|
225,000
|
$0.00
|
—
|
$0.00
|
Granted
|
225,000
|
0.20
|
—
|
0.00
|
Forfeited or
expired
|
(50,000)
|
—
|
—
|
0.00
|
Exercised
|
—
|
—
|
—
|
|
Outstanding at
January 1, 2016
|
400,000
|
$0.20
|
3.25
|
$0.00
|
|
|
|
|
|
Granted
|
225,000
|
0.12
|
3.50
|
0.00
|
Forfeited or
expired
|
(75,000)
|
0.22
|
2.00
|
0.00
|
Exercised
|
—
|
—
|
—
|
|
Outstanding at
December 31, 2016
|
550,000
|
$0.20
|
3.00
|
0.00
|
Exercisable at
December 31, 2016
|
225,000
|
$0.20
|
—
|
0.00
|
Vested and expected
to vest
|
325,000
|
$0.20
|
3.00
|
0.00
|
The
unrecognized compensation cost for unvested stock option awards
outstanding at December 31, 2016 was approximately $21,032 to
be recognized over approximately 3years.
Restricted Stock Grants
During
the period ended December 31, 2016 the
Company granted an aggregate of 332,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.16 per share based upon the closing price of shares
of Common Stock on the date of the grant. These shares were
fully vested on the date of the grant. The Company recorded $53,000
in share-based compensation expense related to restricted stock
grants.
F-112
During
the period ended December 31, 2015 the
Company granted an aggregate of 132,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.34 per share based upon the closing price of shares
of Common Stock on the date of the grant. These shares were
fully vested on the date of the grant. The Company recorded $44,880
in share-based compensation expense related to restricted stock
grants.
|
Restricted Stock
Share
|
Weighted
Average Value
|
Nonvested
restricted stock at January 1, 2015
|
—
|
$—
|
Granted
|
132,000
|
0.34
|
Vested
|
(132,000)
|
0.34
|
Forfeited or
expired
|
—
|
—
|
Nonvested
restricted stock at December 31, 2015
|
—
|
$—
|
Granted
|
332,000
|
0.16
|
Vested
|
(332,000)
|
0.16
|
Forfeited or
expired
|
—
|
—
|
Nonvested
restricted stock at December 31, 2016
|
—
|
$—
|
2008 Stock Incentive Plan
The
2008 Incentive Plan is designed to provide an additional incentive
to executives, employees, directors and key consultants, aligning
the long term interests of participants in the 2008 Incentive Plan
with those of the Company and the Company’s stockholders. The
2008 Incentive Plan provides that up to 8 million shares of
the Company’s common stock may be issued pursuant to awards
granted under the 2008 Incentive Plan. As of December 31,
2016, 5,339,000 shares of common stock remained available for
future issuance under the 2008 Incentive Plan.
2008 Employee Stock Purchase Plan
On
February 19, 2008, the Board of Directors authorized the
adoption of the 2008 Employee Stock Purchase Plan (the
“Purchase Plan”), subsequently approved by the
stockholders on April 25, 2008, which is designed to encourage
and enable eligible employees to acquire a proprietary interest in
the Company’s common stock. The Purchase Plan provides that
up to 2 million shares of the Company’s common stock may
be issued under the Plan. No shares have been issued under the
Plan.
NOTE 15 – EMPLOYEE BENEFIT PLANS
The
Company has a defined contribution savings plan under
Section 401(k) of the Internal Revenue Code. The 401(k) Plan
is a defined contribution plan, which covers substantially all
U.S.-based employees of the Company and its wholly-owned
subsidiaries who have completed three months of service. The 401(k)
Plan provides that the Company will match 50% of the participant
salary deferrals up to 3% of a participant’s compensation for
all participants. The Company contributed $13,352 and $8,718 during
the years ended December 31, 2016 and, 2015,
respectively.
NOTE 16 – MAJOR CUSTOMERS AND VENDORS
Major Customers
The
Company has several ATSE contracts with government agencies, of
which net revenue from four customers during the year ended
December 31, 2016 represented 63% of the total net revenue.
Four customers accounted for 88% of total accounts receivable as of
December 31, 2016, which was subsequently collected in
2017.
Net
revenue from five customers during the year ended December 31,
2015 represented 80% of the total net revenue. Accounts receivable
due from three customers at December 31, 2015 amounted to 91%
of total accounts receivable at that date.
F-113
Major Vendors
The
Company purchased products and services for fulfillment of ATSE
contracts from several vendors. As of December 31, 2016 and
2015, accounts payable due to these vendors amounted to 47% and 38%
of total accounts payable, respectively.
NOTE 17 – INCOME TAXES
As of
December 31, 2016, the Company has approximately
$7.55 million of federal and state net operating loss
carryforwards available to offset future taxable income, if any,
through 2034. These net operating losses begin to expire in
2028. If, however, there is an ownership change in the
Company, some of the Company’s tax attributes may limit the
Company’s ability to utilize loss carryforwards. Therefore,
these operating loss carryforwards could become limited in future
years if ownership changes were to occur as defined in the Internal
Revenue Code and similar state income tax provisions. The Company
files income tax returns with the U.S. Internal Revenue Service and
with the revenue services of various states.
The
Company’s deferred tax assets and liabilities at
December 31, 2016 and 2015 are as follows:
|
December 31,
|
|
|
2016
|
2015
|
Net operating loss
carry forwards
|
$3,112,000
|
$2,780,000
|
Property and
Equipment
|
(490,000)
|
(500,000)
|
Other
|
—
|
—
|
|
2,622,000
|
2,280,000
|
Valuation
allowance
|
(2,622,000)
|
(2,280,000)
|
Net deferred tax
asset
|
$—
|
$—
|
The
Company’s recorded income tax, net of the change in the
valuation allowance for each of the periods presented, is as
follows:
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
Current
|
|
|
Federal
|
$—
|
$—
|
State
|
—
|
—
|
|
—
|
—
|
|
|
|
Deferred
|
|
|
Federal
|
(369,000)
|
(130,000)
|
State
|
(55,000)
|
(20,000)
|
|
(424000)
|
(150,000)
|
Change in valuation
allowance
|
424,000
|
150,000
|
Income tax
expense
|
$—
|
$—
|
Management
has evaluated the recoverability of the deferred income tax assets
and the level of the valuation allowance required with respect to
such deferred income tax assets. After considering all available
facts, the Company fully reserved for its deferred tax assets
because management believes that it is more likely than not that
their benefits will not be realized in future periods. The Company
will continue to evaluate its deferred tax assets to determine
whether any changes in circumstances could affect the realization
of their future benefit. If it is determined in future periods that
portions of the Company’s deferred income tax assets
satisfies the realization standard, the valuation allowance will be
reduced accordingly.
F-114
A
reconciliation of the expected Federal statutory rate of 35% to the
Company’s actual rate as reported for each of the periods
presented is as follows:
|
Years Ended
December 31,
|
||
|
2016
|
|
2015
|
Expected statutory
rate
|
(35.0)%
|
|
(35.0)%
|
State income tax
rate, net of Federal benefit
|
(5.2)%
|
|
(5.2)%
|
Permanent
differences
|
|
|
|
Other
|
—%
|
|
—%
|
|
40.2%
|
|
40.2%
|
Valuation
allowance
|
(40.2)%
|
|
(40.2)%
|
|
—%
|
|
—%
|
NOTE 18 – SUBSEQUENT EVENTS
Merger Agreement
On
February 10, 2017, Brekford entered into an Agreement and Plan
of Merger (the “Merger Agreement”) to combine the
businesses of Brekford and KeyStone Solutions, Inc., a Delaware
corporation (“KeyStone”). The Merger Agreement provides
that Brekford and KeyStone will each engage in merger transactions
(the “Mergers”) with separate wholly-owned subsidiaries
of a newly-formed company, Novume Solutions, Inc., a Delaware
corporation (“Novume”). Under one merger transaction
(the “Brekford Merger”), one wholly-owned subsidiary of
Novume will merge with and into Brekford, leaving Brekford as a
wholly-owned subsidiary of Novume. Under a separate merger
transaction (the “KeyStone Merger”), KeyStone will
merge with and into another wholly-owned subsidiary of Novume
(“KeyStone Merger Sub”), with KeyStone Merger Sub
surviving such merger. The time at which the Mergers are
completed in accordance with the Merger Agreement is referred to as
the “Effective Time”. As soon as practicable after the
Effective Time, Brekford will change its name to “Brekford
Traffic Safety, Inc.” and KeyStone Merger Sub will change its
name to “KeyStone Solutions, Inc.”
Merger Consideration
As
consideration for the Mergers, each outstanding share of the common
stock, par value $0.0001 per share, of Brekford (“Brekford
Common Stock”) immediately prior to the Effective Time will
become convertible into and exchangeable for 1/15th of a share
of common stock, par value $0.0001 per share, of Novume
(“Novume Common Stock” and such ratio, the
“Brekford Exchange Ratio”). Each outstanding share of
the common stock, par value $0.0001 per share, of KeyStone
(“KeyStone Common Stock”) immediately prior to the
Effective Time, will become convertible into and exchangeable for
1.9399 shares of Novume Common Stock (the “KeyStone Common
Exchange Ratio”), and each outstanding share of the Series A
Cumulative Convertible Redeemable Preferred Stock, par value
$0.0001 per share, of KeyStone (“KeyStone Preferred
Stock”) will become convertible into and exchangeable for 1
share of the Series A Cumulative Convertible Redeemable Preferred
Stock of Novume (“Novume Preferred Stock” and such
ratio, the “KeyStone Preferred Exchange Ratio”). The
outstanding warrants and options to purchase shares of Brekford
Common Stock and KeyStone Common Stock, as applicable, shall be
exchanged for warrants and options to purchase Novume Common Stock
at the Brekford Exchange Ratio or the KeyStone Common Exchange
Ratio, as applicable. Collectively, the forgoing is referred to
herein as the “Merger Consideration”.
The
Merger Consideration, and each of the Brekford Exchange Ratio, the
KeyStone Common Exchange Ratio and the KeyStone Preferred Exchange
Ratio, were determined so that, immediately after the Effective
Time, the pre-merger stockholders of Brekford will own such portion
of the capital stock of Novume as shall be equal to approximately
20% of the issued and outstanding Novume Common Stock, on a
fully-diluted basis, and the pre-merger stockholders of KeyStone
will own that portion of the capital stock of Novume as is equal to
approximately 80% of the issued and outstanding Novume Common
Stock, on a fully-diluted basis.
Contribution and Unit Purchase Agreement
On
February 6, 2017, the Company entered into a Contribution and
Unit Purchase Agreement (the “LB&B Agreement”) with
LB&B Associates Inc. (the “Purchaser”) and Global
Public Safety, LLC (“GPS”).
F-115
The
closing for the transaction set forth in the Agreement occurred on
February 28, 2017 (the “LB&B Closing”) and on
such date the Company contributed substantially all of the assets
and certain liabilities related to its vehicle services business
(the “Business”) to GPS. After the LB&B Closing,
the Company will continue to own and run other business operations
that are not related to the Business.
On the
LB&B Closing, GPS sold units representing 80.1% of the units of
GPS to the Purchaser 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 Purchaser
issuing the Company a promissory note (the “Promissory
Note”). After the LB&B Closing, the Company continues to
own 19.9% of the units of GPS.
The
Promissory Note is subordinated to the Purchaser’s senior
lender and accrues interest at a rate of 3% per annum. The
maturity date of the Promissory Note is March 31, 2022. The
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
Promissory Note is secured pursuant to the terms of a Pledge
Agreement (the “Pledge Agreement”) between the Company
and Purchaser. Pursuant to the Pledge Agreement the Purchaser
granted the Company a continuing second priority lien and security
interest in the Purchaser’s units of GPS subject to liens of
the Purchaser’s senior lender.
Pursuant
to the Agreement, the Company and GPS executed a Transition
Services Agreement (the “Transition Services
Agreement”). Pursuant to the Transition Services Agreement,
the Company will perform certain support services to promote the
efficient transition of the Business for the fees set forth in the
Agreement.
In
connection with the Agreement the Company entered into an Amended
and Restated Limited Liability Company Agreement of Global Public
Safety, LLC (the “LLC Agreement”). The LLC Agreement
provides for the operations of GPS and provides that all limited
liability company powers of the Company shall be exercised by and
under the authority of the Board of Representatives except as
otherwise provided by the LLC Agreement or applicable law. The
initial number of representatives constituting the Board of
Representatives is three, of which the Company appointed one member
and if the number of Board of Representatives is increased the
Company shall be able to appoint the number of members required to
maintain 1/3 of the seats on the Board of
Representatives.
Pursuant
to a month-to-month sublease agreement between GPS and the Company,
the Company will continue to occupy 3,362 square feet of office
space, located at 7020 Dorsey Road, Suite C, Hanover, Maryland
21076.
The
Company also entered into a Pre-Novation Agreement with GPS
pursuant to which performance under certain contracts being
assigned to GPS will be made while these contracts are being
assigned to GPS. The Company will also enter into a Novation
Agreement pursuant to which the government contracts being assigned
to GPS will be transferred.
Director Resignation
On
February 18, 2017, Edward Parker notified Brekford that he was
resigning from the Company’s board of directors effective
immediately.
F-116
FIRESTORM SOLUTIONS, LLC AND AFFILIATE
Index to Combined Financial Statements
Independent
Auditor’s Report
|
F-118
|
Combined Balance
Sheets at December 31, 2016 and 2015
|
F-119
|
Combined Statements
of Operations for the Years Ended December 31, 2016 and
2015
|
F-120
|
Combined Statements
of Members’ Equity (Deficit) for the Years Ended
December 31, 2016 and 2015
|
F-121
|
Combined Statements
of Cash Flows for the Years Ended December 31, 2016 and
2015
|
F-122
|
Notes
to Combined Financial Statements
|
F-123
|
F-117
Independent Auditor’s Report
To the
Board of Directors and Members
Firestorm
Solutions, LLC and Affiliate
Report on Financial Statements
We have
audited the accompanying combined financial statements of Firestorm
Solutions, LLC and Affiliate (“the Company”) which
comprise the balance sheets as of December 31, 2016 and 2015,
and the related statements of operations, changes in members’
equity and cash flows for the years then ended, and the related
notes to the financial statements.
Management’s Responsibility for the Financial
Statements
Management
is responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of
the financial statements to design audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation
of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of December 31, 2016 and 2015, and the results of its
operations and its cash flows for the years then ended in
accordance with accounting principles generally accepted in the
United States of America.
/s/
BD & Company, Inc.
Owings
Mills, Maryland
June 9,
2017
F-118
Firestorm Solutions, LLC and Affiliate
Combined Balance Sheets
|
December 31,
|
|
|
2016
|
2015
|
ASSETS
|
|
|
CURRENT
ASSETS
|
|
|
Cash
|
$3,319
|
$28,357
|
Accounts
receivable
|
76,517
|
67,620
|
Prepaid expenses
and other current assets
|
8,940
|
8,014
|
Total current
assets
|
88,776
|
103,991
|
Intangibles,
net
|
45,370
|
51,775
|
Other
|
4,441
|
4,441
|
Total
assets
|
$138,587
|
$160,207
|
|
|
|
LIABILITIES
AND MEMBERS’ EQUITY (DEFICIT)
|
|
|
Current
liabilities
|
|
|
Accounts payable
and accrued expenses
|
$62,847
|
$41,918
|
Due to
member
|
—
|
148,600
|
Total
liabilities
|
62,847
|
190,518
|
Commitments
|
|
|
MEMBERS’
EQUITY (DEFICIT)
|
75,740
|
(30,311)
|
Total liabilities
and members’ equity (deficit)
|
$138,587
|
$160,207
|
The accompanying notes are an integral part of these combined
financial statements.
