Property and Equipment
The
cost of furniture and fixtures and 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 - 15 years
|
|
Internally developed software
|
3 - 5 years
|
|
Automobiles
|
3 - 5 years
|
|
Camera systems
|
3 years
|
The
Company capitalizes eligible costs related to internally-developed
software in accordance with ASC 985-20 which were incurred during
the application development stage. Capitalized internally-developed
software costs, net, not yet placed in service were $913,455 and
$52,400 as of December 31, 2018 and 2017,
respectively.
Repairs
and maintenance are expensed as incurred. Expenditures for
additions, improvements and replacements are capitalized.
Depreciation and amortization expense for the years ended December
31, 2018 and 2017 was $345,136 and $142,545,
respectively.
Business Combination
Management
conducts a valuation analysis on the tangible and intangible assets
acquired and liabilities assumed at the acquisition date thereof.
During the measurement period, which may be up to one year from
the acquisition date,
we may record adjustments to the fair value of these tangible and
intangible assets acquired and liabilities assumed,
with the corresponding offset to goodwill. In addition, uncertain
tax positions and
tax-related valuation allowances are initially established in
connection with a business combination as of the acquisition date. Upon the
conclusion of the measurement period or final determination of the fair value of
assets acquired or liabilities assumed, whichever comes first, any
subsequent adjustments
are recorded to our consolidated statements of
operations.
Amounts
paid for acquisitions are allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the
date of acquisition. We allocate a portion of the purchase price to
the fair value of identifiable intangible assets. The fair value of
identifiable intangible assets is based on detailed valuations that
use information and assumptions provided by management. We allocate
any excess purchase price over the fair value of the net tangible
and intangible assets acquired to goodwill.
We
recorded goodwill and intangible assets for the mergers and
acquisitions that occurred in 2017 and 2018. The BC Management,
Secure Education and Firestorm acquisitions were asset
acquisitions, which created both book and tax bases in goodwill and
non-goodwill intangible assets. BC Management’s acquisition
resulted in $0.4 million of non-goodwill intangible assets. Secure
Education’s acquisition resulted in $0.4 million of
non-goodwill intangible assets. The Firestorm acquisition resulted
in $2.5 million of non-goodwill intangible assets. Brekford and
Global were stock acquisitions and only have book basis in the
goodwill and intangible assets. The fair value assigned to
Brekford’s intangible and goodwill is $0.6 million and $1.4
million, respectively. The GTS and GCP goodwill and intangible
assets resulted in a fair value of $1.6 million and $2.6 million,
respectively, and corresponding net deferred tax liability of $0.5
million. As a result of the deferred tax liability, an adjustment
was recorded to goodwill to account for the tax effect of the
deferred tax liability in the year ended December 31,
2017.
Goodwill and Other Intangibles
In
applying the acquisition method of accounting, amounts assigned to
identifiable assets and liabilities acquired were based on
estimated fair values as of the date of acquisition, with the
remainder recorded as goodwill. Identifiable
intangible assets are initially valued at fair value using
generally accepted valuation methods appropriate for the type
of intangible asset. Identifiable intangible assets
with definite lives are amortized over their estimated useful lives
and are reviewed for impairment if indicators of impairment
arise. Intangible assets with indefinite lives are tested
for impairment within one year of acquisitions or annually as
of October 1, and whenever indicators of impairment
exist. The
fair value of intangible assets are
compared with their carrying values, and an impairment loss would
be recognized for the amount by which a carrying amount exceeds its
fair value. No material impairments have been recorded through
December 31, 2018.
Acquired identifiable
intangible assets are amortized over the following
periods:
Acquired Intangible Asset
|
|
|
|
|
Customer-Related
|
|
Straight-line
basis
|
5-15
|
|
Marketing-Related
|
|
Straight-line
basis
|
4
|
|
Technology-Based
|
|
In
line with underlying cash flows or straight-line basis
|
3
|
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 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 store 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 collection efforts, from
citizens, are completed and posted to the municipality’s
account. The respective municipality is then billed depending on
the terms of the respective contract, typically 15 days after the
preceding month while collections are reconciled. For contracts
where the Company receives a percentage of collected fines, revenue
is calculated based upon the posted payments from citizens
multiplied by the Company’s contractual percentage. For
contracts where the Company receives a specific fixed monthly fee
regardless of citations issued or collected, revenue is recorded
once the amount collected from citizens exceeds the monthly fee per
camera. Brekford’s fixed-fee contracts typically have a
revenue neutral provision whereby the municipality’s payment
to Brekford cannot exceed amounts collected from citizens within a
given month.
Advertising
The
Company expenses all non-direct-response advertising costs as
incurred. Such costs were not material for the years ended December
31, 2018 and 2017.
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
Income
tax expense consists of U.S. federal and state income taxes. We are
required to pay income taxes in certain state jurisdictions.
Historically, AOC Key Solutions and GCP initially elected to be
taxed under the provisions of Subchapter S of the Internal Revenue
Code. Under those provisions, neither AOC Key Solutions nor GCP
paid 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 GCP revoked its S Corporation election upon the
acquisition by Novume, and are therefore, subject to corporate
income taxes. Firestorm is a single-member LLC with KeyStone as the
sole member.
We use
the liability method of accounting for income taxes as set forth in
the authoritative guidance for accounting for income taxes. This
method requires an asset and liability approach for the recognition
of deferred tax assets and liabilities. 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.
Management has evaluated the recoverability of the net deferred
income tax assets and the level of the valuation allowance required
with respect to such net deferred income tax assets. After
considering all available facts, the Company fully reserved for its
net deferred tax assets because management believes that it is not
more likely than not that their benefits will be realized in future
periods. The Company will continue to evaluate its net 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 net deferred
income tax assets satisfy the realization standard, the
valuation allowance will be reduced accordingly. As of December 31,
2018 the Company has gross federal and state NOL carry forwards of
$9.7 million and $0.5 million, net of federal tax effects,
respectively. These NOLs are scheduled to begin to expire in 2034
and $4.7 million are grandfathered under the Tax Cuts and Jobs Act;
thus, these NOLs are not subject to the 80 percent limitation. NOLs
generated in 2018 of $5.0 million will be carried forward
indefinitely and are subject to the annual 80 percent limitation.
The Company also has a valuation allowance of $2.3 million recorded
against its net deferred tax assets as of December 31, 2018.
The tax effects of uncertain tax positions are recognized in the
consolidated financial statements only if the position is more
likely than not to be sustained on audit, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the amount recognized in the consolidated
financial statements is the largest benefit that has a greater than
50% likelihood of being realized. It is our accounting policy to
account for ASC 740-10-related penalties and interest as a
component of the income tax provision in the consolidated
statements of operations and comprehensive loss.
As of
December 31, 2018 and 2017, our evaluation revealed no uncertain
tax positions that would have a material impact on the financial
statements. The 2015 through 2017 tax years remain subject to
examination by the IRS, as of December 31, 2018. 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.
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the
“2017 Act”) was enacted, which changes U.S. tax law and
includes various provisions that impact our Company. The 2017 Act
effects our Company by: changing U.S. tax rates; increasing the
Company’s ability to use accumulated net operating losses
generated after December 31, 2017; and limiting the Company’s
ability to deduct interest.
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, 2018 and 2017 was
$464,509 and $408,465, 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 years ended December 31, 2018 and
2017:
|
|
For the Years Ended December 31,
|
|
|
2018
|
|
2017
|
|
Risk-free interest rate
|
3.03%
|
|
1.00% - 2.17%
|
|
Expected term
|
5 years
|
|
0.3 – 6.1 years
|
|
Volatility
|
88.5%
|
|
70.0%
|
|
Dividend yield
|
0%
|
|
0%
|
|
Estimated annual forfeiture rate at time of grant
|
0%
|
|
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 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 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 December 31, 2018 and 2017 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, 2018, 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 –
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 determined that the value of the remaining balance of the
note receivable at December 31, 2017 approximated its recorded
value, and the Company sold the note in February 2018 for proceeds
of $1,400,000.
The Company’s goodwill and other intangible assets are
measured at fair value on a non-recurring basis using Level 2 and
Level 3 inputs.
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, which includes the accretion of the discounted
interest component through December 31, 2018. There were no changes
in levels during the years ended December 31, 2018 and
2017.
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, 2018 and 2017, the Company had
$2,176,907 and $1,707,212, 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 preferred
stock 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 effected a 1.9339-to-1 stock exchange
related to its acquisition of Brekford. The per share amounts have
been updated to show the effect of the exchange on earnings per
share as if the exchange occurred at the beginning of 2017. The
impact of the stock exchange is also shown on the Company’s
Statement of Changes in Stockholders’ Equity.
Segment Reporting
The
Financial Accounting Standards Board (“FASB”) ASC Topic
280, Segment Reporting,
requires that an enterprise report selected information about
reportable 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 reportable segment for the years ended December 31, 2018 and
2017. Beginning with the first quarter
of 2019, the Company anticipates changing its operating and
reportable segments from one segment to two segments. The two
segments are expected to reflect the Company’s focus on both
technology products and services and professional
services.
New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Not Yet Adopted
In August 2018, the Financial
Accounting Standards Board (“FASB”) issued ASU No.