F-119
Firestorm Solutions, LLC and Affiliate
Combined Statements of Operations
|
Years
Ended
December 31,
|
|
|
2016
|
2015
|
REVENUE
|
|
|
Consulting services
fees
|
$1,124,254
|
$802,529
|
Franchise royalty
fees
|
62,758
|
102,400
|
Other
revenue
|
8,462
|
2,993
|
Total
revenue
|
1,195,474
|
907,922
|
COSTS
AND EXPENSES
|
|
|
Contractors’
fees and commissions
|
686,722
|
535,883
|
Selling, general
and administrative expenses
|
446,662
|
436,117
|
Professional
fees
|
110,830
|
55,726
|
Amortization
expense
|
6,405
|
6,405
|
Total costs and
expenses
|
1,250,619
|
1,034,131
|
Operating
loss
|
(55,145)
|
(126,209)
|
Other
income
|
12,596
|
33,405
|
Net
loss
|
$(42,549)
|
$(92,804)
|
The accompanying notes are an integral part of these combined
financial statements.
F-120
Firestorm Solutions, LLC and Affiliate
Combined Statements of Members’ Equity (Deficit)
Years Ended December 31, 2016 and 2015
Balance,
January 1, 2015
|
$62,493
|
Net
loss—2015
|
(92,804)
|
Balance,
December 31, 2015
|
(30,311)
|
Contribution of
note payable to member
|
148,600
|
Net
loss—2016
|
(42,549)
|
Balance,
December 31, 2016
|
$75,740
|
The accompanying notes are an integral part of these combined
financial statements.
F-121
Firestorm Solutions, LLC and Affiliate
Combined Statements of Cash Flows
|
Years Ended
December 31,
|
|
|
2016
|
2015
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
loss
|
$(42,549)
|
$(92,804)
|
Adjustments to
reconcile net loss to net cash used in operating
activities
|
|
|
Amortization
|
6,405
|
6,405
|
Changes in
operating assets and liabilities
|
|
|
Accounts
receivable
|
(8,897)
|
54,618
|
Prepaid expenses
and other current assets
|
(926)
|
(4,386)
|
Accounts payable
and accrued expenses
|
20,929
|
6,811
|
Net cash used in
operating activities
|
(25,038)
|
(29,356)
|
Cash, beginning of
year
|
28,357
|
57,713
|
Cash, end of
year
|
$3,319
|
$28,357
|
Supplemental disclosure of noncash financing
activities:
During
the year ended December 31, 2016, a member contributed
$148,600 through a conversion of a note payable.
The accompanying notes are an integral part of these combined
financial statements.
F-122
Firestorm Solutions, LLC and Affiliate
Notes to Combined Financial Statements
December 31, 2016 and 2015
NOTE 1 – NATURE OF OPERATIONS
The
combined financial statements of Firestorm Solutions, LLC and
Affiliate (collectively referred to as the “Company” or
“Firestorm”) include the accounts of Firestorm
Solutions, LLC (“Solutions”) and Firestorm Franchising,
LLC and subsidiary (“Franchising”). The companies are
under common management and Solutions has a 49% equity interest in
Franchising while one member of Solutions owns the other 51% equity
interest in Franchising. The liability of the members of the
Company is limited to the members’ total capital
contributions.
The
Company provides professional services to its clients including
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. The Company is focused on prevention in
addition to planning and response initiatives and also franchises
its security and disaster solutions.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation
The
accompanying combined financial statements have been prepared on
the accrual basis of accounting. All intercompany transactions and
balances have been eliminated in combination.
Use of estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates. The most significant
estimates made by management in the accompanying combined financial
statements relate to the valuation of accounts receivable and
intangible assets.
Accounts receivable
Credit
is granted to customers as per individual agreements with each
customer and franchisee. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the failure
of the customer or franchisee to make required payments. The
Company reviews the accounts receivable on a periodic basis and
establishes allowances where there is doubt as to the
collectability of individual balances. In evaluating the
collectability of individual receivable balances, the Company
considers many factors, including the age of the balance, the
customer or franchisee’s payment history, its current
credit-worthiness and current economic trends. The Company
determined that an allowance for doubtful accounts was not required
as of December 31, 2016 and 2015.
Service fee revenue
Service
fee revenue is revenue earned from a franchisee for fulfilling a
contract on behalf of a franchisee. Service fee revenue is
primarily recognized on a “time and materials” basis.
Reimbursements for out-of-pocket expenses that are billed to a
franchisee are recorded in the combined statement of operations as
revenue and expenses.
Franchise fee revenue
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 store development and the franchisee is
considered operational at the time the franchise agreement is
signed or when required training is completed, if
applicable.
Royalty fee revenue
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.
F-123
Intangible assets
The
cost of intangible assets is amortized over the estimated useful
lives of the related assets, which are tradenames. Amortization is
computed on the straight line method for financial reporting
purposes over the useful life of fifteen years. Intangible assets
with finite lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the
assets to the future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
Income taxes
Solutions
and Franchising have elected to be taxed as partnerships for U.S
Federal and state income tax purposes. Under this election,
profits, losses, credits and deductions of the Company are passed
through and allocated to the members. Accordingly, no provision for
income taxes is included in the accompanying combined financial
statements.
The
Company accounts for uncertainty in income taxes in accordance with
the Financial Accounting Standards Board’s Accounting
Standards Codification Topic 740, Income Taxes. Application of this topic
involves an assessment of whether each income tax position is
“more likely than not” of being sustained on audit,
including resolution of related appeals or litigation process, if
any. For each income tax position that meets the “more likely
than not” recognition threshold, the Company then assesses
the largest amount of tax benefit that is greater than 50%
likelihood of being realized upon effective settlement with the tax
authority. There were no uncertain income tax positions at
December 31, 2016 or 2015. While no income tax returns filed
by the Company are currently being examined by the Internal Revenue
Service or state authorities, tax returns since 2013 remain open.
The Company accrues interest and penalties associated with
uncertain tax positions, if any, as part of the income tax
provision. There were no income tax related interest and penalties
recorded for the years ended December 31, 2016 and
2015.
Going concern assessment
Beginning
with year ended December 31, 2016 and all annual and interim
periods thereafter, management will assess going concern
uncertainty in the Company’s combined financial statements to
determine if there is sufficient cash on hand and working capital
to operate for a period of at least one year from the date the
combined financial statements are issued or available to be issued,
which is referred to as the “look-forward period”, as
defined in generally accepted accounting principles. As part of
this assessment, based on conditions that are known and reasonably
knowable, 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, and its ability to delay or curtail expenditures or
programs, 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
In
August 2015, the Financial Accounting Standards Board issued
Accounting Standards Update (“ASU”) 2015-14,
Revenue from Contracts with
Customers—Deferral of the Effective Date, which defers
by one year the mandatory effective date of its revenue recognition
standard, and provides entities the option to adopt the standard as
of the original effective date. The new standard is now effective
for annual reporting periods beginning after December 15,
2017, and interim periods within those annual periods. Early
adoption is now permitted, but not before the original effective
date. The Company is currently evaluating the impact, if any, this
new standard will have on its combined financial statements, when
the Company will adopt the new standard, and the method of
adoption.
In
August 2014, the Financial Accounting Standards Board 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.
F-124
Subsequent events
The
Company has evaluated subsequent events through June 7, 2017, which
is the date the combined financial statements were available to be
issued. See Note 7.
NOTE 3 – INTANGIBLES
Intangibles
as of December 31, 2016 consist of the following:
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net Carrying
Amount
|
Estimated Useful Lives
|
Tradenames
|
$96,078
|
$50,708
|
$45,370
|
15 years
|
Intangibles
as of December 31, 2015 consist of the following:
|
Gross Carrying
Amount
|
Accumulated
Amortization
|
Net
CarryingAmount
|
Estimated Useful Lives
|
Tradenames
|
$96,078
|
$44,303
|
$51,775
|
15 years
|
Amortization
expense for intangible assets for each of the years ended
December 31, 2016 and 2015 amounted to $6,405.
The
following is a schedule of the future amortization expense for the
five years subsequent to December 31, 2016:
Year Ending
December 31,
|
Amount
|
2017
|
$6,405
|
2018
|
6,405
|
2019
|
6,405
|
2020
|
6,405
|
2021
|
6,405
|
Thereafter
|
13,345
|
Total
|
$45,370
|
NOTE 4 – RELATED PARTY TRANSACTIONS
The
Company had a short-term note payable to Mr. James
Satterfield, President and a member of Solutions and Franchising.
The note amount outstanding at December 31, 2015 was $148,700
and the note was non-interest bearing with no stated term of
repayment. During the year ended December 31, 2016, $100 was
repaid and Mr. Satterfield contributed the balance of this
note payable as a capital contribution to the Company.
For the
years ended December 31, 2016 and 2015, the Company paid
certain members and related parties consulting and contracting fees
totaling $400,170 and $224,080, respectively, which are included in
contractors’ fees and commissions in the accompanying
combined statements of operations.
F-125
NOTE 5 – CONCENTRATION RISKS
Major customers
For the
years ended December 31, 2016 and 2015, approximately 34% and
29% of the Company’s consulting services fee revenue,
respectively, was generated from two customers. For the year ended
December 31, 2015, the entire balance of the Company’s
initial franchise fee revenue came from one franchisee. For the
years ended December 31, 2016 and 2015, the entire balance of
the Company’s franchise royalty fee came from five
franchises. At December 31, 2016, approximately 82% of the
Company’s receivables were due from three customers. At
December 31, 2015, approximately 70% of the Company’s
accounts receivable were due from two customers.
NOTE 6 – COMMITMENTS
Leases
The
future rental commitments with noncancellable operating leases at
December 31, 2016 is estimated to be $27,458 for 2017. Rent
expense for the years ended December 31, 2016 and 2015 was
approximately $34,000 and $33,000, respectively.
NOTE 7 – SUBSEQUENT EVENT
In a
membership interest purchase agreement dated January 25, 2017,
100% of the membership interests in Solutions and Franchising was
acquired by Firestorm Holdings, LLC, a wholly-owned subsidiary of
KeyStone Solutions, Inc. (“KeyStone”) for a purchase
price of $500,000 in cash, $1,000,000 in unsecured, subordinated
promissory notes, 488,904 shares of common stock of KeyStone and
warrants to purchase 325,398 shares of common stock of
KeyStone.
F-126
GLOBAL TECHNICAL SERVICES, INC.
Index to Financial Statements
Independent
Auditor’s Report
|
F-128
|
Combined Balance
Sheets at December 31, 2016 and 2015
|
F-129
|
Combined Statements
of Operations for the Years Ended December 31, 2016 and
2015
|
F-130
|
Combined Statements
of Stockholders’ Equity (Deficit) for the Years Ended
December 31, 2016 and 2015
|
F-131
|
Combined Statements
of Cash Flows for the Years Ended December 31, 2016 and
2015
|
F-132
|
Notes
to Combined Financial Statements
|
F-133
|
F-127
Independent Auditors’ Report
To the
Board of Directors
Global
Technical Services, Inc.
Report on Financial Statements
We have
audited the accompanying financial statements of Global Technical
Services, Inc. (“the Company”) which comprise the
balance sheets as of December 31, 2016 and 2015, and the related
statements of operations, changes in stockholders’ equity
(deficit) and cash flows for the years then ended, and the related
notes to the financial statements.
Management’s Responsibility for the Financial
Statements
Management
is responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of
the financial statements to design audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation
of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of December 31, 2016 and 2015, and the results of its operations
and its cash flows for the years then ended in accordance with
accounting principles generally accepted in the United States of
America.
/s/
BD & Company, Inc.
Owings
Mills, MD
September
29, 2017
F-128
GLOBAL TECHNICAL SERVICES, INC.
BALANCE SHEETS
December 31, 2016 and 2015
|
2016
|
2015
|
ASSETS
|
|
|
Current
assets
|
|
|
Cash
|
$43,239
|
$60,369
|
Accounts
receivable - trade
|
2,337,461
|
1,768,050
|
Accounts
receivable - other
|
12,295
|
3,586
|
Employee
advances
|
84,008
|
137,049
|
Notes
Receivable
|
564,537
|
451,835
|
Interest
Receivable
|
19,628
|
24,111
|
Prepaid
expenses
|
214,659
|
277,109
|
Total
current assets
|
3,275,827
|
2,722,109
|
|
|
|
Property
and equipment
|
|
|
Autos
|
41,687
|
41,687
|
Furniture
and Equipment
|
723,958
|
1,493,787
|
Leasehold
improvements
|
135,485
|
135,485
|
|
901,130
|
1,670,959
|
Less
accumulated depreciation
|
(778,382)
|
(1,492,545)
|
Total
property and equipment
|
122,748
|
178,414
|
|
|
|
Total
assets
|
$3,398,575
|
$2,900,523
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' (DEFICIT) EQUITY
|
|
|
Current
liabilities
|
|
|
Accounts
payable
|
$91,173
|
$96,453
|
Accrued
expenses
|
347,275
|
247,171
|
Accrued
interest
|
69,940
|
31,878
|
Note
payable - current portion
|
421,193
|
342,172
|
Line
of credit
|
2,074,115
|
1,246,692
|
Total
current liabilities
|
3,003,696
|
1,964,366
|
Long-term
liabilities
|
|
|
Note
payable - net of current portion
|
682,897
|
827,713
|
Total
long-term liabilities
|
682,897
|
827,713
|
|
|
|
Total
liabilities
|
3,686,593
|
2,792,079
|
|
|
|
Stockholders'
(deficit) equity
|
|
|
Capital
Stock, $.10 par value; 1,000,000 shares authorized, 100,000 shares
issued, 44,050 shares outstanding at December 31, 2016 and
2015
|
10,000
|
10,000
|
Additional
paid-in-capital
|
565,984
|
565,984
|
Treasury
stock, 55,950 shares as of December 31, 2016 and 2015
|
(4,464,860)
|
(4,464,860)
|
Retained
earnings
|
3,600,858
|
3,997,320
|
Total
stockholders' (deficit) equity
|
(288,018)
|
108,444
|
|
|
|
Total
liabilities and stockholders' (deficit) equity
|
$3,398,575
|
$2,900,523
|
See accompanying notes to the financial statements.
F-129
GLOBAL TECHNICAL SERVICES, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 2016 and 2015
|
2016
|
2015
|
Sales
|
$18,116,381
|
$13,973,857
|
Cost
of sales
|
16,076,148
|
12,340,009
|
Gross
profit
|
2,040,233
|
1,633,848
|
|
|
|
Selling,
general and administrative expenses
|
2,313,754
|
2,170,247
|
Operating
loss
|
(273,521)
|
(536,399)
|
Other
income/(expense)
|
|
|
Interest
expense, net
|
(125,015)
|
(99,739)
|
Other
income, net
|
2,074
|
6,360
|
Other
expense, net
|
(122,941)
|
(93,379)
|
Net
loss
|
$(396,462)
|
$(629,778)
|
See accompanying notes to the financial statements.
F-130
GLOBAL TECHNICAL SERVICES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
For the years ended December 31, 2016 and 2015
|
Shares of Common Stock
|
Common Stock
|
Shares of Treasury Stock
|
Treasury Stock
|
Additional Paid-In Capital
|
Retained Earnings
|
Total Stockholders’ Equity (Accumulated
Deficit)
|
Balance
as of January 1, 2015
|
44,050
|
$10,000
|
55,950
|
$(4,464,860)
|
$565,984
|
$4,627,098
|
$738,222
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(629,778)
|
(629,778)
|
Balance
as of December 31, 2015
|
44,050
|
10,000
|
55,950
|
(4,464,860)
|
565,984
|
3,997,320
|
108,444
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(396,462)
|
(396,462)
|
Balance
as of December 31, 2016
|
44,050
|
$10,000
|
55,950
|
$(4,464,860)
|
$565,984
|
$3,600,858
|
$(288,018)
|
See accompanying notes to the financial statements.
F-131
GLOBAL TECHNICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2016 and 2015
|
2016
|
2015
|
Cash flows from
operating activities
|
|
|
Net
loss
|
(396,462)
|
(629,778)
|
Adjustments to
reconcile net income to cash provided by operating
activities
|
|
|
Depreciation and
amortization
|
66,970
|
81,145
|
Bad debt
expense
|
347,407
|
123,626
|
(Increase) decrease
in:
|
|
|
Accounts
receivables – trade
|
(917,963)
|
(192,569)
|
Accounts
receivables – other
|
(7,401)
|
2,663
|
Employee
advances
|
52,877
|
(53,668)
|
Interest
receivable
|
4,483
|
30,603
|
Prepaid
expenses
|
62,451
|
269,015
|
Increase (decrease)
in:
|
|
|
Accounts
payable-trade
|
(5,280)
|
21,458
|
Accrued
expenses
|
100,103
|
125,744
|
Accrued
interest
|
38,062
|
31,878
|
Total
adjustments
|
(258,291)
|
439,895
|
Net cash used in
operating activities
|
(654,753)
|
(189,883)
|
Cash flows from
investing activities
|
|
|
Purchase of
property and equipment
|
(11,304)
|
(70,292)
|
Collections on
notes receivable
|
(112,703)
|
-
|
Advances on notes
receivable
|
-
|
359,397
|
Net cash (used in)
provided by investing activities
|
(124,007)
|
289,105
|
Cash flows from
financing activities
|
|
|
Proceeds of
short-term borrowings
|
18,054,015
|
14,033,049
|
Repayment of
short-term borrowings
|
(17,226,591)
|
(14,192,423)
|
Proceeds of notes
payable
|
239,074
|
244,865
|
Repayment of notes
payable
|
(304,868)
|
(354,288)
|
Net cash provided
by (used in) financing activities
|
761,630
|
(268,797)
|
Net decrease in
cash
|
(17,130)
|
(169,575)
|
Cash, beginning of
year
|
60,369
|
229,944
|
Cash, end of
year
|
$43,239
|
$60,369
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
Cash paid for
income taxes
|
$5,016
|
$6,860
|
Cash paid for
interest
|
$117,387
|
$91,032
|
See accompanying notes to the financial statements.
F-132
GLOBAL TECHNICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – NATURE OF BUSINESS
Global
Technical Services, Inc. (the Company) was organized and chartered
in 1989, in the state of Texas, as a corporation for the purpose of
providing temporary contract professional and skilled labor to
businesses throughout the United States. Contracts to provide such
services vary in length, usually less than one year. The
Company’s corporate offices are located in Fort Worth,
Texas.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A
summary of the Company’s significant accounting policies
consistently applied in the preparation of the accompanying
financial statements follows:
Basis of accounting
The
accounts are maintained and the financial statements have been
prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles (GAAP).
Statements of cash flows
For
purposes of the statements of cash flows, the Company considers all
short-term investments purchased with an original maturity of three
months or less to be cash equivalents. At December 31, 2016 and
2015, the Company had no such investments included in
cash.
Accounts receivable
The
Company performs ongoing credit evaluations of its customers’
financial conditions and extends credit to virtually all of its
customers on an uncollateralized basis. Customers are headquartered
throughout the United States and operate primarily within the
aerospace and defense industries.
Accounts receivable are stated at cost, net of any allowance for
doubtful accounts. The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the failure of
customers to make required payments. The Company reviews the
accounts receivable on a periodic basis and establishes allowances
where there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable
balances, the Company considers many factors including the age of
the balance, the customer’s payments history, its current
credit-worthiness, and current economic trends. As of the years
ending December 31, 2016 and 2015, the Company deems all
receivables as collectible.
Accounts receivable at December 31, 2016 and 2015 include $222,269
and $188,415 in unbilled contracts respectively related to work
performed in the year in which the receivable was recorded. These
amounts were billed in the respective subsequent
years.
Revenue Recognition
The
Company recognizes revenues for the performance of services when
persuasive evidence of an arrangement exists, service 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 derives revenues from fees for services
generated on a project basis. Revenues are recognized based on the
number of hours worked by the employees or consultants at an
agreed-upon rate per hour per the Company’s contracts or
purchase orders.
Property and equipment
Property
and equipment is stated at cost. Depreciation of property and
equipment is provided on the double-declining balance method over
the estimated useful lives as follows:
Autos
|
5
Years
|
Furniture
and equipment
|
5-7
Years
|
Leasehold
improvements
|
15
Years
|
Repairs
and maintenance are expensed as incurred; expenditures for
additions, improvements and replacements are capitalized.
Depreciation expense of $66,970 and $81,145 was incurred during
2016 and 2005, respectively.
F-133
Treasury stock
Treasury
stock is shown at cost and consists of 55,950 shares of the Company
common stock at December 31, 2016 and 2015.
Income taxes
The
Company has adopted the liability method of accounting for income
taxes in accordance with Account Standards Codification (ASC) 740,
“Accounting for Income
Taxes”. Deferred income taxes are recognized for
temporary differences between financial statement and income tax
basis of assets and liabilities and net operating loss
carry-forwards for which tax benefits will be realized in future
years.
Profit sharing plan
The
Company has a 401(k) deferred compensation plan for all eligible
employees. Active participants may elect to have the Company make
salary reduction contributions on their behalf based on a
percentage of their earnings, not to exceed 25% in 2016 and 2015.
The Company has the option of making annual discretionary
contributions to the plan up to a predetermined limit. For the
years ended December 31, 2016 and 2015, the Company made no
contributions to the plan. The Company terminated the 401(k) plan
on January 31, 2017.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense
was $54,735 and $56,393 for the years ended December 31, 2016 and
2005, respectively.
Use of estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
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 combined financial statements to
determine if there is sufficient cash on hand and working capital
to operate for a period of at least one year from the date the
combined financial statements are issued or available to be issued,
which is referred to as the “look-forward period”, as
defined in generally accepted accounting principles. As part of
this assessment, based on conditions that are known and reasonably
knowable, 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, and its ability to delay or curtail expenditures or
programs, 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
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 U.S. 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.
F-134
In
August 2015, the Financial Accounting Standards Board issued
Accounting Standards Update (“ASU”) 2015-14,
Revenue from Contracts with
Customers—Deferral of the Effective Date, which defers
by one year the mandatory effective date of its revenue recognition
standard, and provides entities the option to adopt the standard as
of the original effective date. The new standard is now effective
for annual reporting periods beginning after December 15,
2017, and interim periods within those annual periods. Early
adoption is now permitted, but not before the original effective
date. The Company is currently evaluating the impact, if any, this
new standard will have on its combined financial statements, when
the Company will adopt the new standard, and the method of
adoption.
In
August 2014, the Financial Accounting Standards Board 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.
Subsequent events
The
Company has evaluated subsequent events through September 29, 2017,
which is the date the combined financial statements were available
to be issued. See Note 10.
NOTE 3 -- LIQUIDITY
For the
year ended December 31, 2016, the Company generated net loss of
$409,255 and used $654,753 of cash for continuing operations.
Additionally, at December 31, 2016 the company had cash available
of $43,239 and a working capital of $259,338.
On
September 21, 2017, the Company entered into a Purchase Agreement
to be acquired by Novume Solutions Inc. Upon closing of the
acquisition, the Company will become a wholly-owned subsidiary of
Novume Solutions, Inc., a Delaware corporation
(“Novume”). For additional detail regarding this
transaction, refer to Subsequent Events (Note 10).
Management
believes that the Company’s current level of cash combined
with cash that it expects to generate in its operations during the
next 12 months including anticipated new customer contracts will be
sufficient to sustain the Company’s business initiatives
through at least September 2018, but there can be no assurance that
these measures will be successful or adequate. In the event that
the Company’s cash reserves and cash flow from operations are
not sufficient to fund the Company’s future operations, the
Company may need to obtain additional capital and rely on Novume
Solutions, Inc.
NOTE 4 -- NOTES PAYABLE
Notes
payable as of December 31, 2016 and 2015, consisted of the
following:
|
December
31,
2016
|
December
31,
2015
|
G&W
Ventures
|
$953,722
|
$953,722
|
Ally
Financial
|
13,894
|
21,505
|
Bank
Direct
|
49,440
|
15,617
|
SBC Insurance
Agency
|
87,034
|
145,612
|
Cowboys Stadium,
LP
|
-
|
33,429
|
Total Current Notes
Payable
|
1,104,090
|
1,169,885
|
Less: Current
Maturities of Long-Term Debt
|
(421,193)
|
(342,172)
|
Notes Payable, Less
Current Maturities
|
$682,897
|
$827,713
|
F-135
The
Company has an outstanding notes payable to G&W Ventures, Inc.
that carries an interest rate of 4% per annum and requires monthly
interest payments of $11,137. The note payable is secured by
Company stock and a life insurance policy. The principal balance at
December 31, 2016 and 2015 totaled $953,722 and $953,722,
respectively. Principal payments during the year ended December 31,
2015 totaled $15,837. There were no principal payments made during
the year ended December 31, 2016.
On
September 26, 2013, the Company entered into a note agreement with
Ally Financial in the amount of $38,000 for the purchase of an
automobile. The note matures on October 11, 2018. Payments of
principal and interest at 0.00% are due and payable monthly
beginning November 11, 2013. The principal balance at December 31,
2016 and 2015 totaled $13,892 and $21,505, respectively. Principal
payments made in 2016 and 2015 totaled $7,613 and
$6,985.
On
August 8, 2012, the Company entered into a note agreement with
Cowboys Stadium, L.P. in the amount of $36,000 for the purchase of
Seat Option at the Cowboys Stadium. The note matures on August 8,
2038. Payments of principal and interest at 8% are due and payable
annually beginning March 1, 2013. On November 28, 2016 the Company
exercised Seat Option Assignment and Assumption Agreement and sold
the rights to stadium seats. The principal balance at December 31,
2016 and 2015 totaled $0 and $33,429, respectively. Principal
payments made in 2016 and 2015 totaled $520 and $480,
respectively.
On
October 1, 2015, the Company entered into a note agreement with
Bank Direct Capital Finance in the amount of $23,212. The note was
unsecured and matured on July 1, 2016. Payments of principal and
interest at 7.4% were due and payable monthly beginning November 1,
2015. The principal balance at December 31, 2015 totaled $15,617.
Principal payments made in 2016 and 2015 totaled $7,595 and
$15,617, respectively.
On
October 1, 2015, the Company entered into a note agreement with SBC
Insurance Agency in the amount of $208,014. The note was unsecured
and matured on June 1, 2016. Payments of principal were due and
payable monthly beginning November 1, 2015. The principal balance
at December 31, 2015 totaled $145,612. Principal payments made in
2016 and 2015 totaled $62,404 and 145,612,
respectively.
On
October 1, 2016, the Company entered into a note agreement with
Bank Direct Capital Finance in the amount of $74,022. The note
matures on July 1, 2017. Payments of principal and interest at 7.0%
are due and payable monthly beginning November 1, 2016. The
principal balance at December 31, 2016 totaled $49,440. Principal
payments made in 2016totaled $24,582. Payment of the note payable
is unsecured.
On
October 1, 2016, the Company entered into a note agreement with SBC
Insurance Agency in the amount of $111,905. The note matures on
July 1, 2017. Payments of principal are due and payable monthly
beginning November 1, 2016. The principal balance at December 31,
2016 totaled $87,034. Principal payments made in 2016totaled
$24,871. Payment of the note payable is unsecured.
The
future debt service requirements are as follows:
2017
|
$421,193
|
2018
|
114,839
|
2019
|
112,978
|
2020
|
117,580
|
2021 and
thereafter
|
337,501
|
|
$1,104,091
|
NOTE 5 -- LINE OF CREDIT – BANK
As of
December 31, 2016, the Company renewed a revolving line of credit
with Wells Fargo Capital Finance (WFCF). Advances from WFCF are due
on December 31, 2017 with interest at the LIBOR plus 3% payable
monthly. Payment of the revolving line of credit is secured by the
accounts receivable of the Company. The principal balance at
December 31, 2016 and 2015 totaled $2,074,115 and $1,246,692,
respectively.
As part
of the Line of Credit Agreement, the Company must maintain certain
financial covenants. The Company met all financial covenant
requirements during and as of the years ended December 31, 2016 and
2015.
F-136
NOTE 6 -- RELATED PARTY TRANSACTIONS
Employee advances
The
Company had outstanding employee advances to officers of $71,302
and $137,049 as of December 31, 2016 and 2015,
respectively.
Revolving line of credit
January
5, 2004, the Company granted a revolving line of credit in the
amount of $1,000,000 to Global Contract Professionals, Inc. (GCP),
a related party through common ownership. Advances to GCP are due
annually with interest at prime + ½% payable monthly. The
principal balance at December 31, 2016 and 2015 was $564,537 and
$451,835, respectively, and was recorded as notes receivable on the
Company’s balance sheet. The Company has recorded interest
income receivable of $19,628 and $24,111 as of December 31, 2016
and 2015, respectively from GCP.
Reimbursement for expenses
The
Company received reimbursement from GCP for various expenses during
2016 and 2015 in the amounts of $134,744 and $217,487,
respectively.
NOTE 7 -- LEASES
The
Company conducts its operations from facilities that are leased
under a 24-month operating lease, with payments of $14,758 per
month through March 2016. In March of 2015 the company reduced
lease space and extended its lease through March 2018 with payments
of $12,559 per month. In June of 2016 the Company reduced lease
space and adjusted rent payment to $10,085.
In
March 2015 the Company increased the sublease base rent with GCP to
$1,960 per month. An additional amount equal to the percentage of
total paychecks processed multiplied by $6,816 (the remaining
unallocated rent of $12,559) is due monthly.
In June
2016 the Company renegotiated the sublease with GCP for the
facilities to $3,516 per month. An additional amount equal to the
percentage of total paychecks processed multiplied by $3,054 (the
remaining unallocated rent of $10,085) is due monthly.
Rent
expense for the years ended December 31, 2016 and 2015 was $68,781
and $105,871, respectively. Rental income from the sublease to GCP
during the year ended December 31, 2016 and 2015 was $66,696 and
$68,321, respectively.
Minimum
rental payments net of rental income required under the above
operating leases are as follows:
2017
|
$42,192
|
2018
|
42,192
|
|
$84,384
|
NOTE 8 -- INCOME TAXES
Income
taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus
deferred taxes. Deferred taxes are recognized for differences
between the basis of assets and liabilities for financial statement
and income tax purposes. The differences relate primarily to
depreciable assets (use of different depreciation methods and lives
for financial statement and income tax purposes) and state income
taxes (which are accrued for book purposes but deducted for tax
purposes in the year paid) and contribution carryovers (which are
deducted for book purposes when paid but are limited to 10% of
taxable income for tax purposes). The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the
assets and liabilities are recovered or settled.
F-137
The
differences between actual income tax expense and the tax provision
computed by applying the statutory federal income tax rate to
earnings before income taxes are attributable to the
following:
|
2015
|
2016
|
Deferred Tax
Assets
|
|
|
Charity
Carryforward
|
$79,140
|
$84,402
|
NOL
|
227,022
|
359,766
|
Deferred Tax
Liabilities
|
|
|
Fixed
Assets
|
11,928
|
18,700
|
Net Deferred Tax
Assets
|
318,089
|
462,868
|
Less: Valuation
Allowance
|
(318,089)
|
(462,868)
|
Net Deferred Tax
Asset
|
$-
|
$-
|
NOTE 9 -- CONCENTRATION OF CREDIT RISK
The
Company operates within the aerospace and defense industries.