2018-13, Fair Value Measurement (Topic
820), Disclosure Framework-Changes to the Disclosure Requirements
for Fair Value Measurement (“ASU 2018-13”). This ASU modifies the
disclosure requirements for fair value measurements by removing,
modifying or adding certain disclosures. ASU 2018-13 is effective
for annual periods beginning after December 15, 2019 and interim
periods within those annual periods, with early adoption permitted.
The amendments on changes in unrealized gains and losses, the range
and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative
description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. The Company is currently
evaluating the effect that ASU 2018-13 will have on its
consolidated financial statements and related
disclosures.
In June 2018, the FASB issued ASU No.
2018-07, Compensation – Stock
Compensation (Topic 718), Improvements to Nonemployee Share-Based
Payment Accounting (“ASU
2018-01”). This ASU is intended to simplify aspects of
share-based compensation issued to non-employees by making the
guidance consistent with the accounting for employee share-based
compensation. ASU 2018-07 is effective for annual periods beginning
after December 15, 2018 and interim periods within those annual
periods, with early adoption permitted but no earlier than an
entity’s adoption date of Topic 606. The Company will adopt
the provisions of this ASU in the first quarter of 2019. Adoption
of the new standard is not expected to have a material impact on
the Company’s consolidated financial statements and related
disclosures.
In August 2017, the FASB issued Accounting Standards Update
(“ASU”) No. 2017-12, Derivatives and Hedging (Topic
815), which provides 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 its consolidated financial statements, including
accounting policies, processes, and systems.
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. The Company will test
goodwill for impairment within one year of the acquisition or
annually as of October 1, and whenever indicators of
impairment exist. 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
(“ASU 2016-13”) 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. The Company is
currently in the process of evaluating the impact of the adoption
of ASU 2016-13 on its consolidated financial
statements.
In
February 2016, the FASB issued ASU 2016-02, Leases. This ASU is a comprehensive new
leases standard that amends various aspects of existing guidance
for leases and requires additional disclosures about leasing
arrangements. It will require companies to recognize lease assets
and lease liabilities by lessees for those leases classified as
operating leases under previous GAAP. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The ASU is
effective for annual periods beginning after December 15,
2018, including interim periods within those fiscal years; earlier
adoption is permitted. The Company is
finalizing its adoption of the new standard effective January 1,
2019 and will be adopting the standard using the optional
transition method by recognizing a cumulative-effect adjustment to
the balance sheet at January 1, 2019 and not revising prior period
presented amounts. The processes that are in final refinement
related to the Company’s full implementation of the standard
include: finalizing the Company’s estimates related to the
applicable incremental borrowing rate at January 1, 2019; and
process enhancements for refining the Company’s financial
reporting procedures to develop the additional required qualitative
and quantitative disclosures required beginning in 2019. The
Company has elected the following practical expedients: it has not
reassessed whether any expired or existing contracts are or contain
leases; it has not reassessed lease classification for any expired
or existing leases; it has not reassessed initial direct costs for
any existing leases; and it has not separated lease and nonlease
components.
The standard will have a material impact on the Company’s
consolidated balance sheets, but will not have a material impact on
its consolidated statements of operations. The most significant
impact will be the recognition of right-of-use (“ROU”)
assets and lease liabilities for operating leases.
Adoption of the standard will result in the recognition of
additional ROU assets and lease liabilities for operating leases
ranging between $0.8 million to $1.2 million as of January 1,
2019.
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 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. ASU 2014-09 and ASU 2016-12 are
effective for annual reporting periods beginning
after December 15, 2017.
On January 1, 2018, the Company adopted Topic 606, Revenue from Contracts with Customers,
using the modified retrospective method. Novume has aggregated and
reviewed its contracts that are within the scope of Topic 606.
Based on its evaluation, Novume does not anticipate the adoption of
Topic 606 will have a material impact on its balance sheet or
related consolidated statements of operations, equity or cash
flows. The impact of adopting Topic 606 to the Company relates to:
(1) a change to franchisee agreements recorded prior to 2017; and
(2) the timing of certain contractual agreements which the Company
deemed as immaterial. Revenue recognition related to the
Company’s other revenue streams remained substantially
unchanged following the adoption of Topic 606 and therefore did not
have a material impact on its revenues. The comparative information has not been restated
and continues to be reported under the accounting standards in
effect for those periods.
The
following tables summarize the impact of adopting ASC 606 on the
Company’s consolidated financial statements as of and for the
year ended December 31, 2018:
|
|
|
|
|
|
|
Balance Without Adoption of 606
|
|
Consolidated Balance Sheet
|
|
|
|
|
Liabilities
|
|
|
|
|
Deferred
revenue
|
$207,059
|
$(10,999)
|
$196,060
|
|
Equity
|
|
|
|
|
Accumulated
deficit
|
$(12,063,791)
|
$10,999
|
$(12,052,792)
|
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
Balance Without Adoption of 606
|
|
Consolidated Statement of Operations
|
|
|
|
|
Revenue
|
$48,562,441
|
$(56,001)
|
$48,506,440
|
|
|
|
|
|
|
Net
loss
|
$(5,703,499)
|
$(56,001)
|
$(5,759,500)
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.44)
|
$-
|
$(0.44)
|
|
Diluted
|
$(0.44)
|
$-
|
$(0.44)
|
The adoption of ASC 606 did not affect the Company's
reported total amounts of cash flows from operating, investing or
financing activities in its consolidated statements of cash
flows.
Practical
Expedients Election ‒ Costs
to Obtain and Fulfill a Contract ‒ The Company’s
incremental costs of obtaining a contract consist of sales
commissions. As part of the Company's
adoption of ASC 606, the Company elected to use the practical
expedient to expense costs to obtain a
contract as incurred when the amortization period would have been
one year or less. As of December 31, 2018, costs
incurred to fulfill contracts in excess of one year have been
immaterial to date.
Revenue Recognition ‒
The Company generates substantially
all revenues from providing professional services to clients. A
single contract could include one or multiple performance
obligations. For those contracts that have multiple performance
obligations, the Company allocates the total transaction price to
each performance obligation based on its relative standalone
selling price, which is determined based on our overall pricing
objectives, taking into consideration market conditions and other
factors.
Revenue is recognized when control of the goods and services
provided are transferred to our customers, in an amount that
reflects the consideration the Company expects to be entitled to in
exchange for those goods and services using the following
steps:
●
Identification of
the contract, or contracts, with a customer
●
Identification of
the performance obligations in the contract
●
Determination of
the transaction price
●
Allocation of the
transaction price to the performance obligations in the
contract
●
Recognition of
revenue when, or as, performance obligations are
satisfied
The
Company accounts for a contract when it has approval and commitment
from both parties, the rights of the parties are identified,
payment terms are identified, the contract has commercial substance
and collectability of consideration is probable.
Disaggregated Revenue ‒ The
Company disaggregates revenue from contracts with customers by
contract type, as it believes it best depicts how the nature,
amount, timing and uncertainty of revenue and cash flows are
affected by economic factors.
The
Company’s revenue by contract type is as
follows:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
Revenues
|
|
|
|
Time
& materials
|
$42,559,925
|
$19,553,770
|
|
Fixed
price
|
5,905,181
|
2,225,179
|
|
Franchising
|
97,335
|
356,869
|
|
Total
revenue
|
$48,562,441
|
$22,135,818
|
Performance Obligations
‒ Performance obligations for three different types of
services are discussed below:
●
Time and Material
Services ‒
Revenues for time and material
contracts are recognized as a single promise to provide hourly
support or staff augmentation. Revenue is based on the number of
hours worked by the employees or consultants at an agreed-upon rate
per hour set forth in standard rate sheets or as written from time
to time in contracts or purchase orders.
●
Firm-Fixed-Price
Services ‒
Revenues related to firm-fixed-price
contracts are primarily a single promise to provide a specific
service, such as a site assessment or report. Revenues
related to firm-fixed-price contracts are recognized in two ways,
either as services are provided for longer term contracts or upon
completion of the project for short-term contracts.
●
Franchising
Services ‒
Revenue from the sale of individual
franchises represents a single promise to provide a distinctive
system that offers critical decision support, planning and
consulting to individuals, corporate entities and government
agencies. As no additional services are provided under the
franchising sale, revenue is recognized when the contract is signed
and collectability is assured, unless the franchisee is required to
perform certain training before operations commence. Royalty and
advertising and promotion services are provided over the term of
the franchise and therefore revenue from these services are
recognized over time based on the monthly fee per the contract
terms.
Accounts Receivable,
Net ‒ Accounts
receivable, net, are amounts due from customers where there is an
unconditional right to consideration. Unbilled receivables
of $1,124,705 and $1,259,089
are included in this balance at December 31, 2018 and 2017,
respectively. The payment of consideration related to these
unbilled receivables is subject only to the passage of
time.
The Company reviews accounts receivable on a periodic basis to
determine if any receivables will potentially be uncollectible.
Estimates are used to determine the amount of the allowance for
doubtful accounts necessary to reduce accounts receivable to its
estimated net realizable value. The estimates are based on an
analysis of past due receivables, historical bad debt trends,
current economic conditions, and customer specific information.