Accordingly, the risk exists that the ability to collect amounts
due from customers could be affected by economic fluctuations in
these markets and industries. The Company does not believe,
however, that it is subject to any unusual credit risk beyond the
normal credit risk attendant to operating the business.
Historically, credit losses have not been significant.
The
Company has one customer in 2016 and two customers in 2015, which
combined, accounted for approximately 59% and 65% of the
Company’s total sales during 2016 and 2015, respectively. The
amount due from these customers, included in accounts receivable,
was $1,535,128 and $1,535,128, or approximately 59% and 52% of the
balances, at December 31, 2016 and 2015, respectively.
NOTE 10 -- SUBSEQUENT EVENTS
On
September 21, 2017 the Company entered into a Equity Purchase
Agreement with Novume Solutions, Inc. in the amount of
approximately $3,750,000. This purchase agreement is expected to
close on October 1, 2017.
On
February 23, 2017 the Company entered into a note agreement with
Fora Financial in the amount of $149,500 with a fixed finance
charge of $37,375. The Company renegotiated the agreement on July
24, 2017 borrowing an additional $100,000 with a fixed finance
charge of $32,000, if paid by October 31, 2017.
F-138
GLOBAL CONTRACT PROFESSIONAL, INC.
Index to Financial Statements
Independent
Auditor’s Report
|
F-140
|
Combined Balance
Sheets at December 31, 2016 and 2015
|
F-141
|
Combined Statements
of Operations for the Years Ended December 31, 2016 and
2015
|
F-142
|
Combined Statements
of Stockholders’ Equity (Deficit) for the Years Ended
December 31, 2016 and 2015
|
F-143
|
Combined Statements
of Cash Flows for the Years Ended December 31, 2016 and
2015
|
F-144
|
Notes
to Combined Financial Statements
|
F-145
|
F-139
Independent Auditors’ Report
To the
Board of Directors
Global
Contract Professionals, Inc.
Report on Financial Statements
We have
audited the accompanying financial statements of Global Contract
Professionals, Inc. (“the Company”) which comprise the
balance sheets as of December 31, 2016 and 2015, and the related
statements of operations, changes in stockholders’ deficit
and cash flows for the years then ended, and the related notes to
the financial statements.
Management’s Responsibility for the Financial
Statements
Management
is responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of
the financial statements to design audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation
of the financial statements.
We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of December 31, 2016 and 2015, and the results of its operations
and its cash flows for the years then ended in accordance with
accounting principles generally accepted in the United States of
America.
/s/
BD & Company, Inc.
Owings
Mills, MD
September
29, 2017
F-140
GLOBAL CONTRACT PROFESSIONALS, INC.
BALANCE SHEETS
December 31, 2016 and 2015
ASSETS
|
2016
|
2015
|
Current
assets
|
|
|
Cash
|
$28,458
|
$188,150
|
Accounts receivable
- trade
|
525,304
|
756,283
|
Accounts receivable
- other
|
1,750
|
17,150
|
Prepaid
expenses
|
3,525
|
17,482
|
Total current
assets
|
559,037
|
979,065
|
Property and
equipment
|
|
|
Autos
|
-
|
-
|
Furniture and
equipment
|
137,215
|
172,582
|
Leasehold
improvements
|
11,604
|
5,104
|
|
148,819
|
177,686
|
Less accumulated
depreciation
|
(115,867)
|
(133,642)
|
Total property and
equipment
|
32,952
|
44,044
|
Other
assets
|
|
|
Deposits
|
9,241
|
9,241
|
Total other
assets
|
9,241
|
9,241
|
Total
assets
|
$601,230
|
$1,032,350
|
LIABILITIES AND
STOCKHOLDERS' DEFICIT
|
|
|
Current
liabilities
|
|
|
Accounts
payable
|
$2,024
|
$24,555
|
Accrued
expenses
|
54,142
|
71,710
|
Accrued interest -
related party
|
19,628
|
24,111
|
Note payable -
related party
|
564,537
|
446,760
|
Line of
credit
|
434,587
|
636,949
|
Total current
liabilities
|
1,074,918
|
1,204,085
|
Total
liabilities
|
1,074,918
|
1,204,085
|
Stockholders'
deficit
|
|
|
Capital Stock, $.01
par value; 1,000,000 shares authorized 44,050 shares issued and
outstanding
|
441
|
441
|
Accumulated
deficit
|
(474,129)
|
(172,176)
|
Total stockholders'
equity
|
(473,688)
|
(171,735)
|
Total liabilities
and stockholders' deficit
|
$601,230
|
$1,032,350
|
See accompanying notes to the financial statements.
F-141
GLOBAL CONTRACT PROFESSIONALS, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 2016 and 2015
|
2016
|
2015
|
Sales
|
$6,272,572
|
$9,509,987
|
Cost
of sales
|
5,605,520
|
8,469,733
|
Gross
profit
|
667,052
|
1,040,254
|
Selling,
general and administrative expenses
|
896,702
|
1,034,705
|
Operating
(loss) income
|
(229,650)
|
5,549
|
Other
expense
|
|
|
Interest
expense
|
(71,621)
|
(82,783)
|
Other
expense, net
|
(682)
|
(1,734)
|
Net
loss
|
$(301,953)
|
$(78,968)
|
See accompanying notes to the financial statements.
F-142
GLOBAL CONTRACT PROFESSIONALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
For the years ended December 31, 2016 and 2015
|
Shares of Common Stock
|
Common Stock
|
Accumulated Deficit
|
Total Stockholders’ Deficit
|
Balance
as of January 1, 2015
|
44,050
|
$441
|
$(93,208)
|
$(92,767)
|
Net
loss
|
-
|
-
|
(78,968)
|
(78,968)
|
Balance
as of December 31, 2015
|
44,050
|
441
|
(172,176)
|
(171,735)
|
Net
loss
|
-
|
-
|
(301,953)
|
(301,953)
|
Balance
as of December 31, 2016
|
44,050
|
$441
|
$(474,129)
|
$(473,688)
|
See accompanying notes to the financial statements.
F-143
GLOBAL CONTRACT PROFESSIONALS, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2016 and 2015
|
2016
|
2015
|
Cash flows from
operating activities
|
|
|
Net
loss
|
$(301,953)
|
$(78,968)
|
Adjustments to
reconcile net income to cash provided by operating
activities
|
|
|
Depreciation and
amortization
|
19,083
|
20,083
|
Bad debt
expense
|
50,468
|
-
|
(Increase) decrease
in:
|
|
|
Accounts
receivables - trade
|
180,511
|
239,291
|
Accounts
receivables - other
|
6,500
|
30,724
|
Employee
advances
|
8,900
|
300
|
Prepaid
expenses
|
13,955
|
(12,154)
|
Increase (decrease)
in:
|
|
|
Accounts
payable-trade
|
(22,528)
|
(11,450)
|
Accrued
expenses
|
(17,568)
|
(3,968)
|
Accrued
interest
|
(4,483)
|
(1,505)
|
Total
adjustments
|
234,838
|
261,321
|
Net cash provided
by operating activities
|
(67,115)
|
182,353
|
Cash flows from
investing activities
|
|
|
Purchase of
property and equipment
|
(7,992)
|
(23,327)
|
Net cash used in
investing activities
|
(7,992)
|
(23,327)
|
Cash flows from
financing activities
|
|
|
Proceeds of
short-term borrowings
|
6,414,447
|
9,583,633
|
Repayment of
short-term borrowings
|
(6,616,809)
|
(9,793,139)
|
Proceeds of notes
payable
|
423,277
|
550,966
|
Repayment of notes
payable
|
(305,500)
|
(385,476)
|
Net cash used in
financing activities
|
(84,585)
|
(44,016)
|
Net decrease in
cash
|
(159,692)
|
115,010
|
Cash, beginning of
year
|
188,150
|
73,140
|
Cash, end of
year
|
$28,458
|
$188,150
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
Cash paid for
income taxes
|
$2,500
|
$10,103
|
Cash paid for
interest
|
$73,057
|
$84,288
|
See accompanying notes to the financial statements.
F-144
GLOBAL CONTRACT PROFESSIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 – NATURE OF BUSINESS
Global
Contract Professionals, Inc. (the Company) was organized and
chartered on December 29, 2003, in the state of Texas, as a
corporation for the purpose of providing temporary contract
professional and skilled labor to businesses throughout the United
States. Contracts to provide such services vary in length, usually
less than one year. The Company’s corporate offices are
located in Fort Worth, Texas.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
A
summary of the Company’s significant accounting policies
consistently applied in the preparation of the accompanying
financial statements follows:
Basis of accounting
The
accounts are maintained and the financial statements have been
prepared on the accrual basis of accounting in accordance with
generally accepted accounting principles (GAAP).
Cash and cash equivalents
For
purposes of the balance sheet and statement of cash flows, the
Company considers all short-term investments purchased with an
original maturity of three months or less to be cash equivalents.
At December 31, 2016 and 2015, the Company had no such investments
included in cash.
Accounts receivable
The
Company performs ongoing credit evaluations of its customers’
financial conditions and extends credit to virtually all of its
customers on an uncollateralized basis. Customers are headquartered
throughout the United States and operate primarily within the
aerospace and defense industries.
Accounts receivable are stated at cost, net of any allowance for
doubtful accounts. The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the failure of
customers to make required payments. The Company reviews the
accounts receivable on a periodic basis and establishes allowances
where there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable
balances, the Company considers many factors including the age of
the balance, the customer’s payments history, its current
credit-worthiness, and current economic trends. As of the years
ending December 31, 2016 and 2015, the Company deems all
receivables as collectible.
Accounts receivable at December 31, 2016 and 2015 include $16,445
and $41,363 in unbilled contracts respectively related to work
performed in the year in which the receivable was recorded. These
amounts were billed in the respective subsequent
years.
Revenue Recognition
The
Company recognizes revenues for the performance of services when
persuasive evidence of an arrangement exists, service 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 derives revenues from fees for services
generated on a project basis. Revenues are recognized based on the
number of hours worked by the employees or consultants at an
agreed-upon rate per hour per the Company’s contracts or
purchase orders.
Property and equipment
Property
and equipment is stated at cost. Depreciation of property and
equipment is provided on the double-declining balance method over
the estimated useful lives as follows:
Autos
|
5
Years
|
Furniture
and equipment
|
5-7
Years
|
Leasehold
improvements
|
15
Years
|
F-145
Repairs
and maintenance are expensed as incurred; expenditures for
additions, improvements and replacements are capitalized.
Depreciation expense of $19,083 and $20,083 was incurred during the
years ended December 31, 2016 and 2015, respectively.
Profit sharing plan
The
Company has a 401(k) deferred compensation plan for all eligible
employees. Active participants may elect to have the Company make
salary reduction contributions on their behalf based on a
percentage of their earnings, not to exceed 25%. The Company has
the option of making annual discretionary contributions to the plan
up to a predetermined limit. For the year ended December 31, 2016
and 2015, the Company made no contributions to the
plan.
Advertising
The
Company expenses advertising costs as incurred. Advertising expense
was $54,545 and $73,763 for the years ended December 31, 2016 and
2015, respectively.
Use of estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
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 combined financial statements to
determine if there is sufficient cash on hand and working capital
to operate for a period of at least one year from the date the
combined financial statements are issued or available to be issued,
which is referred to as the “look-forward period”, as
defined in generally accepted accounting principles. As part of
this assessment, based on conditions that are known and reasonably
knowable, 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, and its ability to delay or curtail expenditures or
programs, 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
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 U.S. 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
August 2015, the Financial Accounting Standards Board issued
Accounting Standards Update (“ASU”) 2015-14,
Revenue from Contracts with
Customers—Deferral of the Effective Date, which defers
by one year the mandatory effective date of its revenue recognition
standard, and provides entities the option to adopt the standard as
of the original effective date. The new standard is now effective
for annual reporting periods beginning after December 15,
2017, and interim periods within those annual periods. Early
adoption is now permitted, but not before the original effective
date. The Company is currently evaluating the impact, if any, this
new standard will have on its combined financial statements, when
the Company will adopt the new standard, and the method of
adoption.
F-146
In
August 2014, the Financial Accounting Standards Board 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.
Subsequent events
The
Company has evaluated subsequent events through September 29, 2017,
which is the date the combined financial statements were available
to be issued. See Note 12.
3. – LIQUIDITY
For the
year ended December 31, 2016, the Company generated net loss of
$301,953 and used $67,115 of cash for continuing operations.
Additionally, at December 31, 2016 the company had cash available
of $28,458 and a working capital deficit of $515,881.
On
September 21, 2017, the Company entered into a Purchase Agreement
to be acquired by Novume Solutions Inc. Upon closing of the
acquisition, the Company will become a wholly-owned subsidiary of
Novume Solutions, Inc., a Delaware corporation
(“Novume”). For additional detail regarding this
transaction, refer to Subsequent Events (Note 11).
Management
believes that the Company’s current level of cash combined
with cash that it expects to generate in its operations during the
next 12 months including anticipated new customer contracts will be
sufficient to sustain the Company’s business initiatives
through at least September 2018, but there can be no assurance that
these measures will be successful or adequate. In the event that
the Company’s cash reserves and cash flow from operations are
not sufficient to fund the Company’s future operations, the
Company may need to obtain additional capital and rely on Novume
Solutions, Inc.
NOTE 4 – LINE OF CREDIT – BANK
As of
December 31, 2016, the Company renewed a revolving line of credit
with Wells Fargo Capital Finance (WFCF). Advances from WFCF are due
on December 31, 2017 with interest at the LIBOR plus 3% payable
monthly. Payment of the revolving line of credit is secured by the
accounts receivable of the Company. The principal balance at
December 31, 2016 and 2015 totaled $434,587 and $636,949,
respectively.
As part
of the Line of Credit Agreement, the Company must maintain certain
financial covenants. The Company met all financial covenant
requirements during and as of the years ended December 31, 2016 and
2015.
NOTE 5 – RELATED PARTY TRANSACTIONS
Reimbursement for expenses
The
Company reimbursed Global Technical Services, Inc. (GTS), a related
party through common ownership, for various expenses during 2016
and 2015 in the amounts of $134,744 and $217,487,
respectively.
Revolving line of credit
As of
January 5, 2004, the Company secured a revolving line of credit in
the amount of $1,000,000 from GTS. Advances from GTS are due
annually with interest at prime + 1/2% payable monthly. The
principal balance at December 31, 2016 and 2015 was $564,537 and
$446,760, respectively and was recorded as notes payable –
related party on the Company’s balance sheet. The Company has
recorded interest expense payable of $19,628 and $24,111 in 2016
and 2015, respectively.
F-147
Employee advances
The
Company had outstanding employee advances to officers of $1,750 and
$10,650 as of December 31, 2016 and 2015,
respectively.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
The
Company is a guarantor on a line of credit to GTS from a bank in
the amount of $3,000,000, with a balance at December 31, 2016 of
$2,074,115. This guarantee would require the Company to make
required loan payments to the bank in the event GTS was unable to
do so.
NOTE 7 – CONCENTRATION OF CREDIT RISK
The
Company operates within the aerospace and defense industries.
Accordingly, the risk exists that the ability to collect amounts
due from customers could be affected by economic fluctuations in
these markets and industries. The Company does not believe,
however, that it is subject to any unusual credit risk beyond the
normal credit risk attendant to operating the business.
Historically, credit losses have not been significant.
The
Company has three customers, which combined, accounted for
approximately 77% and 85% of the Company’s total sales during
2016 and 2015, respectively. The amount due from these customers,
included in accounts receivable, was $503,114 and $745,853 or
approximately 91% and 81% of the balances, at December 31, 2016 and
2015, respectively.