After the Company has exhausted all collection efforts, the
outstanding receivable balance relating to services provided is
written off against the allowance. Additions to the provision for
bad debt are charged to expense.
The
Company determined that an allowance for loss of $24,405 and
$24,000 was required at December 31, 2018 and 2017,
respectively.
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 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. The
Company adopted this standard and the impact of the adoption was
not material to the consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying
the Definition of a Business (“ASU 2017-01”).
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. The Company adopted ASU 2017-01 as
of January 1, 2017.
In May 2017, the FASB issued 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 adopted this ASU in 2018
and the impact of the adoption was not material to its consolidated
financial statements and related disclosures.
NOTE 3 – ACQUISITIONS
Secure Education Consultants Acquisition
On
January 1, 2018, Novume completed its acquisition of certain assets
of Secure Education through Firestorm. Consideration paid as part
of this acquisition included: (a) $99,197 in cash, (b) 33,333
shares of Novume common stock valued at $163,332; (c) warrants to
purchase 33,333 shares of Novume common stock, exercisable over a
period of five years, at an exercise price of $5.44 per share,
valued at $65,988 and (d) warrants to purchase 33,333 of Novume
common stock, exercisable over a period of five years at an
exercise price of $6.53 per share, valued at $57,484.
The
Company has completed its analysis of the purchase price
allocation. The Company recorded $386,001 of customer relationships
as intangibles. The table below shows the final breakdown related
to the Secure Education acquisition:
|
Cash
paid
|
$99,197
|
|
Common
stock issued
|
163,332
|
|
Warrants
issued, at $5.44
|
65,988
|
|
Warrants
issued, at $6.53
|
57,484
|
|
Total
consideration
|
386,001
|
|
Less
intangible and intellectual property
|
(386,001)
|
|
Net
goodwill recorded
|
$-
|
BC Management Acquisition
On
December 31, 2017, Novume completed its acquisition of certain
assets of BC Management, Inc. (“BC Management”).
Consideration paid as part of this acquisition included: (a)
$100,000 in cash, (b) 33,333 shares of Novume common stock valued
at $163,332 and (c) 66,666 warrants to purchase Novume common stock
valued at $123,472.
The
preliminary purchase price has been allocated to the assets
acquired and liabilities assumed based on fair values as of the
acquisition date. Since the acquisition of BC Management occurred
on December 31, 2017, the results of operations for BC Management
have not been included in the Company’s Consolidated
Statement of Operations for the year ended December 31,
2017.
The
Company has completed its analysis of the purchase price allocation
which was the same as the preliminary allocation. The Company
recorded $386,004 of customer relationships as intangibles. The
table below shows the final breakdown related to the BC Management
acquisition:
|
Cash
paid
|
$100,000
|
|
Common
stock issued
|
163,332
|
|
Warrants
issued, at $5.44
|
65,988
|
|
Warrants
issued, at $6.53
|
57,484
|
|
Total
consideration
|
386,804
|
|
Less
intangible and intellectual property
|
(386,804)
|
|
Net
goodwill recorded
|
$-
|
Global Acquisition
On
October 1, 2017, Novume completed its acquisition of Global by
purchasing GTS and GCP. Consideration paid as part of the Global
acquisition included: (a) $750,000 in cash, (b) 375,000 shares of
Novume common stock valued at $566,288 and (c) 240,861 shares of
Novume Series B Cumulative Convertible Preferred Stock (the
“Novume Series B Preferred Stock”) valued at
$2,408,610. In addition to the 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
(“WFB”) (the “GTS
Wells Fargo Credit Facility”) and (b) the Secured Account
Purchase Agreement dated August 22, 2012 by and between GCP
and WFB (the “GCP Wells Fargo Credit Facility” and
together with the GTS Wells Fargo Credit Facility, the “Wells
Fargo Credit Facilities”), which have remained in effect
following the consummation of the Global Acquisition. In connection
with the Wells Fargo Credit Facilities, Novume delivered general
continuing guaranties, dated September 29, 2017 to WFB,
guaranteeing the Guaranteed 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 October 1, 2017. Additionally, Novume assumed $2,462,276 of
Global’s liabilities.
As part
of the Global acquisition, the Company issued 240,861 shares of
$0.0001 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 $10.00 per share as part
of the acquisition of Global. The Series B Preferred Stock is
entitled to quarterly cash dividends of 1.12% (4.48% per annum) per
share. The Series B Preferred Stock has a conversion price of $5.00
per share. Each Series B Preferred Stock has an automatic
conversion feature based on the share price of Novume (see Note 9).
The Company measured the holdback consideration in April 2018 and
determined that the contingent liability should be decreased by
$94,657. In accordance with ASC 805-10-25, a contingent
consideration classified as an asset or liability shall be
recognized in earnings, and $94,657 was recognized as other income
for the year ended December 31, 2018. As of December 31, 2017, the
Company had $200,000 of holdback consideration included in accrued
expenses. For the year ended December 31, 2018, the Company paid
$105,343 of the holdback consideration.
The
Company completed its analysis of the purchase price allocation in
2017. The table below shows the final breakdown related to the
Global acquisition:
|
Assets
acquired
|
$4,384,668
|
|
Liabilities
acquired
|
(4,384,417)
|
|
Net assets
acquired
|
251
|
|
Less intangible
assets
|
2,574,000
|
|
Consideration paid
(see below)
|
4,264,934
|
|
Net goodwill
recorded
|
$1,690,683
|
|
|
|
|
Cash
consideration
|
$550,000
|
|
Cash paid towards
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
|
The
determination of the fair value of the assets acquired and
liabilities assumed, includes approximately $2.6 million of
intangible and intellectual property and approximately $1.7 million
of goodwill.
Brekford Acquisition
On
August 28, 2017, the mergers by and among Novume, KeyStone,
Brekford, Brekford Merger Sub, Inc., and KeyStone Merger Sub, LLC,
were
consummated (the “Brekford Merger”). As a result,
Brekford became a wholly-owned subsidiary of Novume, and Brekford
Merger Sub ceased to exist. KeyStone Merger Sub, LLC also became a
wholly-owned subsidiary of Novume, and KeyStone Solutions, Inc.
ceased to exist. When KeyStone Merger Sub, Inc. filed its
certificate of merger with the Secretary of 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% or 13,548,837 of
the issued and outstanding capital stock of Novume on a
fully-diluted basis, and the pre-merger stockholders of Brekford
owned approximately 20% or 3,375,084 shares of the issued and
outstanding capital stock of Novume on a fully-diluted
basis.
The
Company completed its analysis of the purchase price allocation in
2017. The table below shows the final breakdown related to the
Brekford acquisition:
|
Common
stock issued
|
$5,851,193
|
|
Total
consideration
|
5,851,193
|
|
Less
cash received
|
(1,943,778)
|
|
Less
note receivable
|
(2,000,000)
|
|
Less
other assets
|
(1,139,007)
|
|
Less
intangible assets
|
(558,412)
|
|
Plus
liabilities assumed
|
1,191,937
|
|
Net
goodwill recorded
|
$1,401,933
|
The
determination of the fair value of the assets acquired and
liabilities assumed, includes approximately $0.6 million of
intangible and intellectual property and approximately $1.4 million
of goodwill.
Firestorm Acquisition
On
January 25, 2017, the Company acquired each of the Firestorm
Entities for the following consideration: $500,000 in cash;
$1,000,000 in the aggregate in the form of four unsecured,
subordinated promissory notes with interest (of which interest on
$500,000 of the notes is payable at an interest rate of 7% and
interest on $500,000 of the notes is payable at an interest rate of
2%) payable over, and principal due after, five years (of which
$907,407 was recorded to notes payable to reflect the net fair
value of the notes issued due to the difference in interest rates);
488,094 (946,875 post Brekford Merger) shares of Novume common
stock; warrants to purchase 162,699 (315,627 post Brekford Merger)
shares of Novume common stock, exercisable over a period of five
years, at an exercise price of $2.58 per share; and warrants to
purchase 162,699 (315,627 post Brekford Merger) shares of Novume
common stock, exercisable over a period of five years, at an
exercise price of $3.61 per share.
The
Company completed its analysis of the purchase price allocation in
2017. 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. In connection with the
acquisition, Novume also entered into employment agreements with
Harry Rhulen, James Satterfield and Suzanne Loughlin (the
“Firestorm Principals”). On December 28, 2018, the
Firestorm Principals resigned and their employment agreements were
terminated effective with their resignations. Any Firestorm
Principals’ unvested options expired concurrently with their
termination. The Firestorm Principals had 90 days from the date of
their termination to exercise any vested options and they did not
do so.
Operations of Combined Entities
The
following 2017 unaudited pro-forma combined financial information
gives effect to the acquisition of Firestorm, the merger with
Brekford and the acquisition of Global as if they were consummated
January 1, 2017. This 2017 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, 2017 (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 Years Ended December 31,
|
|
|
|
|
|
Revenues
|
$48,562,441
|
$42,828,709
|
|
Net
loss
|
$(5,703,499)
|
$(6,183,910)
|
|
Basic
earnings (loss) per share
|
$(0.44)
|
$(0.52)
|
|
Diluted
earnings (loss) per share
|
$(0.44)
|
$(0.52)
|
|
|
|
|
|
Basic
Number of Shares
|
15,409,014
|
13,592,532
|
|
Diluted
Number of Shares
|
15,409,014
|
13,592,532
|
NOTE 4 – INVESTMENT AT COST AND NOTES RECEIVABLE
On
February 6, 2017, prior to the Brekford Merger, Brekford entered
into a Contribution and Unit Purchase Agreement (the “CUP
Agreement”) with LB&B Associates Inc.
(“LB&B”) and Global Public Safety, LLC
(“Global Public Safety”).
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
Global Public Safety. On the GPS
Closing, the Company sold units representing 80.1% of the units
of Global Public Safety to
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 Global Public Safety after the transaction. The Company is accounting
for this as an investment at cost. The Company recorded an
impairment of $262,140 related to the investment in Global Public
Safety for the year end December 31,
2018.
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 was March 31, 2022. The
GPS Promissory Note was 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
was 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 Global Public
Safety, subject to liens of the
LB&B’s senior lender. As of December 31, 2017, the
Company reclassified the note receivable balance to a current asset
and wrote down $450,000 based on the decision to sell the note
receivable to an unrelated third-party. The sale was consummated in
February 2018. The current portion of notes receivable was $0 and
$1,475,000 as of December 31, 2018 and 2017, respectively.
In connection with the sale, the Company indemnified the unrelated
third-party buyer for any amount of principal and interest not paid
by LB&B.
NOTE 5 – IDENTIFIABLE INTANGIBLE ASSETS
The following provides a breakdown of identifiable intangible
assets as of December 31, 2018:
|
|
|
|
|
|
|
Identifiable
intangible assets, gross
|
$5,588,677
|
$730,000
|
$83,412
|
$6,402,089
|
|
Accumulated
amortization
|
(1,332,868)
|
(234,718)
|
-
|
(1,567,586)
|
|
Identifiable
intangible assets, net
|
$4,255,809
|
$495,282
|
$83,412
|
$4,834,503
|
In connection with the acquisition of Firestorm, Global, Brekford,
BC Management and Secure Education, the Company identified
intangible assets of $2,497,686, $2,574,000, $558,412,
$386,804 and $386,801 respectively, representing trade names,
customer relationships and technology. These assets are being
amortized on a straight-line basis over their weighted average
estimated useful life of 7.8 years and amortization expense
amounted to $1,021,176 and $456,410 for the years ended December
31, 2018 and 2017, respectively.
As of December 31, 2018, the estimated annual amortization expense
for each of the next five fiscal years and thereafter is as
follows:
|
2019
|
$1,048,980
|
|
2020
|
1,048,980
|
|
2021
|
996,778
|
|
2022
|
238,155
|
|
2023
|
154,596
|
|
Thereafter
|
1,347,014
|
|
Total
|
$4,834,503
|
NOTE 6 – SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Supplemental
disclosures of cash flow information for the years ended
December 31, 2018 and 2017 was as follows:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
Cash
paid for interest
|
$478,693
|
$213,455
|
|
Cash
paid for taxes
|
$13,607
|
$-
|
|
|
|
|
|
Issuance
of common stock for the extinguishment of warrants
|
$133,755
|
$-
|
|
Common
stock issued in connection with note payable
|
$126,001
|
$-
|
|
Warrants
issued in connection with issuance of Series A Preferred
Stock
|
$-
|
$67,491
|
|
Notes
payable for equipment purchase
|
$31,824
|
$-
|
|
|
|
|
|
Business
Combinations:
|
|
|
|
Current
assets
|
$-
|
$5,263,445
|
|
Property
and equipment
|
$-
|
$382,159
|
|
Intangible
assets
|
$386,001
|
$6,015,285
|
|
Goodwill
|
$-
|
$3,092,616
|
|
Other
non-current assets
|
$-
|
$271,381
|
|
Note
receivable, long-term
|
$-
|
$1,700,000
|
|
Assumed
liabilities
|
$-
|
$(5,069,709)
|
|
Deferred
revenue
|
$-
|
$(22,493)
|
|
Other
non-current liabilities
|
$-
|
$(16,584)
|
|
Issuance
of common stock
|
$(163,332)
|
$(7,784,560)
|
|
Issuance
of Series B preferred stock
|
$-
|
$(2,408,610)
|
|
Notes
payable
|
$-
|
$(1,117,253)
|
|
Issuance
of common stock warrants
|
$(123,472)
|
$(123,473)
|
On April 7, 2017, Novume paid cash dividends of $75,694 to
shareholders of record of Series A Preferred Stock as of
March 30, 2017. On July 8, 2017, October 7, 2017, January 5,
2018, April 6, 2018 and July 9, 2018, the Company paid cash
dividends of $87,907 to shareholders of record of Series A
Preferred Stock as of the end of the previous month. On
September 30, 2018, December 31, 2018 and March 31, 2019, the
Company accrued dividends of $87,907 to Series A Preferred Stock
shareholders of record. Accrued dividends payable to Series A
Preferred Stock shareholders were $175,814 and $87,907 as of
December 31, 2018 and 2017, respectively.
On January 5, 2018, April 6, 2018 and July 9, 2018, the Company
paid cash dividends of $27,001 to shareholders of record of Series
B Preferred Stock as of the end of the previous month. On
September 30, 2018, December 31, 2018 and March 31, 2019, the
Company accrued dividends of $27,001 to Series B Preferred Stock
shareholders of record. Accrued dividends payable to Series B
Preferred Stock shareholders were $54,002 and $27,001 as of
December 31, 2018 and 2017, respectively.
NOTE 7 – DEBT
Line of Credit
Global
has revolving lines of credit with WFB under the Wells Fargo Credit
Facilities. WFB agreed to advance
to Global, 90% of all eligible
accounts with a maximum facility amount of $5,000,000. Interest is
payable under the Wells Fargo Credit Facilities at a monthly rate equal to the Three-Month LIBOR
in effect from time to time plus 3% plus the Margin. The Margin is
3%. Payment of the revolving lines of credit is secured by
the accounts receivable of Global. The
terms of the Wells Fargo Credit Facilities ran through December 31, 2018, with automatic
renewal terms of 12 months. The current term of the Wells
Fargo Credit Facilities run through December 31, 2019. WFB or
Global may terminate the Wells
Fargo Credit Facilities upon at least
60 days’ written notice prior to the last day of the
current term. The principal balance at December 31, 2018 and
December 31, 2017 was $1,094,766 and $2,057,259, respectively. As
part of the lines of credit agreements, Global must maintain
certain financial covenants. Global met all financial covenant
requirements for the year ended December 31, 2018.
On November 12, 2017, AOC Key Solutions entered into an Account Purchase Agreement and
related agreements (the “AOC Wells Agreement”) with
WFB. Pursuant to the AOC Wells Agreement, AOC Key Solutions
agreed to sell and assign to WFB all
of its Accounts (as such term is defined in Article 9 of the
Uniform Commercial Code), constituting accounts arising out of
sales of Goods (as such term is defined in Article 9 of the Uniform
Commercial Code) or rendition of services that WFB deems to be
eligible for borrowing under the AOC Wells Agreement. WFB agreed to
advance to AOC Key Solutions,
90% of all eligible accounts with a maximum facility amount of
$3,000,000. Interest is payable under the AOC Wells Agreement at a
monthly rate equal to the Daily One Month LIBOR in effect from time
to time plus 5%. The AOC Wells Agreement also provides for a
deficit interest rate equal to the then applicable interest rate
plus 50% and a default interest rate equal to the then applicable
interest rate or deficit interest rate, plus 50%. The initial term
of the AOC Wells Agreement runs through December 31, 2018 (the
“Initial Term”), with automatic renewal terms of 12
months (the “Renewal Term”), commencing on the first
day after the last day of the Initial Term. AOC Key
Solutions may terminate the AOC Wells
Agreement upon at least 60 days’ prior written notice, but no
more than 120 days’ written notice, prior to and effective as
of the last day of the Initial Term or the Renewal Term, as the
case may be. WFB may terminate the AOC Wells Agreement at any time
and for any reason upon 30 days’ written notice or without
notice upon the occurrence of an Event of Default (as such term is
defined in the Agreement) after the expiration of any grace or cure
period. The principal balance at December 31, 2018 and
December 31, 2017 was $566,447 and $1,606,327, respectively. As
part of the line of credit agreement, AOC Key Solutions must
maintain certain financial covenants. AOC Key Solutions met all
financial covenant requirements for the year ended December 31,
2018.
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 (the "Avon Road Note") 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
$1.031 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 had an
expiration date of March 16, 2019 and qualified for equity
accounting as the warrants did not fall within the scope of ASC
Topic 480, Distinguishing
Liabilities from Equity. 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 effective interest rate of the Avon
Road Note Purchase Agreement is 12.9%.
The
Avon Road Note accrues simple interest 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 was to mature on
March 16, 2019. On October 23, 2018, the maturity date of this
note was extended to March 16, 2020. On March 12, 2019, the
$500,000 balance due on the Avon Road Note was retired in its
entirety (see Note 17).