NOTE 8 – INCOME TAXES
The
Company has elected to be taxed under provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does
not pay federal corporate income taxes on its taxable income and is
not allowed a net operating loss carryover or carry back as a
deduction. Instead, the stockholders are liable for individual
federal income taxes on their respective shares of the
Company’s taxable income or include their respective shares
of the Company’s net operating loss in their individual
income tax returns.
NOTE 9 – EQUITY
The
Company has authorized a total of 1,000,000 shares of $.01 par
value common stock. The Company issued 44,050 shares of voting
stock to stockholders. The number of shares issued and outstanding
at December 31, 2016 and 2015 is 44,050.
NOTE 10 – LEASES
The
Company conducts its operations from facilities that are subleased
from GTS. In March 2015, the Company increased the sublease base
rent with GTS to $1,960 per month. An additional amount equal to
the percentage of total paychecks processed multiplied by $6,816
(the remaining unallocated rent of $12,559) is due
monthly.
In June
2016, the Company renegotiated the sublease with GTS for the
facilities to $3,516 per month. An additional amount equal to the
percentage of total paychecks processed multiplied by $3,054 (the
remaining unallocated rent of $10,085) is due monthly.
Net
rent expense for the years ended December 31, 2016 and 2015 was
$66,696 and $52,621, respectively.
Minimum
rental payments required under the above operating lease are as
follows:
2017
|
$42,192
|
2018
|
10,548
|
|
$52,740
|
F-148
NOTE 11 – SUBSEQUENT EVENTS
On
September 21, 2017, the Company entered into an Equity Purchase
Agreement with Novume Solutions, Inc. in the amount of
$3,750,000.
F-149
NEOSYSTEMS, CORP.
Contents
Independent
auditor’s report
|
F-151
|
Financial
statements
|
|
Balance
sheets
|
F-152
|
Statements of
operations
|
F-153
|
Statements of
stockholders’ equity
|
F-154
|
Statements of cash
flows
|
F-155
|
Notes
to financial statements
|
F-156
|
F-150
Independent Auditor’s Report
To the Stockholders
NeoSystems, Corp.
Tysons Corner, Virginia
Report on the Financial Statements
We have
audited the accompanying financial statements of NeoSystems, Corp.,
which comprise the balance sheets as of December 31, 2016 and 2015,
and the related statements of operations, stockholders’
equity and cash flows for the years then ended, and the related
notes to the financial statements.
Management’s Responsibility for the Financial
Statements
Management
is responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles
generally accepted in the United States of America; this includes
the design, implementation, and maintenance of internal control
relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of
the financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit
also includes evaluating the appropriateness of accounting policies
used and the reasonableness of significant accounting estimates
made by management, as well as evaluating the overall presentation
of the financial statements.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
NeoSystems, Corp. as of December 31, 2016 and 2015, and the results
of its operations and its cash flows for the years then ended in
accordance with accounting principles generally accepted in the
United States of America.
/s/ RSM
US LLP
McLean,
Virginia
April
26, 2017
F-151
NeoSystems, Corp.
Balance Sheets
December 31, 2016 and 2015
|
2016
|
2015
|
Assets
|
|
|
Current
assets:
|
|
|
Cash and cash
equivalents
|
$2,662,891
|
$6,163,998
|
Accounts
receivable, net
|
5,540,963
|
7,532,506
|
Note receivable,
net
|
206,930
|
204,683
|
Prepaid software
licenses and maintenance
|
231,225
|
387,676
|
Prepaid expenses
and other current assets
|
591,040
|
114,440
|
Total current
assets
|
9,233,049
|
14,403,303
|
Property and
equipment, net
|
3,643,631
|
3,897,095
|
Other
assets
|
614,184
|
590,713
|
Total
assets
|
$13,490,864
|
$18,891,111
|
Liabilities and
Stockholders’ Equity
|
|
|
Current
liabilities:
|
|
|
Notes payable,
current portion
|
$4,491,941
|
$620,180
|
Capital lease
obligations, current portion
|
110,227
|
172,084
|
Accounts payable
and accrued expenses
|
844,229
|
1,156,742
|
Accrued
compensation, benefits and related liabilities
|
1,960,985
|
3,315,574
|
Deferred
revenue
|
297,847
|
117,604
|
Total current
liabilities
|
7,705,229
|
5,382,184
|
Long-term
liabilities:
|
|
|
Notes payable, net
of current portion, discount and net deferred charges
|
177,352
|
4,695,888
|
Capital lease
obligations, net of current portion
|
-
|
109,388
|
Derivative
liability
|
471,470
|
1,278,038
|
Deferred
compensation liability
|
266,223
|
319,969
|
Deferred tax
liability
|
383,645
|
1,533,768
|
Deferred
rent
|
2,032,189
|
2,219,031
|
Total long-term
liabilities
|
3,330,879
|
10,156,082
|
Total
liabilities
|
11,036,108
|
15,538,266
|
Stockholders’
equity:
|
|
|
Series A preferred
stock, $.001 par value, 778,432 shares authorized, 521,962 shares
issued and outstanding
|
522
|
522
|
Common stock, no
par value, 7,000,000 shares authorized, 3,507,419 and 3,499,919
shares issued and outstanding in 2016 and 2015,
respectively
|
3,427,654
|
3,218,768
|
Additional paid-in
capital
|
1,250,383
|
1,136,716
|
Accumulated
deficit
|
(2,223,803)
|
(1,003,161)
|
Total
stockholders’ equity
|
2,454,756
|
3,352,845
|
Total liabilities
and stockholders’ equity
|
$13,490,864
|
$18,891,111
|
See
notes to financial statements.
F-152
NeoSystems, Corp.
Statements of Operations
Years ended December 31, 2016 and 2015
|
2016
|
2015
|
Revenue
|
$29,821,204
|
$40,503,491
|
Cost of
sales:
|
|
|
Service
labor
|
9,524,671
|
12,668,563
|
Other cost of
sales
|
2,134,675
|
3,014,352
|
Total cost of
sales
|
11,659,346
|
15,682,915
|
Gross
margin
|
18,161,858
|
24,820,576
|
Selling, general
and administrative expenses
|
20,256,251
|
20,667,945
|
(Loss) income from
operations
|
(2,094,393)
|
4,152,631
|
Gain (loss) on fair
value derivative liability
|
806,568
|
(230,589)
|
Other
income
|
25,077
|
40,483
|
Interest
expense
|
(1,229,479)
|
(1,340,708)
|
(Loss) income
before income taxes
|
(2,492,227)
|
2,621,817
|
Income tax benefit
(expense)
|
1,385,252
|
(1,337,514)
|
Net (loss)
income
|
$(1,106,975)
|
$1,284,303
|
See
notes to financial statements.
F-153
NeoSystems, Corp.
Statements of Stockholders’ Equity
Years ended December 31, 2016 and 2015
|
Series A
Preferred Stock
|
Common
Stock
|
|
|
|
||
|
Shares
|
Amount
|
Shares
|
Amount
|
Series A
Additional Paid-in Capital
|
Accumulated
Deficit
|
Total
Stockholders’ Equity
|
Balance, December
31, 2014
|
521,962
|
$522
|
3,435,426
|
$2,979,968
|
$1,032,812
|
$(2,183,560)
|
$1,829,742
|
Accretion of
preferred stock to redemption value
|
-
|
-
|
-
|
-
|
103,904
|
(103,904)
|
-
|
Exercise of stock
options
|
-
|
-
|
64,493
|
63,516
|
-
|
-
|
63,516
|
Stock based
compensation
|
-
|
-
|
-
|
175,284
|
-
|
-
|
175,284
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
1,284,303
|
1,284,303
|
Balance, December
31, 2015
|
521,962
|
522
|
3,499,919
|
3,218,768
|
1,136,716
|
(1,003,161)
|
3,352,845
|
Accretion of
preferred stock to redemption value
|
-
|
-
|
-
|
-
|
113,667
|
(113,667)
|
-
|
Exercise of stock
options
|
-
|
-
|
7,000
|
9,280
|
-
|
-
|
9,280
|
Stock based
compensation
|
-
|
-
|
-
|
199,606
|
-
|
-
|
199,606
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(1,106,975)
|
(1,106,975)
|
Balance, December
31, 2016
|
521,962
|
$522
|
3,506,919
|
$3,427,654
|
$1,250,383
|
$(2,223,803)
|
$2,454,756
|
See
notes to financial statements.
F-154
NeoSystems, Corp.
Statements of Cash Flow
Years ended December 31, 2016 and 2015
|
2016
|
2015
|
Cash flows from
operating activities:
|
|
|
Net (loss)
income
|
$(1,106,975)
|
$1,284,303
|
Adjustments to
reconcile net (loss) income to net cash
|
|
|
(used in) provided
by operating activities:
|
|
|
(Gain) loss on fair
value of derivative liability
|
(806,568)
|
230,589
|
Reduction of note
receivable in exchange for subscription services
|
47,753
|
-
|
Bad debt
(recoveries) expense
|
(120,119)
|
35,302
|
Paid-in-kind
interest
|
83,369
|
92,811
|
Amortization of
debt discount and deferred charges
|
511,746
|
620,004
|
Depreciation and
amortization
|
1,116,075
|
924,509
|
Deferred
rent
|
(186,842)
|
263,176
|
Deferred income
taxes
|
(1,150,123)
|
1,012,202
|
Stock based
compensation
|
199,606
|
175,284
|
Changes in
operating assets and liabilities:
|
|
|
(Increase) decrease
in assets:
|
|
|
Accounts
receivable
|
2,061,662
|
(1,943,424)
|
Prepaid software
licenses and maintenance
|
156,451
|
154,379
|
Prepaid expenses
and other current assets
|
(476,600)
|
105,318
|
Other
assets
|
3,874
|
(85,727)
|
Increase (decrease)
in liabilities:
|
|
|
Accounts payable
and accrued expenses
|
(312,513)
|
65,156
|
Accrued
compensation, benefits and related liabilities
|
(1,354,589)
|
888,283
|
Deferred
compensation liability
|
(53,746)
|
(58,404)
|
Deferred
revenue
|
180,243
|
(35,423)
|
Net cash (used in)
provided by operating activities
|
(1,207,296)
|
3,728,338
|
Cash flows from
investing activities:
|
|
|
Payments received
on note receivable
|
-
|
9,929
|
Contributions to
life insurance policy assets
|
(27,347)
|
(26,967)
|
Purchase of
property and equipment
|
(862,609)
|
(1,867,828)
|
Net cash used in
investing activities
|
(889,956)
|
(1,884,866)
|
Cash flows from
financing activities:
|
|
|
Exercise of stock
options
|
$9,280
|
$63,516
|
Principal payments
on notes payable
|
(1,241,890)
|
(595,434)
|
Principal payments
on capital lease obligations
|
(171,245)
|
(209,571)
|
Net cash used in
financing activities
|
(1,403,855)
|
(741,489)
|
Net (decrease)
increase in cash
|
(3,501,107)
|
1,101,983
|
Cash and cash
equivalents:
|
|
|
Beginning
|
6,163,998
|
5,062,015
|
Ending
|
$2,662,891
|
$6,163,998
|
Supplemental
disclosures of cash flow information:
|
|
|
Cash paid during
year for interest
|
$919,276
|
$950,361
|
Cash paid during
the year for taxes
|
$-
|
$135,000
|
Supplemental
schedule of noncash investing and financing
activities:
|
|
|
Accretion of
redemption value on Series A preferred stock
|
$113,667
|
$103,904
|
See
notes to financial statements
F-155
NeoSystems, Corp.
Notes to Financial Statements
Note
1.
Nature
of Business and Significant Accounting Policies
Nature of organization: NeoSystems, Corp. (NeoSystems or the
Company) was incorporated in the Commonwealth of Virginia on
January 28, 2003, and provides full-scope, on-site, business
accounting services to companies contracting with the federal
government as well as companies within other industries. NeoSystems
is headquartered in Tysons Corner, Virginia.
A
summary of the Company’s significant accounting policies
follows:
Cash and cash equivalents: The Company considers highly
liquid debt investments with an original maturity of less than
three months to be cash equivalents.
The
Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation (FDIC) covers $250,000 for substantially all
depository accounts. The Company from time to time may have amounts
on deposit in excess of the insured limits.
Accounts receivable: Accounts receivable are stated at the
amount management expects to collect from balances outstanding at
year-end. Unbilled receivables are included in accounts receivable
and include invoices that were billed subsequent to
year-end.
The
Company bases its allowance for doubtful accounts on a review of
current outstanding receivables, historical collection information
on its receivables, and existing economic conditions. The Company
provides for the amounts of receivables estimated to become
uncollectible in the future by maintaining an allowance for
doubtful accounts. This allowance was $299,865 and $320,484 at
December 31, 2016 and 2015, respectively. Accounts receivable are
written off when deemed uncollectible.
Billed
accounts receivable are considered past due if the invoice has been
outstanding more than 30 days. The Company does not charge interest
on past due amounts.
Prepaid software licenses and maintenance: The Company
purchases software licenses and maintenance on behalf of their
clients as part of their service offerings. The costs associated
with these licenses and maintenance agreements are amortized to
direct costs over the license or maintenance period.
Property and equipment: Property and equipment is stated at
cost less accumulated depreciation and amortization. Depreciation
and amortization of property and equipment is computed using the
straight-line method over estimated useful lives ranging from three
to seven years. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the estimated
useful lives of the assets or the term of the related lease.
Amortization of equipment under capital lease obligations is
computed using the straight-line method over the lesser of the
lease term or the useful life of the equipment.
Deferred charges: Deferred charges are financing
fees being amortized using an effective interest rate method over
the life of the related loan. Amortization expense was $284,912 and
$322,468 for the years ended December 31, 2016 and 2015,
respectively.
Life insurance policies: The Company is the beneficiary of
life insurance policies on certain executives. The cash surrender
value of these policies totaled $532,334 and $504,987 for the years
ended December 31, 2016 and 2015, respectively, and is
included in other assets on the balance sheets.
F-156
Note
1. Nature of Business and
Significant Accounting Policies (Continued)
Deferred rent: The Company recognizes the total cost of its
operating leases ratably over the lease term. The difference
between rent payments and rent expense is reflected as deferred
rent on the balance sheets.
Income taxes: Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amount 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 in income.
Deferred tax assets are reduced by a valuation allowance if it is
more likely than not that the tax benefits will not be
realized.
Management
has evaluated all other tax positions that could have a significant
effect on the financial statements and determined the Company had
no uncertain income tax positions at December 31, 2016. The Company
is no longer subject to U.S. federal or state and local tax
examinations by tax authorities for years before 2013.
The
Company recognizes interest accrued related to unrecognized tax
benefits in interest expense and penalties in selling, general and
administrative expenses. During the year ended December 31, 2016,
the Company did not recognize any such amounts related to interest
and penalties.
Revenue recognition: The Company recognizes revenue
when a contract has been executed, the contract price is fixed and
determinable, delivery of the product or service has occurred, and
collectability of the contract price is reasonably assured. The
Company performs work under time-and-material and cost plus fixed
fee (CPFF) contracts. Revenue on time-and-material contracts are
recognized based upon time (at established rates) and other direct
costs incurred. Revenue on CPFF contracts is recognized based on
actual allowable costs plus a fixed fee. Revenue recognized on
contracts in excess of related billings is reflected as unbilled
receivables.