On
January 25, 2017, pursuant to the terms of the Novume 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 with interest
payable over five years after the Firestorm Closing Date, to Lancer
Financial Group, Inc. (“Lancer”) and the Firestorm
Principals. 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 notes mature on January 25, 2022. The balance of
these notes payable was $938,272 and $924,383, net of unamortized
interest, as of December 31, 2018 and 2017, respectively, to
reflect the amortized fair value of the notes issued due to the
difference in interest rates of $61,728 and $75,617,
respectively.
On
April 3, 2018, Novume and Brekford entered into a transaction
pursuant to which an institutional investor (the
“Lender”) loaned $2,000,000 to Novume and Brekford (the
“2018 Promissory Note”). The loan was originally due
and payable on May 1, 2019 and bears interest at 15% per annum,
with a minimum of 15% interest payable if the loan is repaid prior
to May 1, 2019. On October 24, 2018, Novume and Brekford entered
into a note amendment with the Lender by which the maturity date of
the note was extended to May 1, 2020 (the “2018 Promissory
Note Amendment”). The 2018 Promissory Note Amendment further
provides for payment of interest through May 1, 2019, if the
principal is repaid before May 1, 2019, and for the payment of
interest through May 1, 2020, if the principal is repaid after May
1, 2019 and before May 1, 2020. The loan is secured by a security
interest in all of the assets of Brekford. In addition, Novume
issued 35,000 shares of common stock to the Lender, which shares
contain piggy-back registration rights. If the shares are not so
registered on the next selling shareholder registration statement,
Novume shall be obligated to issue an additional 15,000 shares to
the Lender. Upon any sale of Brekford or its assets, the Lender
will be entitled to receive 7% of any proceeds received by Novume
or Brekford in excess of $5 million (the “Lender’s
Participation”). In addition, commencing January 1, 2020, the
Lender shall be paid 7% of Brekford’s earnings before
interest, taxes, depreciation and amortization, less any capital
expenditures, which amount would be credited for any payments that
might ultimately be paid to the Lender as its Lender’s
Participation, if any. At April 3, 2018, the fair value of shares
issued was $126,000. At October 24, 2018, an additional $62,500 fee
was paid as consideration for extending the maturity date to May 1,
2020 (as described above) and designated as financing costs related
to the 2018 Promissory Note Amendment. Amortized financing cost for
the year ended December 31, 2018 was determined to be $96,378 and
is included in interest expense. The 2018 Promissory Note has an
effective interest rate of 19.5%. On March 12, 2019, the $2,000,000
balance due on the 2018 Promissory Note was retired in its entirety
(see Note 17).
The
principal amounts due for long-term notes payable described above
and a minor equipment note payable are shown below as of December
31, 2018:
|
|
|
|
|
|
2019
|
$2,563,245
|
$-
|
$2,563,245
|
|
2020
|
-
|
4,665
|
4,665
|
|
2021
|
-
|
4,959
|
4,959
|
|
2022
|
-
|
1,005,273
|
1,005,273
|
|
2023
|
-
|
11,564
|
11,564
|
|
Thereafter
|
-
|
-
|
-
|
|
Total
|
2,563,245
|
1,026,461
|
3,589,706
|
|
|
|
|
|
|
Less
unamortized interest
|
-
|
(61,728)
|
(61,728)
|
|
Less
unamortized financing costs
|
(94,034)
|
-
|
(94,034)
|
|
|
2,469,211
|
964,733
|
3,433,944
|
|
Current
portion of long-term debt
|
(2,469,211)
|
-
|
(2,469,211)
|
|
Long-term
debt
|
$-
|
$964,733
|
$964,733
|
NOTE 8 – 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.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the
“2017 Act”) was enacted, which changes U.S. tax law and
includes various provisions that impact our company. The 2017 Act
effects our company by (i) changing U.S. tax rates, (ii) increasing
the Company’s ability to utilize accumulated net operating
losses generated after December 31, 2017, and (iii) impacts the
estimates of our deferred tax assets and liabilities.
The
expense (benefit) benefit from income taxes for the years ended
December 31, 2018 and 2017 consists of the following:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
Current:
|
|
|
|
State
|
$29,250
|
$23,919
|
|
Deferred:
|
|
|
|
Federal
|
$82,893
|
$(311,211)
|
|
State
|
(82,893)
|
(7,374)
|
|
Expense
(benefit) from income taxes
|
$29,250
|
$(294,666)
|
The
components of deferred income tax assets and liabilities are as
follows at December 31, 2018 and 2017:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Fixed
assets
|
$-
|
$14,604
|
|
Amortizable
start-up costs
|
34,439
|
-
|
|
Accrual
and others
|
240,646
|
507,052
|
|
Interest
expense carryforward
|
147,260
|
|
|
Net
operating loss carryforward
|
2,517,900
|
1,513,921
|
|
Valuation
allowance
|
(2,308,460)
|
(1,342,108)
|
|
|
631,785
|
693,469
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Goodwill
and Intangibles
|
(551,301)
|
(693,469)
|
|
Fixed
assets
|
(80,484)
|
-
|
|
Total
deferred tax assets, net
|
$-
|
$-
|
The
difference between the income tax provision computed at the U.S.
Federal statutory rate and the effective tax rate is as follows for
the years ended December 31, 2018 and 2017:
|
|
For the Years Ended December 31,
|
|
|
|
|
|
U.S.
statutory federal rate
|
21.0%
|
34.0%
|
|
(Decrease)
increase in taxes resulting from:
|
|
|
|
State
income tax rate, net of U.S. Federal benefit
|
2.9%
|
5.1%
|
|
Acquisition
related costs
|
0.0%
|
-6.8%
|
|
Impact
of changes in tax rates
|
-0.1%
|
-16.9%
|
|
True-ups
|
-5.7%
|
0.0%
|
|
Other
|
-1.6%
|
-4.0%
|
|
Valuation
allowance
|
-17.0%
|
-5.8%
|
|
Effective
tax rate
|
-0.5%
|
5.6%
|
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,
2018.
Management has evaluated the recoverability of the net deferred
income tax assets and the level of the valuation allowance required
with respect to such net deferred income tax assets. After
considering all available facts, the Company fully reserved for its
net deferred tax assets because management believes that it is not
more likely than not that their benefits will 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 net deferred
income tax assets satisfy the realization standard, the valuation
allowance will be reduced accordingly.
At
December 31, 2018, Novume had gross net operating loss
carryforwards of $9,733,277 and a valuation allowance of $2,308,460
recorded against its net deferred tax assets.
At
December 31, 2017, Novume had gross net operating loss
carryforwards of $5,909,378 and a valuation allowance of $1,342,108
recorded against its net deferred tax assets.
For the
years ended December 31, 2018 and 2017, 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. The
2015 through 2017 tax years remain subject to examination by the
IRS.
NOTE 9 – STOCKHOLDERS’ EQUITY
Common Stock
The
Company is authorized to issue 30,000,000 shares of common stock,
$0.0001 par value. As of December 31, 2018 and December 31, 2017,
the issued and outstanding common shares of Novume were 18,767,619
and 14,463,364, respectively.
On
March 15, 2016, the stockholders of AOC Key Solutions formed
KeyStone as a holding company with the same proportionate ownership
percentage as AOC Key Solutions. Pursuant to the KeyStone Merger
Agreement, the stockholders exchanged 100% of the outstanding
common stock of AOC Key Solutions for 5,000,000 (9,699,720 post
merger exchange) 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
$0.0001 par value common stock. As of December 31, 2016,
5,000,000 (9,699,720 post merger exchange) shares of KeyStone
common stock were issued and outstanding.
In
January 2017, the Company issued 488,094 (946,875 post Brekford
merger exchange) shares of KeyStone common stock as consideration
as part of its acquisition of Firestorm.
Upon completion of the KeyStone and Brekford merger on August 28,
2017, the pre-merger stockholders of KeyStone 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. As consideration, in accordance
with the terms of the Brekford Merger Agreement, the Company issued
5,158,503 shares of Novume common stock to former KeyStone
shareholders and 3,287,187 shares of Novume common stock to
former Brekford shareholders.
In
October 2017, the Company issued 375,000 shares of Novume common
stock as consideration as part of its acquisition of
Global.
In
December 2017, the Company issued 33,333 shares of Novume common
stock as consideration as part of its acquisition of BC
Management.
In
January 2018, the Company issued 33,333 shares of Novume common
stock as consideration as part of its acquisition of Secure
Education.
In
April 2018, the Company issued 35,000 shares of Novume common stock
as additional consideration to the Lender in connection with the
2018 Promissory Note.
As part
of its acquisition of Brekford on August 29, 2017, the Company
assumed warrants to purchase 56,000 shares of Novume common stock
(the “Brekford Warrants”) (see Note 10). Effective
October 16, 2018, the Company entered into exchange agreements with
holders of the Brekford Warrants pursuant to which the Company
issued to the holders an aggregate of 96,924 shares of common stock
in exchange for the return of the warrants to the Company for
cancellation.
On
November 1, 2018, the Company issued 4,125,000 shares of common
stock through an underwritten public offering at a public offering
price of $0.80 per share. Net proceeds to the Company was
approximately $2.8 million. In addition, the Company granted
underwriters a 45-day option to purchase up to 618,750 additional
shares of common stock to cover over-allotment, if any. The
underwriters did not exercise this option and the options were
cancelled. As part of the consideration to the underwriters, the
Company issued to the underwriters warrants to purchase an
aggregate of 206,250 shares of common stock, exercisable over a
period of five years, at an exercise price of $1.00 per share. The
underwriter warrants have a value of approximately $0.2 million and
are exercisable commencing April 27, 2019 and expire on October 29,
2023.
On
December 13, 2018, the Company received a letter from the Nasdaq
indicating that the Company is required to maintain a minimum bid
price of $1 per share of its common stock. The Company's closing
bid price of its common stock had been less than $1 for the
previous 30 consecutive business days. As such, the Company was not
compliant with the minimum bid price requirements under Nasdaq
Listing Rule 5550(a)(2). The letter from Nasdaq provided the
Company with a compliance period of 180 calendar days, or until
June 11, 2019, to regain compliance with the minimum bid price
requirement. If at any time during this 180-day compliance period
the closing bid price of the Company’s common stock is at
least $1 for a minimum of 10 consecutive business days, then Nasdaq
will provide the Company with written confirmation of compliance
and the matter will be closed.
In the
event that the Company’s common stock were to be delisted
from the Nasdaq, management expects that it would be traded on the
OTCQB or OTCQX, which are unorganized, inter-dealer,
over-the-counter markets which provides significantly less
liquidity than the Nasdaq or other national securities exchanges.
In the event that the Company’s common stock were to be
delisted from the Nasdaq, it may have a material adverse effect on
the trading and price.
For the
year ended December 31, 2018, the Company issued 13,998 shares of Novume common stock
related to the exercise of common stock options.
For the
year ended December 31, 2018 and 2017, the Company issued
4,304,255 and 9,463,364 shares
of Novume common stock, respectively.
On
February 15, 2019, the Company entered into Amendment No. 1 to the
OpenALPR Purchase Agreement (see Note 12), pursuant to which the
Company agreed to issue 600,000 shares of Novume common stock as
partial consideration for the acquisition of the assets of
OpenALPR. On March 12, 2019, the Company issued 600,000 shares of
Novume common stock pursuant to the acquisition of
OpenALPR.
Preferred Stock
The
Company is authorized to issue up to 2,000,000 shares of preferred
stock, $0.0001 par value. The Company’s preferred stock may
be entitled to preference over the common stock with respect to the
distribution of assets of the Company in the event of liquidation,
dissolution or winding-up of the Company, whether voluntarily or
involuntarily, or in the event of any other distribution of assets
of the Company among its shareholders for the purpose of the
winding-up of its affairs. The authorized but unissued shares of
the preferred stock may be divided into, and issued in, designated
series from time to time by one or more resolutions adopted by the
Board of Directors of the Company. The Board of Directors of the
Company, in its sole discretion, has the power to determine the
relative powers, preferences and rights of each series of preferred
stock.
Series A Cumulative Convertible Redeemable Preferred
Stock
Of the
2,000,000 authorized shares of preferred stock, 500,000 shares were
initially designated as $0.0001 par value 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, KeyStone commenced a Regulation A Offering (the
“Reg A Offering”) of up to 3,000,000 Units. Each Unit
(post merger exchange) consisted of one share of Series A Preferred
Stock and one Unit Warrant to purchase 0.48 shares of
Novume’s common stock at an exercise price of $1.03 per
share. The holders of Series A Preferred Stock are entitled to
quarterly dividends of 7.0% per annum per share.
The
holders of Series A Preferred Stock have 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 holders of Series A Preferred
Stock also have a 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 holders of Series A
Preferred Stock 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 sheets as of December 31, 2018 and
2017.
The Reg
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 Reg A
Offering for the sale and issuance of 119,757 shares of Series A
Preferred Stock and 119,757 Unit Warrants with the Company
receiving aggregate gross proceeds of $1,197,570.
On
March 21, 2017, the Company completed its third and final
closing of the Reg A Offering for the sale and issuance of 81,000
shares of Series A Preferred Stock and 81,000 Unit Warrants with
the Company receiving aggregate gross proceeds of
$810,000.
The
aggregate total sold in the Reg 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 Reg 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 recorded through additional paid in capital of
$655,103 and $550,655 for the years ended December 31, 2018 and
2017, respectively.
As of
December 31, 2018 and 2017, 502,327 shares of Series A Preferred
Stock were issued and outstanding.
The
Series A Preferred Stock is entitled to quarterly cash dividends of
$0.175 (7% per annum) per share. Dividends accrue quarterly and
dividend payments for declared dividends are due within five
business days following the end of a quarter. On April 7, 2017, Novume paid cash dividends
of $75,694 to shareholders of record of Series A Preferred Stock as
of March 30, 2017. On July 8, 2017, October 7, 2017, January
5, 2018, April 6, 2018 and July 9, 2018, the Company paid cash
dividends of $87,907 to shareholders of record of Series A
Preferred Stock as of the end of the previous month. On
September 30, 2018, December 31, 2018 and March 31, 2019, the
Company accrued dividends of $87,907 to Series A Preferred Stock
shareholders of record. Accrued dividends payable to Series A
Preferred Stock shareholders were $175,814 and $87,907 as of
December 31, 2018 and 2017, respectively.
The
Unit Warrants expire on November 8, 2023. 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 aggregate fair value at the
dates of issuance was $169,125. As of December 31, 2018 and 2017,
502,327 Unit Warrants were outstanding.
Series B Cumulative Convertible Preferred Stock
Of the
2,000,000 authorized shares of preferred stock, 240,861 shares are
designated as $0.0001 par value Novume Series B Cumulative
Convertible Preferred Stock (the "Series B Preferred Stock"). As
part of the Global Merger, the Company issued 240,861 shares of
$0.0001 par value Series B Preferred Stock. All Series B Preferred
Stock was issued at a price of $10.00 per share as part of the
acquisition of the Global Merger. The Series B Preferred Stock has
a conversion price of $5.00 per share. Each Series B Preferred
Stock has an automatic conversion feature based on the share price
of Novume. The Series B Preferred Stock is entitled to quarterly
cash dividends of 1.121% (4.484% per annum) per share. Dividends
accrue quarterly and dividend payments for declared dividends are
due within five business days following the end of a quarter.
On January 5, 2018, April 6, 2018 and
July 9, 2018, the Company paid cash dividends of $27,001 to
shareholders of record of Series B Preferred Stock as of the end of
the previous month. On September 30, 2018, December 31, 2018
and March 31, 2019, the Company accrued dividends of $27,001 to Series B Preferred Stock
shareholders of record. Accrued dividends payable to Series B
Preferred Stock shareholders were $54,002 and $27,001 as of
December 31, 2018 and 2017, respectively.
Warrants
The
Company has a total of 1,473,163 and 1,256,247 warrants issued and
outstanding as of December 31, 2018 and 2017, respectively. These
warrants are exercisable and convertible for a total of 1,214,491
and 997,575 shares of Novume
common stock as of December 31, 2018 and 2017,
respectively.
The
exercise price for the Brekford Warrant is $7.50 and they expire on
March 31, 2020. Effective October 16, 2018, the Company entered
into exchange agreements with holders of the Brekford Warrant
pursuant to which the Company issued to the holders an aggregate of
96,924 shares of common stock in exchange for the return of the
warrants to the Company for cancellation. As of December 31, 2018,
no Brekford Warrants were outstanding. As of December 31, 2017,
there were 56,000 Brekford Warrants outstanding (see Note
10).
As part
of the Reg A Offering in fiscal year 2016 and 2017, Novume issued
502,327 Unit Warrants to the holders of Series A Preferred Stock.
The exercise price for these Unit Warrants is $1.03 and they are
convertible into a total of 243,655 shares of Novume common stock.
The Unit Warrants expire on November 23, 2023. As of December 31,
2018 and 2017, there are 502,327 Unit Warrants
outstanding.
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 $1.031 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, an affiliate of
Robert Berman, Novume’s CEO and a member of Novume’s
Board of Directors. These warrants were exercised on December 11,
2017 for proceeds of $125,006 and there are no Avon Road
Subordinated Note Warrants outstanding as of December 31, 2018 and
2017. On March 12, 2019, the $500,000 principal balance due on the
Avon Road Note was retired in its entirety (see Note
17).
Pursuant
to its acquisition of Firestorm on January 24, 2017, Novume issued
warrants to purchase 315,627 shares of Novume common stock,
exercisable over a period of five years, at an exercise price of
$2.5744 per share; and warrants to purchase 315,627 Novume Common
Shares, exercisable over a period of five years, at an exercise
price of $3.6083 per share. The expiration date of the Firestorm
warrants is January 24, 2022. As of December 31, 2018 and 2017,
there are 631,254 Firestorm warrants outstanding.
Pursuant
to its acquisition of BC Management on December 31, 2017, Novume
issued warrants to purchase 33,333 shares of Novume common stock,
exercisable over a period of five years, at an exercise price of
$5.44 per share; and warrants to purchase 33,333 Novume common
stock, exercisable over a period of five years, at an exercise
price of $6.53 per share. The expiration date of the BC Management
warrants is December 31, 2022. As of December 31, 2018 and 2017,
there are 66,666 BC Management warrants outstanding.