Use of estimates: In preparing financial statements in
conformity with accounting principles generally accepted in the
United States of America, management is required to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenue and expenses
during the reporting period. These estimates include assessing the
collectability of accounts receivable, assessing the useful lives
and impairment of assets, and determining the fair value of stock
options issued during the year and the fair value of preferred
stock and the derivative liability as of year-end. Estimates and
assumptions are reviewed periodically and the effects of revisions
are reflected in the financial statements in the period they are
determined to be necessary. Actual results could differ from those
estimates.
Stock-based compensation expense: The Company accounts for
stock-based compensation in accordance with the Financial
Accounting Standards Board (FASB) Accounting Standards Codification
(ASC) Topic, Compensation – Stock Compensation, which
requires the recognition of the expense related to the fair value
of the stock-based compensation awards within the statements of
income. Stock-based compensation expense is recognized for
stock-based payments granted based on the grant date fair value
estimated in accordance with the provisions of this topic. The
expense is recognized using the straight-line method, over the
requisite service period, estimated to be three years for most
option grants. Stock-based compensation expense recognized in the
statements of operations is based on awards ultimately expected to
vest, which requires management to estimate forfeitures. This topic
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.
F-157
Note
1. Nature of Business and
Significant Accounting Policies (Continued)
The
Company uses the Black-Scholes Option-Pricing Model (Black-Scholes
model) to value stock-based awards granted. The Company’s
determination of the fair value of stock-based payments on the date
of grant using an option-pricing model is affected by the
Company’s stock price as well as assumptions regarding a
number of complex and subjective variables. Determining the fair
value of stock-based awards at the grant date requires judgment
about expected volatility, terms, and estimating the amount of
stock-based awards that are expected to be forfeited. If actual
results differ significantly from these estimates, stock-based
compensation expense and the Company’s results of operations
could be materially affected.
Fair value: The Company records certain liabilities and
equity instruments at their fair value. The carrying amounts of the
Company’s financial instruments, including cash, accounts
receivable, payables and other current assets approximate fair
value due to their short maturities.
In
accordance with ASC 820, the Company maximizes the use of
observable inputs and minimizes the use of unobservable inputs when
measuring fair value. In the absence of actively quoted market
prices, the Company uses observable market-based inputs or
independently sources parameters to measure fair value. The Company
classifies its assets and liabilities that are carried at fair
value in accordance with ASC 820’s three-level
hierarchy:
Level 1:
Quoted prices
(unadjusted) in active markets for identical assets and
liabilities
Level 2:
Inputs other than
quoted prices that are either directly or indirectly observable for
the asset or liability
Level 3:
Unobservable inputs
for the asset or liability, including situations where there is
little, if any, market activity for the asset or
liability
Derivatives: The Company uses an option pricing model to
determine the fair value of the derivative liability related to the
conversion features included in the Series A Preferred stock. The
Company derives the fair value of the conversion feature using the
common stock price, the conversion price of the embedded stock, the
risk-free interest rate, the historical volatility and the
Company’s dividend yield. The expected volatility is based on
historical volatility of comparable public companies. The fair
value of the conversion feature is classified as Level 3 within the
Company’s fair value hierarchy.
Convertible equity: The Company accounts for hybrid
contracts that feature conversion options in accordance with ASC
815, Derivatives and Hedging Activities. ASC 815 requires companies
to bifurcate conversion options from their host instruments and
account for them as freestanding derivative instruments according
to certain criteria. The criteria includes circumstances in which
(a) the economic characteristics and risks of the embedded
derivative instrument are not clearly and closely related to the
economic characteristics of the host contract, (b) the hybrid
instrument that embodies both the embedded derivative and the host
contract is not re-measured at fair value under the applicable
generally accepted accounting principles (GAAP) with changes in
fair value reporting in earnings as they occur and (c) a separate
instrument with the same terms as the embedded derivative
instrument would be considered a derivative
instrument.
F-158
Note
1. Nature of Business and
Significant Accounting Policies (Continued)
Conversion
options that contain variable settlement features such as
provisions to adjust the conversion price upon subsequent issuances
of equity or equity linked securities at exercise prices more
favorable than the feature in the hybrid contract generally result
in their bifurcation from the host instrument. The Company accounts
for convertible instruments, when the Company has determined that
the embedded conversion options should be bifurcated from their
host instrument, in accordance with ASC 815. Under ASC 815, a
portion of the proceeds received upon the issuance of the hybrid
contracts are allocated to the fair value of the derivative. The
derivative is subsequently marked to market at each reporting date
based on current fair value with the changes in fair value reported
in results of operations.
Recent accounting pronouncements: In May 2014, the FASB
issued Accounting Standards Update (ASU) 2014-09, Revenue From Contracts With Customers (Topic
606), requiring an entity to recognize the amount of revenue
to which it expects to be entitled for the transfer of promised
goods or services to customers. Additionally, there have been
various updates issued in 2015 and 2016 to clarify the guidance in
ASC Topic 606. The updated standard will replace most existing
revenue recognition guidance in GAAP when it becomes effective and
permits the use of either a full retrospective or retrospective
with cumulative effect transition method. The updated standard
becomes effective for the Company in the first quarter of fiscal
year 2019. The Company has not yet selected a transition method and
is currently evaluating the effect that the updated standard will
have on the financial statements.
In
August 2014, the FASB issued ASU 2014-15, Presentation of Financial
Statements—Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern. ASU 2014-15 explicitly requires management to
evaluate, at each annual or interim reporting period, whether there
are conditions or events that exist which raise substantial doubt
about an entity’s ability to continue as a going concern and
to provide related disclosures. The Company adopted ASU 2014-15 in
2016. The adoption of ASU 2014-15 did not have a material effect on
the Company’s financial statements or
disclosures.
In
April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest
(Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs. This ASU requires the debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability
consistent with debt discounts. This guidance does not apply to the
lines of credit, accordingly the FASB would not object to
presenting the deferred issuance costs related to a line of credit
as an asset. The Company adopted ASU 2015-03 retrospectively in
2016 and has therefore classified debt net of the deferred charges
in 2016 and 2015.
In
November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes, which requires that
deferred tax liabilities and assets be classified as noncurrent in
a classified statement of financial position. The Company adopted
this standard in 2016 and has presented all deferred tax
liabilities as long term in 2016 and 2015.
In
February 2016, the FASB issued ASU 2016-02, Leases (FASB Topic 842), which will
update the existing guidance on accounting for leases and require
new qualitative and quantitative disclosures about the
Company’s leasing activities. The new standard requires the
Company to recognize lease assets and lease liabilities on the
balance sheet for all leases under which the Company is the lessee,
including those classified as operating leases under previous
accounting guidance. The new standard allows the Company to make an
accounting policy election not to recognize on the balance sheet
lease assets and liabilities for leases with a term of 12 months or
less. The new standard will be effective for the Company for annual
reporting periods beginning on January 1, 2020, with early adoption
permitted. In transition, lessees are required to recognize and
measure leases at the beginning of the earliest period presented
using a modified retrospective approach. The modified retrospective
approach includes a number of optional practical expedients that
the Company may elect to apply. The Company is currently evaluating
the expected impact of the adoption of this standard on its
financial statements and related disclosures.
F-159
Note
1. Nature of Business and
Significant Accounting Policies (Continued)
In
April 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718):
Improvements to Employee Share
Based Payment Accounting, to reduce the complexity of
certain aspects of the accounting for employee share-based payment
transaction. For private companies, the ASU is effective for annual
periods beginning after December 15, 2017. Early adoption is
permitted. The Company is currently evaluating the methods and
impact on the financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash
Payments. ASU 2016-15 provides
guidance on how certain cash receipts and cash payments should be
presented and classified in the statement of cash flows with the
objective of reducing existing diversity in practice with respect
to these items. ASU 2016-15 will be effective for the Company on
January 1, 2019. The Company is currently evaluating the impact the
adoption of this guidance will have on its statement of cash
flows.
Note
2.
Accounts
Receivable
Accounts
receivable consists of the following as of December 31, 2016 and
2015:
|
2016
|
2015
|
Billed trade
accounts receivable
|
$3,732,872
|
$5,443,977
|
Unbilled trade
accounts receivable
|
2,107,956
|
2,409,013
|
Allowance for
doubtful accounts
|
(299,865)
|
(320,484)
|
|
$5,540,963
|
$7,532,506
|
Note
3.
Note
Receivable
On June
30, 2010, the Company sold its interest in ProvatoHR, Inc.
(Provato), a previously consolidated subsidiary. Effective October
1, 2010, the Company reached an agreement with Provato to
consolidate receivables into a five-year term note, originally
maturing in October 2015. The note bears interest at a rate of 4.5%
per annum and required monthly payments of principle plus interest
in the amount of $7,386. As of December 31, 2015, the note had been
adjusted for a management reserve of $50,000 for potentially
uncollectible amounts.
Effective
April 1, 2016, a subscription service agreement was entered into by
Provato and the Company to settle the balance on the note of
$254,683. Based on the terms of the agreement, the Company will
receive a 48-month software subscription. The monthly subscription
fee of $5,306 will reduce the amount outstanding on the note over
the term of the subscription and will reduce the note receivable to
zero. As a result of this modified agreement, management removed
the reserve of $50,000. The balance of the note receivable at
December 31, 2016 and 2015, was $206,930 and $204,683,
respectively.
F-160
Note
4.
Property
and Equipment
Property
and equipment consists of the following as of December 31, 2016 and
2015:
|
2016
|
2015
|
Equipment and
hardware
|
$3,314,765
|
$2,781,458
|
Computer
software
|
2,107,944
|
1,819,027
|
Vehicles
|
233,837
|
233,837
|
Leasehold
improvements
|
2,822,893
|
2,782,506
|
Furniture and
fixtures
|
1,531,118
|
1,531,118
|
|
10,010,557
|
9,147,946
|
Less accumulated
depreciation and amortization
|
6,366,926
|
5,250,851
|
|
$3,643,631
|
$3,897,095
|
Total
depreciation and amortization expense for the years ended December
31, 2016 and 2015, was $1,116,075 and $924,509,
respectively.
Assets
purchased under the terms of non-cancelable capital leases were
$1,160,919 at December 31, 2016 and 2015. Amortization expense for
capital leased assets was $76,233 and $108,128 for the years ended
December 31, 2016 and 2015, respectively. Accumulated amortization
on these assets totaled $847,657 and $771,424 at December 31, 2016
and 2015, respectively.
Note
5.
Debt
The
Company entered into a note payable effective August 14, 2014, for
a total principal amount of $2,500,000. Principal payments are due
monthly in the amount of $56,514, with the remaining principal
amount and any accrued interest due in full on August 14, 2018.
Interest is due monthly at a rate equal to the prime rate plus
0.75% (4.5% and 4.25% at December 31, 2016 and 2015, respectively).
Interest expense recorded on this note was $62,358 and $82,739 for
the years ended December 31, 2016 and 2015, respectively. The note
is collateralized by substantially all assets of the Company and is
subject to certain financial covenants. At December 31, 2016, the
Company was in default of these covenants and had obtained a waiver
from the lender. The balance on this note was $1,099,824 and
$1,715,639 at December 31, 2016 and 2015,
respectively.
Also on
August 14, 2014, the Company entered into a loan and securities
purchase agreement with a financial investor for a total of
$5,500,000 for 521,962 shares of Series A Preferred stock and a
note payable with an original principal amount of $4,500,000.
Additional principal is available for future borrowings up to
$2,000,000. Any additional borrowings would also result in
additional Series A Preferred shares being issued based on an
agreed upon formula. All principal and accrued but unpaid interest
is due in full on August 14, 2019. Payment was made in September
2016 in the amount of $626,075. Interest accrues and is due monthly
at a rate of 13.25% and 11.75%, respectively, of which 2.75% and
1.25% at December 31, 2016 and 2015, respectively is considered
paid-in-kind interest. Total interest recorded on this note in 2016
totaled $578,000, of which approximately $83,000 was considered
paid-in-kind and was accrued to the balance of principal. Total
interest recorded on this note in 2015 totaled $601,000, of which
approximately $93,000 was considered paid-in-kind and was accrued
to the balance of principal. The note requires excess cash flow
payments when excess cash, as defined, exists and is subject to
certain financial covenants. As of December 31, 2016, the Company
was in default of their covenants and was not able to obtain a
waiver from the lender. As such, the remaining balance at December
31, 2016 is classified as a current liability on the balance sheet.
The balance on this note was $4,089,617 and $4,632,323 at December
31, 2016 and 2015, respectively.
F-161
Note
5. Debt
(Continued)
As
discussed in Note 6, the loan and securities purchase agreement was
considered a hybrid instrument and the various features of the
instrument, including the loan, Series A preferred stock and a
related conversion feature associated with the preferred stock. The
various features were recognized at their relative fair value,
resulting in the recording of a debt discount totaling $898,497,
which is being amortized and recorded as interest expense over the
related term of the note. Amortization of approximately $226,834
and $297,500 was recorded during 2016 and 2015, respectively, as
interest expense in the statements of operations.
Notes
payable, deferred charges and issuance costs consist of the
following as of December 31, 2016 and 2015:
|
2016
|
2015
|
Notes
payable
|
$1,099,824
|
$1,715,639
|
Subordinated note
payable
|
4,089,617
|
4,632,323
|
Total notes
payable
|
5,189,441
|
6,347,962
|
Less deferred
charges
|
(260,910)
|
(545,822)
|
Total notes
payable, net of deferred charges
|
4,928,531
|
5,802,140
|
Less current
maturities, net of deferred charges
|
(4,491,941)
|
(620,180)
|
Total debt, net
deferred charges and current maturities
|
436,590
|
5,181,960
|
Less unamortized
debt discount
|
(259,238)
|
(486,072)
|
Total
|
$177,352
|
$4,695,888
|
Future
principal payments required on long-term and current debt are as
follows:
Years
ending December 31:
|
|
2017
|
$641,250
|
2018
|
458,574
|
2019
|
4,089,617
|
|
$5,189,441
|
Note
6.
Derivative
Liability
The
Company analyzed the loan and securities agreement referred to in
Note 5 based on the provisions of ASC 815 and determined that the
conversion options within the Series A Preferred stock qualify as
embedded derivatives. For derivative instruments that are accounted
for as liabilities, the derivative instrument is initially recorded
at its fair value and is then revalued at each reporting date. The
Company estimated the fair value of the embedded derivative using
an option pricing model as it was determined that the down-round
provisions were not probable of occurring. Based on the option
pricing model, the fair value at inception of the embedded
derivatives was determined to be $899,561 and the Company recorded
a related derivative liability. The embedded derivative is revalued
at the end of each reporting period and any resulting gain or loss
is recognized as a current period change to operations. The fair
value as of December 31, 2016 and 2015, was $471,470 and
$1,278,038, respectively, resulting in a gain (loss) on fair value
adjustment of $806,568 and $(230,589) recorded on the statements of
operations, respectively.
F-162
Note
6. Derivative Liability
(Continued)
The
fair value of the embedded conversion feature was calculated using
the following factors and assumptions:
|
2016
|
2015
|
Expected dividend
yield
|
0%
|
0%
|
Risk-free interest
rate
|
1.6%
|
1.7%
|
Expected option
term
|
5
|
5
|
Volatility
|
50.00%
|
50.00%
|
The
expected volatility of the underlying share price granted was
estimated using the historical volatility of companies in similar
industries as a substitute for the historical volatility of the
Company’s common shares, which is not determinable without an
active external or internal market. The expected dividends are
based on the Company’s historical issuance and
management’s expectations for dividend issuance in the
future. The expected term represents the period of time until
expected conversion. The risk-free interest rate for periods within
the expected term of the underlying security is based on the U.S.
Treasury yield curve in effect at December 31, 2016 and
2015.
Note
7.