Pursuant
to its acquisition of Secure Education on January 1, 2018, Novume
issued warrants to purchase 33,333 shares of Novume common stock,
exercisable over a period of five years, at an exercise price of
$5.44 per share; and warrants to purchase 33,333 Novume common
stock, exercisable over a period of five years, at an exercise
price of $6.53 per share. The expiration date of the Secure
Education warrants is January 1, 2023. As of December 31, 2018,
there are 66,666 Secure Education warrants
outstanding.
On
November 1, 2018, in connection with the underwritten public
offering, the Company issued to the underwriters warrants to
purchase 206,250 shares of Novume common stock, exercisable over a
period of five years, at an exercise price of $1.00 per share. The
underwriter warrants have a value of approximately $0.2 million and
are exercisable commencing April 27, 2019 and expire on October 29,
2023.
NOTE 10 – WARRANT DERIVATIVE LIABILITY
On
March 17, 2015, Brekford issued a Warrant (“Brekford
Warrant”), which permits the holder to purchase 56,000 shares
of common stock with an exercise price of $7.50 per share and a
life of five years.
The
Brekford Warrant exercise price is subject to anti-dilution
adjustments that allow for its reduction in the event the Company
subsequently issues equity securities, including shares of common
stock or any security convertible or exchangeable for shares of
common stock, for no consideration or for consideration less than
$7.50 a share. The Company accounted for the conversion option of
the Brekford Warrant in accordance with ASC Topic 815. Accordingly,
the conversion option is not considered to be solely indexed to the
Company’s own stock and, as such, is recorded as a liability.
The derivative liability associated with the Brekford Warrant has
been measured at fair value at December 31, 2017 using the Black
Scholes option-pricing model. The assumptions used in the
Black-Scholes model are as follows: dividend yield of 0%;
expected volatility of 70.0% - 81.6%; weighted average risk-free
interest rate of 1.89%; expected life of 2.21-2.71 years; and
estimated fair value of the common stock of $1.80-$4.90 per
share.
Effective
October 16, 2018, the Company entered into exchange agreements with
holders of the Brekford Warrant pursuant to which the Company
issued to the holders an aggregate of 96,924 shares of common stock
in exchange for the return of the warrants to the Company for
cancellation and extinguishment of the warrant
liability.
At
December 31, 2018 and 2017, the outstanding fair value of the
derivative liability was $0 and $78,228, respectively.
NOTE 11 – 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 would
have expired 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 (the “Amended and Restated Option
Agreement”). Pursuant to the Amended and Restated Option
Agreement, Avon Road exercised the option to purchase 4,318,856
shares of Novume’s common stock. As of December 31, 2018,
Avon Road may be deemed to be the beneficial owner with shared
voting and dispositive power of 4,440,104 shares of Novume common
stock in the aggregate, or 23.7% of the class of securities. Mr.
Robert A. Berman may be deemed to be the beneficial owner of
4,462,104 shares of Novume common stock in the aggregate, or 23.8%
of the class of securities. As the general partner of Avon Road,
Mr. Berman may be deemed to share with Avon Road (and not with any
third-party) the power to vote or direct the vote of and to dispose
or direct the disposition of the 4,440,104 shares of Novume common
stock beneficially owned by Avon Road, or 23.7% of the class of
securities. In addition, as of December 31, 2018, Mr. James
McCarthy now holds directly 2,725,836 shares of Novume common and
he may be deemed to be the beneficial owner with sole voting and
dispositive power of 2,725,836 shares of Novume common stock, or
14.5% of the class of securities.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Operating Leases
During
2017 and 2018, AOC Key Solutions leased office space in Chantilly,
Virginia under the terms of a ten-year lease expiring
October 31, 2019. The lease contained one five-year renewal
option. The lease terms included an annual increase in base rent
and expenses of 2.75%, which have been amortized ratably over the
lease term.
During
this same period, AOC Key Solutions was the lessor in an agreement
to sublease office space in Chantilly, Virginia with an initial
term of two years, with eight one-year options for the subtenant to
renew the lease through October 31, 2019. This sublease
provided for annual increases in base rent and expenses of 2.90%.
The initial term ended October 31, 2011 and the subtenant
exercised the renewal options through 2014. On April 7, 2015,
the sublease was amended to sublease more space to the subtenant
and change the rental calculation. The sublease provided for an
offset of $182,534 to rent expense for each of the years ended
December 31, 2018 and 2017.
Effective
December 31, 2018, AOC Key Solutions terminated the original lease
agreement for the Chantilly, Virginia space, and on January 1,
2019, AOC Key Solutions entered into a new agreement as sublessor
for a portion of the original space occupied in this location. This
sublease includes annual increases in base rent and expenses of
2.75% and expires on June 30, 2024, with a right to renew subject
to the sublessor renewing its lease.
AOC Key
Solutions also leases office space in New Orleans, Louisiana under
the terms of a three-year lease which expired on May 31, 2018,
and lease payments are currently being made on a month-to-month
basis.
Firestorm
leases office space in Roswell, Georgia under the terms of a lease
expiring on January 31, 2022 and in Grand Rapids, Michigan under a
lease which expires April 30, 2019.
Brekford
leases office space from Global Public Safety, LLC on a
month-to-month basis. Brekford also leases space under an operating
lease expiring on April 30, 2019.
Global
leases office space in Fort Worth, Texas under the terms of a lease
expiring on January 31, 2022.
Rent expense for the years ended December 31, 2018 and 2017 was
$790,999 and $605,264, respectively, and is included in selling,
general and administrative expenses. As of December 31, 2018, the
future obligations over the primary terms of Novume’s
long-term leases expiring through 2024 are as
follows:
|
2019
|
$348,222
|
|
2020
|
337,437
|
|
2021
|
252,262
|
|
2022
|
193,898
|
|
2023
|
189,682
|
|
Thereafter
|
81,834
|
|
Total
|
$1,403,335
|
The Company is currently finalizing the impact of the FASB’s
new lease standard, ASU 2016-02, on its Consolidated Financial
Statements and related disclosures, as described in Note 2 to the
Consolidated Financial Statements.
NeoSystems
The Company planned to acquire NeoSystems LLC
(“NeoSystems”) through a forward merger under an
agreement entered into on November 16, 2017. The consummation of
the merger was subject to, among other things, the completion of
the Qualifying Offering by February 28, 2018, the proceeds of which
were expected to be used in connection with the contemplated
acquisition of NeoSystems. On March 7, 2018, the Company received
notice of termination of the Agreement and Plan of Merger (the
“NeoSystems Merger Agreement”). The stated basis of
termination by NeoSystems was due to the Company’s failure to
complete a Qualifying Offering, as defined in the NeoSystems Merger
Agreement, by February 28, 2018. The terms of the NeoSystems Merger
Agreement provided that upon termination, the Company was required
to pay certain fees and expenses of legal counsel, financial
advisors, investment bankers and accountants, which shall not
exceed in the aggregate $450,000 (the “Breakup Fee”).
During 2018, the Company paid NeoSystems a Breakup Fee of $225,000
which was recorded as a selling, general and administrative
expense.
OpenALPR Asset Purchase Agreement
On
November 14, 2018, the Company entered into an Asset Purchase
Agreement (the “OpenALPR Purchase Agreement”) by and
among Novume, OpenALPR and Matthew Hill pursuant to which the
Company will purchase all of the assets of OpenALPR and its
subsidiaries, except for certain excluded assets, and assume
certain liabilities as provided for in the OpenALPR Purchase
Agreement (the “OpenALPR Acquisition”). As
consideration for the OpenALPR Acquisition, Novume shall pay
$15,000,000, subject to certain adjustments, provided that OpenALPR
may elect to receive up to 1,000,000 shares of the Company’s
common stock, par value, $0.0001 per share, in lieu of up to
$5,000,000 in cash valued at a price per share of $5.
On
February 15, 2019, the Company entered into Amendment No. 1 to the
OpenALPR Purchase Agreement, pursuant to which the parties agreed
to amend the Base Purchase Price to $7,000,000, subject to
adjustment after closing, issue a promissory note in the amount of
$5,000,000, and issue 600,000 shares of Novume common stock as
consideration for the acquisition of OpenALPR’s
assets.
On
March 8, 2019, the Company entered into Amendment No. 2 to the
OpenALPR Asset Purchase Agreement which eliminated the working capital adjustment
set forth in the OpenALPR Asset Purchase Agreement, as amended, and replaced it
with an adjustment for prepaid maintenance
contracts.
On
March 12, 2019, the Company completed the acquisition of all of the
assets of OpenALPR, except for certain excluded assets, and assumed
certain liabilities, through Brekford. Consideration paid as part
of this acquisition was: (a) $7,000,000 in cash, subject to
adjustment after closing; (b) 600,000 shares of Novume common
stock, and (c) a promissory note in the principal amount of
$5,000,000 pursuant to the 2019 Promissory Note, together with an
accompanying warrant to purchase 625,000 shares of Novume common
stock, exercisable over a period of five years at an exercise price
of $0.74 per share, valued at $208,125 (see Note 17). As the
OpenALPR acquisition has recently been completed, the Company is
currently in the process of completing the purchase price
allocation treating the OpenALPR acquisition as a business
combination. The purchase price allocation for OpenALPR will be
included in the Company’s consolidated financial statements
in the first quarter of the year ending December 31, 2019. As of
March 31, 2019, there are 625,000 OpenALPR warrants
outstanding.