Income
Taxes
The
provision for income tax (benefit) expense consists of the
following for the years ended December 31, 2016 and
2015:
|
2016
|
2015
|
Current tax
(benefit) expense:
|
|
|
Federal
|
$(72,559)
|
$227,413
|
State
|
(162,570)
|
97,899
|
|
(235,129)
|
325,312
|
Deferred tax
(benefit) expense:
|
|
|
Federal
|
(1,033,888)
|
906,582
|
State
|
(116,235)
|
105,620
|
|
(1,150,123)
|
1,012,202
|
|
$(1,385,252)
|
$1,337,514
|
The
differences between the U.S. federal statutory rate of 34% and the
actual tax rate for the years ended December 31, 2016 and 2015, is
attributable to state taxes and items that are not deductible for
federal tax purposes.
Deferred
income taxes reflect the net tax effects of temporary differences
between carrying amounts of the assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The Company pays taxes on the cash method of accounting.
The following is a summary of the significant components of the
Company’s deferred tax assets and liabilities as of December
31, 2016 and 2015:
F-163
Note
7. Income Taxes
(Continued)
|
2016
|
2015
|
Net operating
loss
|
$1,305,116
|
$-
|
AMT
credit
|
88,542
|
-
|
Basis in property
and equipment
|
(1,018,346)
|
(1,134,846)
|
Accrual to
cash
|
(758,957)
|
(398,922)
|
Deferred tax
liability, net
|
$(383,645)
|
$(1,533,768)
|
Loss
carryforwards for tax purposes as of December 31, 2016, totaling
approximately $3,300,000 begin expiring in 2017.
Note
8.
Series
A Preferred Stock
The
Company has authorized 778,432 shares of preferred stock, all of
which have been designated as Series A shares. As discussed in Note
5, 521,962 shares were issued in conjunction with the loan and
securities purchase agreement and were recorded at their relative
fair value of $998,936 at the date of issuance. The Series A shares
accrue dividends cumulatively at a rate of 10% per annum on the
original issue price of $1,000,000 and are entitled to vote based
on the number of whole shares of common stock into which the shares
of preferred stock are convertible. Cumulative undeclared dividends
are $250,333 and $136,667 as of December 31, 2016 and 2015,
respectively. The Series A shares are convertible at any time and
are automatically converted at the earlier of (a) the consummation
of the sale of common stock in an underwritten public offering or
(b) the event or time specified by a majority of the holders of the
then outstanding preferred stock. The conversion price for the
Series A shares is $1.75. As discussed in Note 6, this conversion
feature was evaluated and determined to be a beneficial conversion
feature for which bifurcation and separate recognition at fair
value is required.
In the
event of a liquidation event, the Series A stockholders are
entitled to receive the original issue price plus all accrued and
unpaid dividends prior to any distributions to the common
stockholders. In addition, the holders of a majority of the then
outstanding shares of preferred stock have the right to demand
redemption by the Company by giving written notice any time after a
redemption event occurs. A redemption event is defined as (a) the
repayment in full of the outstanding principal on the related notes
discussed in Note 5; provided that, if repayment in full results
from a mandatory prepayment related to the sweep of excess cash
flow, then the redemption event will be the date that is six months
after the occurrence of such repayment, (b) the acceleration of the
related notes following an event of default as defined in loan and
securities purchase agreement, or (c) the occurrence of the
maturity date, which is August 14, 2019. The price per share paid
to redeem the preferred stock will be the greatest of (a) the
original issue price of the shares plus all accrued and unpaid
dividends as of the redemption date, (b) the fair market value of
such share, and (c) the 8 times EBITDA amount of such share, as
defined in the Amended and Restated Articles of Incorporation. The
Series A Preferred stock is being accreted up to its redemption
value each reporting period, which was determined to be $1,250,333
and $1,136,667 as of December 31, 2016 and 2015,
respectively.
F-164
Note
9.
Stock
Option Plan
The
Company maintains a stock option plan (the Stock Option Plan) under
which the stockholders, directors, key employees, and consultants
of the Company may receive options to purchase shares of the
Company’s common stock at a specified price during specified
time periods. There are 2,000,000 shares reserved and available for
equity incentive plans. The option price is equal to the estimated
fair market value at the time the option is granted. Vested options
expire, if not exercised, by the earlier of ten years after the
date of grant or the period specifically provided for within the
plan. Options for the Stock Option Plan are granted at the Board of
Directors’ discretion. Options vest at a rate of 25% per year
on the first anniversary of the grant date and on a monthly basis
thereafter for three years.
The
fair market value of each stock option award is estimated on the
date of grant using the Black-Scholes model. The following
assumptions were used for options issued for the years ended
December 31, 2016 and 2015:
|
2016
|
2015
|
Expected dividend
yield
|
0%
|
0%
|
Risk-free interest
rate
|
1.6%
|
1.7%
|
Expected option
term
|
5.90
years
|
5.89
years
|
Volatility
|
18.24%
|
29.48%
|
Pursuant
to the Compensation topic of the FASB ASC, the expected volatility
of the options granted may be estimated using the historical
volatility of companies in similar industries as a substitute for
the historical volatility of the Company’s common shares,
which is not determinable without an active external or internal
market. The expected dividends are based on the Company’s
historical issuance and management’s expectations for
dividend issuance in the future.
The
expected term of options granted represents the period of time that
options granted are expected to be outstanding. The risk-free
interest rate for periods within the contractual life of the option
is based on the U.S. Treasury yield curve in effect at December 31,
2016 and 2015.
The
Company recognized compensation expense in the amounts of $199,606
and $175,284 for the years ended December 31, 2016 and 2015,
respectively.
F-165
Note
9. Stock Option
Plan (Continued)
The
following is a summary of stock option activity and related
information for the years ended December 31, 2016 and
2015:
|
Options
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Term (Years)
|
Outstanding,
December 31, 2015
|
1,510,695
|
$2.96
|
|
Granted
|
254,469
|
4.13
|
|
Exercised
|
(7,000)
|
1.19
|
|
Forfeited and
expired
|
(282,238)
|
3.20
|
|
Outstanding,
December 31, 2016
|
1,475,926
|
$3.14
|
5.73
|
|
|
|
|
Exercisable,
December 31, 2016
|
1,032,923
|
$2.88
|
4.65
|
The
weighted-average grant-date fair value of options granted during
the years ended December 31, 2016 and 2015, was $0.87 and $1.09,
respectively. The exercise price range for outstanding options at
December 31, 2016 and 2015, was $0.73 to $4.51.
There
was $310,047 and $352,185 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted
under the Stock Option Plan as of December 31, 2016 and 2015,
respectively. That cost was expected to be recognized over a
weighted-average remaining period of 1.2 and 1.3 years as of
December 31, 2016 and 2015, respectively.
Note
10.
Retirement
Plans
401(k) plan: The Company has a 401(k) profit sharing plan
(the Profit Sharing Plan) which is available to all employees who
are at least 18 years of age. The Profit Sharing Plan allows
eligible employees to defer up to 100% of their compensation
(subject to Internal Revenue Service Code limitations) through a
salary reduction agreement between the employee and the
Company.
The
Company may make discretionary contributions to the Plan, to be
determined during each plan year. The Company recorded
contributions to the Plan of $685,790 and $619,374 for the years
ended December 31, 2016 and 2015, respectively.
409(a) deferred compensation plan: The Company has a 409(a)
deferred compensation plan (the Deferred Compensation Plan) that
allows certain members of Management to defer up to 85% of their
annual salary and up to 100% of any bonus. Company matching
contributions were made on a dollar for dollar basis for the first
10% of compensation deferred until 2009 when matching was
discontinued at the discretion of management as permitted under the
Deferred Compensation Plan. The vesting of the Company match is
based on the employee’s years of service with 20% vesting for
each year of service beginning in year two.
Amounts
payable to participants in the Profit Sharing Plan and the Deferred
Compensation Plan, including the vested company match are recorded
as long-term liabilities in the accompanying balance sheets as a
deferred compensation liability and totaled $266,223 and $319,969
for the years ended December 31, 2016 and 2015,
respectively.
F-166
Note
11.
Leases
and Other Commitments
Leases: The Company leases equipment and office space under
various noncancelable capital and operating leases, which expire on
various dates through 2023. The future minimum lease payments under
capital and operating leases and service commitments are as
follows:
|
Operating
|
Capital
|
Years
ending December 31:
|
|
|
2017
|
$1,469,138
|
$113,332
|
2018
|
1,507,165
|
-
|
2019
|
1,546,187
|
-
|
2020
|
1,586,224
|
-
|
2021
|
1,627,295
|
-
|
Thereafter
|
1,008,920
|
-
|
Total
minimum payments
|
$8,744,929
|
113,332
|
Less
interest
|
|
3,105
|
|
|
$110,227
|
Rent
expense for the year ended December 31, 2016, was $1,093,797, net
of sublease income of $122,908. Rent expense for the year ended
December 31, 2015, was $823,378, net of sublease income of
$309,303. Rent expense is included in selling, general and
administrative expenses on the statements of operations. As of
December 31, 2016, there was one remaining sublease that rents
space on a month to month basis.
Letter of credit: The Company maintains a standby letter of
credit in the amount of $354,373 as a security deposit for its
office lease. This letter of credit is renewable by request of the
Company each March. There were no amounts drawn on the letter of
credit during the years ended December 31, 2016 or
2015.
Note
12.
Contingencies
The
Company is subject to legal proceedings and claims, which arise in
the ordinary course of its business. Although there can be no
assurance as to the ultimate disposition of these matters, it is
the opinion of the Company’s management, based upon the
information available at this time, that the expected outcome of
these matters, individually or in the aggregate, will not have a
material adverse effect on the results of operations and financial
position of the Company. It is also the opinion of the
Company’s management that the Company maintains an adequate
level of insurance to handle the legal claims in the ordinary
course of business.
Note
13.
Subsequent
Events
Management
has reviewed subsequent events through April 26, 2017, the date the
financial statements were available to be issued.
In
January 2017, the Company prepaid $2,000,000 principal on their
loan agreement.
F-167
Units
PROSPECTUS
Benchmark
|
Northland Capital Markets
|
|
|
|
Prospectus
Dated ,
2018
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13.
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth the costs and expenses to be paid by the
Registrant, other than the estimated underwriting discount, in
connection with the sale of the shares of common stock being
registered hereby. All amounts are estimates except for the SEC
registration fee, the FINRA filing fee, and The NASDAQ Capital
Market listing fee.
SEC registration
fee
|
$6,502.00
|
FINRA filing
fee
|
*
|
NASDAQ Capital
Market listing fee
|
*
|
Printing and
engraving
|
*
|
Legal fees and
expenses
|
*
|
Accounting fees and
expenses
|
*
|
Road show
expenses
|
*
|
Transfer agent and
registrar fees and expenses
|
*
|
Miscellaneous
expenses
|
*
|
Total
|
$6,502.00
|
*
To be provided by
amendment.
ITEM 14.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
Section 145
of the Delaware General Corporation Law, or DGCL, authorizes a
court to award, or a company’s board of directors to grant,
indemnity to directors and officers under certain circumstances and
subject to certain limitations. The terms of Section 145 of
the DGCL are sufficiently broad to permit indemnification under
certain circumstances for liabilities, including reimbursement of
expenses incurred, arising under the Securities Act.
As
permitted by the DGCL, the Registrant’s amended and restated
certificate of incorporation contains provisions that eliminate the
personal liability of its directors for monetary damages for any
breach of fiduciary duties as a director, except liability for the
following:
●
any breach of the
director’s duty of loyalty to the Registrant or its
stockholders;
●
acts or omissions
not in good faith or that involve intentional misconduct or a
knowing violation of law;
●
under
Section 174 of the DGCL (regarding unlawful dividends and
stock purchases); or
●
any transaction
from which the director derived an improper personal
benefit.
As
permitted by the DGCL, the Registrant’s amended and restated
bylaws provide that:
●
the Registrant is
required to indemnify its directors and officers to the fullest
extent permitted by the DGCL, subject to very limited
exceptions;
●
the Registrant may
indemnify its other employees and agents as set forth in the
DGCL;
●
the Registrant is
required to advance expenses, as incurred, to its directors and
officers in connection with a legal proceeding to the fullest
extent permitted by the DGCL, subject to very limited exceptions;
and
●
the rights
conferred in the restated bylaws are not exclusive.
II-1
At
present, there is no pending litigation or proceeding involving a
director, executive officer, or employee of the Registrant
regarding which indemnification is sought. Reference is also made
to the underwriting agreement filed as Exhibit 1.1 to this
Registration Statement, which provides for the indemnification of
executive officers, directors, and controlling persons of the
Registrant against certain liabilities. The indemnification
provisions in the Registrant’s amended and restated
certificate of incorporation and amended and restated bylaws may be
sufficiently broad to permit indemnification of the
Registrant’s directors and executive officers for liabilities
arising under the Securities Act.
The
Registrant has directors’ and officers’ liability
insurance for its directors and officers.
ITEM 15.
RECENT
SALES OF UNREGISTERED SECURITIES.
In the
three years preceding the filing of this registration statement, we
have issued the following securities that were not registered under
the Securities Act:
In
December 2017, the Company issued 33,333 shares of its common stock
and warrants to purchase 66,666 shares of its common stock pursuant
to that certain asset purchase agreement dated December 29, 2017 by
and among the Company, Firestorm Solutions, LLC and BCM Management,
Inc.
In
January 2018, the Company issued an aggregate of 33,333 shares of
its common stock and warrants to purchase 66,666 shares of its
common stock pursuant to that certain asset purchase agreement
dated December 31, 2017 by and among the Company, Firestorm
Solutions, LLC and Secure Education Consultants, LLC.
In
September 2017, the Company issued 300,000 shares of its common
stock and (c) 240,861 shares of its Series B Cumulative Convertible
Preferred Stock pursuant to that certain Agreement and Plan of
Merger, dated September 21, 2017 by and among the Company, Global
Technical Services Merger Sub, Inc., Global Contract Professionals
Merger Sub, Inc., a Delaware corporation and a wholly owned
subsidiary of Novume, Global Technical Services, Inc. a Texas
corporation, and Global Contract Professionals, Inc., a Texas
corporation, and the sole stockholder of Global Technical Services,
Inc. and Global Contract Professionals, Inc.
The
foregoing issuances were issued in reliance upon the exemptions
from registration under the Securities Act of 1933, as amended,
provided by Section 4(a)(2) and Rule 506 of Regulation D
promulgated thereunder
Unless
otherwise stated, the sales of the above securities were deemed to
be exempt from registration under the Securities Act in reliance
upon Section 4(a)(2) of the Securities Act (or
Regulation D or Regulation S promulgated thereunder), or
Rule 701 promulgated under Section 3(b) of the Securities
Act as transactions by an issuer not involving any public offering
or pursuant to benefit plans and contracts relating to compensation
as provided under Rule 701. The recipients of the securities
in each of these transactions represented their intentions to
acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof, and
appropriate legends were placed on the stock certificates issued in
these transactions.
II-2
ITEM 16.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
Exhibit No.
|
|
Description
|
1.1
|
|
Form of
Underwriting Agreement**
|
2.1
|
|
Second Amended and
Restated Agreement and Plan of Merger dated July 12, 2017, among
Novume Solutions, Inc., KeyStone Solutions, Inc., Brekford Traffic
Safety, Inc., KeyStone Merger Sub, LLC, and Brekford Merger Sub,
Inc. (Previously filed as Exhibit 2.1 to the Pre-Effective
Amendment No. 2 to the Registration Statement on Form S-4 (Reg.
No.: 333-216014) as filed with the SEC on July 13,
2017.)
|
2.2
|
|
Agreement and Plan
of Merger, dated as of September 21, 2017, by and among Novume
Solutions, Inc., Global Technical Services Merger Sub, Inc., Global
Contract Professionals Merger Sub, Inc., Global Technical Services,
Inc., Global Contract Professionals, Inc. and Paul Milligan
(Previously filed as Exhibit 2.1 to the Company’s current
report on Form 8-K as filed with the SEC on September 21,
2017.)
|
2.3
|
|
Agreement
and Plan of Merger, dated as of November 16, 2017, by and among
Novume Solutions, Inc., NeoSystems Holding, LLC, NeoSystems HoldCo,
Inc., NeoSystems LLC, Robert W. Wilson, Jr., in his personal
capacity, Michael Tinsley, in his personal capacity and Michael
Tinsley as the Stockholders’ Agent (Previously filed as
Exhibit 2.1 to the Company’s current report on Form 8-K as
filed with the SEC on November 20,
2017.)
|
3.1
|
|
Certificate of
Incorporation of Novume Solutions, Inc., as filed with the
Secretary of State of the State of Delaware on February 6,
2017 (Previously filed as Exhibit 3.1 to the Registration Statement
on Form S-4 (Reg. No.: 333-216014) as filed with the SEC on
February 10, 2017.)
|
3.2
|
|
Amended and
Restated Certificate of Incorporation of Novume Solutions, Inc. as
filed with the Secretary of State of Delaware on August 21, 2017
(Previously filed as Exhibit 3.1 to the current report on Form 8-K
as filed with the SEC on August 25,
2017.)
|
3.3
|
|
Certificate of
Designations of Series A Cumulative Convertible Redeemable
Preferred Stock as filed with the Secretary of State of Delaware on
August 25, 2017 (Previously filed as Exhibit 4.1 to the current
report on Form 8-K) as filed with the SEC on August 25,
2017.)
|
3.4
|
|
Bylaws of Novume
Solutions, Inc. (Previously filed as Exhibit 3.4 to the
Registration Statement on Form S-4 (Reg. No.: 333-216014) as filed
with the SEC on February 10, 2017.)
|
3.5
|
|
Amended and
Restated Bylaws of Novume Solutions, Inc. (Previously filed as
Exhibit 3.2 to the current report on Form 8-K as filed with the SEC
on August 25, 2017).
|
4.1
|
|
Form of Novume
Unit Warrant (Previously filed as Exhibit 4.1 to the Pre-Effective
Amendment No. 1 to the Registration Statement on Form S-4 (Reg.
No.: 333-216014) as filed with the SEC on June 9,
2017.)
|
4.2
|
|
Form of Avon Road
Warrant to Purchase Shares of Novume Common Stock. (Previously
filed as Exhibit 4.2 to the Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-4 (Reg. No.: 333-216014) as filed
with the SEC on June 9, 2017.)
|
4.3
|
|
Form of Firestorm
Warrant to Purchase Shares of Novume Common Stock (Previously filed
as Exhibit 4.3 to the Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-4 (Reg. No.: 333-216014) as filed
with the SEC on June 9, 2017.)
|
4.4
|
|
Form of Firestorm
Warrant to Purchase Shares of Novume Common Stock (Previously filed
as Exhibit 4.4 to the Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-4 (Reg. No.: 333-216014) as filed
with the SEC on June 9, 2017.)
|
4.5
|
|
Form of Amended
and Restated Avon Road Option Agreement among James McCarthy,
Richard Nathan and Avon Road Partners, L.P (Previously filed as
Exhibit 4.5 to the Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-4 (Reg. No.: 333-216014) as filed
with the SEC on June 9, 2017.)
|
II-3
4.6
|
|
Form of Key
Stockholder Agreement – KeyStone Solutions (Previously filed
as Exhibit 4.6 to the Registration Statement on Form S-4 (Reg. No.:
333-216014) as filed with the SEC on February 10,
2017.)
|
4.7
|
|
Form of Key
Stockholder Agreement – Brekford Corp. (Previously filed as
Exhibit 4.7 to the Registration Statement on Form S-4 (Reg. No.:
333-216014) as filed with the SEC on February 10,
2017.)
|
4.8
|
|
Form of Brekford
Investor Warrant (Previously filed as Exhibit 4.9 to the
Pre-Effective Amendment No. 1 to the Registration Statement on Form
S-4 (Reg. No.: 333-216014) as filed with the SEC on June 9,
2017.)
|
4.9
|
|
Registration
Rights Agreement, by and among Novume Solutions, Inc., G&W
Ventures Inc., and Paul Milligan. (Previously filed as Exhibit 4.1
to the Company’s current report on Form 8-K as filed with the
SEC on October 4, 2017.)
|
4.10
|
|
Certificate of
Designations of Novume Series B Cumulative Convertible Preferred
Stock as filed with the Secretary of State of Delaware on August
21, 2017 (Previously filed as Exhibit 4.2 to the Company’s
current report on Form 8-K as filed with the SEC on September 21,
2017.)
|
4.11
|
|
2017 Equity Award Plan of Novume Solutions,
Inc. (Previously filed as Exhibit 4.7 to the Registration
Statement on Form S-8 (Reg. No.: 333-220864) as filed with the SEC
on October 6, 2017.)
|
4.12
|
|
Form
of Registration Rights Agreement between Novume Solutions, Inc. and
the holders set forth in Schedule 1 attached thereto (Previously
filed as Exhibit 4.1 to the Company’s current report on Form
8-K as filed with the SEC on November 20,
2017.)
|
4.13
|
|
Form of Warrant Agency Agreement**
|
5.1
|
|
Opinion of
Sichenzia Ross Ference Kesner LLP**
|
10.1
|
|
Berman Employment
Agreement (Previously filed as Exhibit 6.1 to the Offering
Statement of KeyStone Solutions, Inc., on Form 1-A as
filed with the SEC on May 12, 2016.)
|
10.2
|
|
Rhulen Employment
Agreement (Previously filed as Exhibit 6.6 to the Current Report of
KeyStone Solutions, Inc., on Form 1-U as filed with
the SEC on January 26, 2017.)
|
10.3
|
|
Latifullah
Employment Agreement (Previously filed as Exhibit 6.11 to Amendment
No. 2 to the Offering Statement on KeyStone Solutions, Inc.,
on Form 1-A, as filed with the SEC on September 2,
2016.)
|
10.4
|
|
Nathan Employment
Agreement (Previously filed as Exhibit 6.10 to the Offering
Statement of KeyStone Solutions, Inc., on Form 1-A, as
filed with the SEC on May 12, 2016.)
|
10.5
|
|
Loughlin
Employment Agreement (Previously filed as Exhibit 6.7 to the
Current Report of KeyStone Solutions, Inc., on
Form 1-U as filed with the SEC on January 26,
2017.)
|
10.6
|
|
Amended and
Restated McCarthy Offer Letter dated January 8, 2018
(Previously filed as Exhibit 10.6 to Ammendment
No. 1 of the Company's Registration Statement on Form S-1
(Reg. No.:
333-221789) as filed with the SEC on January 9,
2018.)
|
10.7
|
|
Extension of
Gregory McCarthy Employment Agreement (Previously filed as Exhibit
10.7 to the Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-4 (Reg. No.: 333-216014) as filed with the SEC
on June 9, 2017.)
|
10.8
|
|
Extension of
Richard Nathan Employment Agreement (Previously filed as Exhibit
10.8 to the Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-4 (Reg. No.: 333-216014) as filed with the SEC
on June 9, 2017.)
|
10.9
|
|
Form of Hillman
Employment Agreement (Previously filed as Exhibit 10.9 to the
Pre-Effective Amendment No. 1 to the Registration Statement on Form
S-4 (Reg. No.: 333-216014) as filed with the SEC on June 9,
2017.)
|
10.10
|
|
Form of Rutherford
Employment Agreement (Previously filed as Exhibit 10.10 to the
Pre-Effective Amendment No. 1 to the Registration Statement on Form
S-4 (Reg. No.: 333-216014) as filed with the SEC on June 9,
2017.)
|
II-4
10.11
|
|
Loan and Security
Agreement by and between KeyStone Solutions, Inc., AOC Key
Solutions, Inc., and Sandy Spring Bank, dated August 11, 2016.
(Previously filed as Exhibit 6.12 to Amendment No. 2 to the
Offering Statement of KeyStone Solutions, Inc., on
Form 1-A, as filed with the SEC on September 2,
2016.)
|
10.12
|
|
2016 KeyStone
Solutions, Inc. Equity Award Plan (Previously filed as
Exhibit 6.2 to the Offering Statement
on Form 1-A as filed with the SEC on May 12,
2016.)
|
10.13
|
|
Amended and Restated Note issued to Avon
Road Partners, L.P., dated August 25, 2017 (Previously filed as
Exhibit 10.1 to the Company’s current report on Form 8-K as
filed with the SEC on August 29,
2017.)
|
10.14
|
|
Restated, Amended
and Supplemental Employment Agreement between Riaz Latifullah and
the Company, dated as of August 28, 2017 (Previously filed as
Exhibit 10.1 to the Company’s current report on Form 8-K as
filed with the SEC on August 29,
2017.)
|
10.15
|
|
Employment
Agreement between Carl Kumpf and the Company, dated as of August
28, 2017 (Previously filed as Exhibit 10.1 to the Company’s
current report on Form 8-K as filed with the SEC on August 29,
2017.)
|
10.16
|
|
Form of
Registration Rights Agreement, by and among Novume Solutions, Inc.,
G&W Ventures Inc., and Paul Milligan. (Previously filed as Exhibit 10.1 to the
Company’s current report on Form 8-K as filed with the SEC on
September 21, 2017.)
|
10.17
|
|
Assignment and Assumption Agreement, dated
September 29, 2017 bet KeyStone Solutions LLC and Novume Solutions,
Inc. (Previously filed as
Exhibit 10.1 to the Company’s current report on Form 8-K as
filed with the SEC on September 21,
2017.)
|
10.18
|
|
Replacement Note issued in favor of Harry
Rhulen on September 29, 2017(Previously filed as Exhibit 10.2 to
the Company’s current report on Form 8-K as filed with the
SEC on October 3,
2017.)
|
10.19
|
|
Replacement Note
issued in favor of Suzanne Loughlin on September 29, 2017
(Previously filed as Exhibit
10.3 to the Company’s current report on Form 8-K as filed
with the SEC on October 3,
2017.)
|
10.20
|
|
Replacement Note
issued in favor of James Satterfield on September 29,
2017(Previously filed as Exhibit
10.4 to the Company’s current report on Form 8-K as filed
with the SEC on October 3,
2017.)
|
10.21
|
|
Replacement Note issued in favor of Lancer
Financial Group, Inc. on September 29, 2017 (Previously
filed as Exhibit 10.5 to the
Company’s current report on Form 8-K as filed with the SEC on
October 3, 2017.)
|
10.22
|
|
General Continuing Guaranty, dated September
29, 2017 and effective on October 3, 2017, by and between Wells
Fargo Bank, National Association and Novume Solutions, Inc. for
Global Technical Services, Inc. (Previously filed as Exhibit 10.1
to the Company’s current report on Form 8-K as filed with the
SEC on October 4, 2017.)
|
10.23
|
|
General Continuing Guaranty, dated September
29, 2017 and effective on October 3, 2017, by and between Wells
Fargo Bank, National Association and Novume Solutions, Inc. for
Global Contract Professionals, Inc. (Previously filed as Exhibit
10.2 to the Company’s current report on Form 8-K as filed
with the SEC on October 4,
2017.)
|
23.1
|
|
Consent of
BD & Company, Inc.*
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23.2
|
|
Consent of
BD & Company, Inc.*
|
23.3
|
|
Consent of
Stegman & Company*
|
23.4
|
|
Consent of
BD & Company, Inc.*
|
23.5
|
|
Consent of
BD & Company, Inc.*
|
23.6
|
|
Consent of RSM US
LLP*
|
24.1
|
|
Power of attorney
(included on the signature page of the
Company's Registration Statement on Form S-1 filed with the
SEC on November 28, 2017)
|
24.2
|
|
Power of attorney
(included on the signature page of this
Registration Statement)*
|
*
Filed
herewith.
**
To be filed by
amendment.
II-5
(b) Financial Statement Schedule.
All
financial statement schedules are omitted because they are not
applicable or the information is included in the Registrant’s
consolidated financial statements or related notes.
ITEM 17.
UNDERTAKINGS.
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(i) To
include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and
(iii) To
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That,
for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4) That,
for the purpose of determining liability under the Securities Act
of 1933 to any purchaser:
(A) Each
prospectus filed by the registrant pursuant to Rule 424(b)(3)
shall be deemed to be part of the registration statement as of the
date the filed prospectus was deemed part of and included in the
registration statement; and
(B) Each
prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than
registration statements relying on Rule 430B or other
than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made
in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such date of
first use.
II-6
(5) That
for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial
distribution of securities, the undersigned registrant undertakes
that in a primary offering of securities of the undersigned
registrant pursuant to this registration statement, regardless of
the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser
by means of any of the following communications, the undersigned
registrant will be a seller to the purchaser and will be considered
to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to
Rule 424;
(ii) Any
free writing prospectus relating to the offering prepared by or on
behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii) The
portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
(6) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to any
charter provision, by law or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
(7) The
undersigned registrant hereby undertakes that:
(i) For
purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(I) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective;
and
(ii) For
the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-7
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Chantilly,
Virginia, on January 25, 2018.
|
NOVUME
SOLUTIONS, INC.
|
|
|
By:
|
/s/
Robert A. Berman
|
Name:
|
Robert
A. Berman
|
Title:
|
Chief
Executive Officer
|
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed
by the following persons in the capacities and on the dates
indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Robert A.
Berman
|
|
Chief Executive Officer (Principal Executive Officer) and Director |
|
January 25, 2018 |
Robert A. Berman
|
|
|
|
|
|
|
|
|
|
/s/ Carl M. Kumpf, Jr. |
|
Chief Financial
Officer (Principal Financial Officer and Principal Accounting
Officer)
|
|
January 25, 2018 |
Carl M. Kumpf, Jr.
|
|
|
|
|
|
|
|
|
|
*
|
|
Chairman of the
Board of Directors
|
|
January 25, 2018 |
James K. McCarthy
|
|
|
|
|
|
|
|
|
|
*
|
|
Director and Chief
Operating Officer
|
|
January 25, 2018 |
Dr. Richard Nathan
|
|
|
|
|
|
|
|
|
|
*
|
|
Director |
|
January 25, 2018 |
Glenn Goord
|
|
|
|
|
|
|
|
|
|
*
|
|
Director |
|
January 25, 2018 |
Paul de Bary
|
|
|
|
|
|
|
|
|
|
*
|
|
Director |
|
January 25, 2018 |
Christine J. Harada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* By
/s/ Robert A.
Berman
Attorney-in-Fact
KNOW ALL PERSONS BY
THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Robert Berman and Carl Kumpf, or
any of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him or her
and in his name, place and stead, in any and all capacities, to
sign the Registration Statement on Form S-1 of Novume Solutions,
Inc. and any or all amendments (including post-effective
amendments) thereto and any new registration statement with respect
to the offering contemplated thereby filed pursuant to Rule 462(b)
of the Securities Act, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite or necessary to be
done in and about the premises hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or her or their
substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed
by the following persons in the capacities and on the dates
indicated.
/s/ Marta Tienda
|
|
Director
|
|
January
25, 2018
|
Marta Tienda
|
|
|
|
|
Exhibit No.
|
|
Description
|
1.1
|
|
Form of
Underwriting Agreement**
|
|
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|
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4.13
|
|
Form of Warrant Agency Agreement**
|
5.1
|
|
Opinion of
Sichenzia Ross Ference Kesner LLP**
|
|
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24.2
|
|
Power of attorney (included on the signature page of
this Registration Statement)*
|
*
Filed
herewith.
**
To be filed by
amendment.