Hill Employment Agreement
Also,
on November 14, 2018, concurrent with the execution of the OpenALPR
Purchase Agreement, the Company entered into an employment
agreement with Matthew Hill (the “Hill Employment
Agreement”) which became effective as of March 12, 2019, the
closing date of the OpenALPR Purchase Agreement, pursuant to which
Mr. Hill began serving as the Company’s Chief Science
Officer. The Hill Employment Agreement provides for a term of three
years unless earlier terminated pursuant to the terms thereof which
term renews for additional one-year terms until terminated upon
ninety days advance notice. Mr. Hill will earn an annual base
compensation of $165,000.
Either
party may terminate the Hill Employment Agreement with or without
cause with notice as contemplated by the Hill Employment Agreement,
provided however, if Mr. Hill determines to terminate his
employment, he shall provide the Company with at least six months
prior written notice. The Hill Employment Agreement provides for
the payment of severance under certain circumstances as outlined
therein.
NOTE 13 – 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.
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 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.
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 2017
Plan for the years ended December 31, 2018 and 2017 is as
follows:
|
|
Number of Shares
Subject to Option
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
|
Outstanding
Balance at January 1, 2017
|
58,499
|
$1.68
|
9.29
|
|
|
Granted
|
1,638,331
|
2.21
|
9.29
|
|
|
Exercised
|
-
|
-
|
-
|
|
|
Forfeited
|
(1,455)
|
(1.55)
|
(9.07)
|
|
|
Expired
|
-
|
-
|
-
|
|
|
Outstanding
Balance at December 31, 2017
|
1,695,375
|
$2.19
|
9.26
|
$4,590,714
|
|
Granted
|
48,499
|
0.73
|
9.85
|
|
|
Exercised
|
(13,998)
|
1.68
|
9.50
|
|
|
Forfeited
|
(450,633)
|
1.82
|
8.71
|
|
|
Expired
|
(51,686)
|
1.36
|
8.53
|
|
|
Outstanding
Balance at December 31, 2018
|
1,227,557
|
$2.13
|
8.39
|
$-
|
|
Exercisable
at December 31, 2018
|
823,472
|
$1.87
|
8.32
|
$-
|
|
Vested
and expected to vest at December 31, 2018
|
1,107,236
|
$2.08
|
8.37
|
$-
|
Stock
compensation expense for the year ended December 31, 2018 and 2017
was $464,509 and $408,465, respectively, and is included in
selling, general and administrative expenses in the accompanying
consolidated statements of operations. The weighted average grant
date fair value of options granted for the years ended December 31,
2018 and 2017 was $0.73 and $2.21, respectively. The intrinsic
value of the stock options granted during the years ended December
31, 2018 and 2017, was $0 and $4,399,570, respectively. The total
fair value of shares that became vested after grant during the
years ended December 31, 2018 and 2017 was $325,095 and $1,624,252,
respectively.
As of
December 31, 2018, there was $428,557 of unrecognized stock
compensation expense related to unvested stock options granted
under the 2017 Plan that will be recognized over a weighted average
period of 1.75 years.
NOTE 14 – EMPLOYEE BENEFIT PLAN
AOC Key
Solutions has a defined contribution savings plan under Section
401(k) of the Internal Revenue Code (the “Code”) (the
“AOC 401(k) Plan”) which was amended on January 1,
2013, as required by the Code. Pursuant to the amended AOC 401(k)
Plan, AOC Key Solutions will make nondiscretionary “safe
harbor” matching contributions for all participants of 100%
of the participant’s salary deferrals up to 3%, and 50% of
deferrals up to the next 2%, of the participant’s
compensation.
Brekford has a defined contribution savings plan under Section
401(k) of the Code (the “Brekford 401(k) Plan”). The
Brekford 401(k) Plan is a defined contribution plan, which covers
substantially all U.S.-based employees who have completed three
months of service. The Brekford 401(k) Plan provides that Brekford
will match 50% of the participant salary deferrals up to 3% of a
participant’s compensation for all participants.
GCP
also maintains a 401(k) plan (the “GCP 401(k) Plan”),
which was amended September 15, 2014. However, GCP has not
historically made matching contributions to the GCP 401(k)
Plan.
The
amount of contributions recorded by the Company under these plans
during the years ended December 31, 2018 and 2017 were $158,893 and
$144,932, respectively.
On
January 1, 2019, Novume established the Novume Solutions, Inc.
401(k) Plan (the “Novume 401(k) Plan”), a Qualified
Automatic Contribution Arrangement (QACA) safe harbor plan, and the
AOC 401(k) Plan, the Brekford 401(k) Plan, and the GCP 401(k) Plan
were amended and merged into the Novume 401(k) Plan. Employees that
satisfied the eligibility requirements became participants in the
Novume 401(k) Plan. Novume contributes an amount equal to the sum
of 100% of a participant’s elective deferrals that do not
exceed 1% of participant’s compensation, plus 50% of the
participant’s elective deferrals that exceed 1% of the
participants compensation, but do not exceed 6% of the
participant’s compensation. Employee contributions are fully vested and
matching contributions are subject to a two-year service vesting
schedule.
NOTE 15 – INVENTORY
As of December 31, 2018 and December 31, 2017, inventory consisted
entirely of parts of $72,702 and $155,716,
respectively.
NOTE 16 – EARNINGS (LOSS) PER SHARE
The
following table provides information relating to the calculation of
earnings (loss) per common share:
|
|
For the Years
Ended December 31,
|
|
|
|
|
|
Basic and diluted
(loss) earnings per share
|
|
|
|
Net
(loss) earnings from continuing operations
|
$(5,703,499)
|
$(5,041,134)
|
|
Less:
preferred stock accretion
|
(655,103)
|
(550,655)
|
|
Less:
preferred stock dividends
|
(459,632)
|
(362,131)
|
|
Net
income (loss) attributable to shareholders
|
(6,818,234)
|
(5,953,920)
|
|
Weighted
average common shares outstanding - basic
|
15,409,014
|
11,767,304
|
|
Basic
(loss) earnings per share
|
$(0.44)
|
$(0.51)
|
|
Weighted
average common shares outstanding - diluted
|
15,409,014
|
11,767,304
|
|
Diluted
(loss) earnings per share
|
$(0.44)
|
$(0.51)
|
|
Common
stock equivalents excluded due to anti-dilutive effect
|
3,898,257
|
2,362,877
|
As the
Company had a net loss for the year ended December 31, 2018, the
following 3,898,257 potentially dilutive securities were excluded
from diluted loss per share as the Company had a net loss:
1,214,491 for outstanding
warrants, 974,487 related to
the Series A Preferred Stock, 481,722 related to the Series B Preferred
Stock and 1,227,557 related to outstanding options.
For the
year ended December 31, 2017, the following potentially
2,362,877 dilutive securities
were excluded from diluted loss per share as the Company had a net
loss: 968,766 for outstanding
warrants, 932,070 related to
the Series A Preferred Stock, 120,430 related to the Series B Preferred
Stock and 341,611 related to
outstanding options. In addition, 64,082 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.
(Loss) Earnings Per Share under Two –
Class Method
The
Series A Preferred Stock and Series B Preferred Stock have 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 and Series B Preferred Stock are
included in the computation of basic and diluted loss per share
pursuant to the two-class method. Holders of the Series A Preferred
Stock and Series B 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 years ended December 31,
2018 and 2017:
|
|
For the Years
Ended December 31,
|
|
|
|
|
|
Numerator:
|
|
|
|
Net
(loss) earnings from continuing operations
|
$(5,703,499)
|
$(5,041,134)
|
|
Less:
preferred stock accretion
|
(655,103)
|
(550,655)
|
|
Less:
preferred stock dividends
|
(459,632)
|
(362,131)
|
|
Net
income (loss) attributable to shareholders
|
$(6,818,234)
|
$(5,953,920)
|
|
Denominator
(basic):
|
|
|
|
Weighted
average common shares outstanding
|
15,409,014
|
11,767,304
|
|
Participating
securities - Series A preferred stock
|
974,487
|
932,070
|
|
Participating
securities - Series B preferred stock
|
481,722
|
120,430
|
|
Weighted
average shares outstanding
|
16,865,223
|
12,819,804
|
|
|
|
|
|
Loss per common
share - basic under two-class method
|
$(0.40)
|
$(0.46)
|
|
|
|
|
|
Denominator
(diluted):
|
|
|
|
Weighted
average common shares outstanding
|
15,409,014
|
11,767,304
|
|
Participating
securities - Series A preferred stock
|
974,487
|
932,070
|
|
Participating
securities - Series B preferred stock
|
481,722
|
120,430
|
|
Weighted
average shares outstanding
|
16,865,223
|
12,819,804
|
|
|
|
|
|
Loss per common
share - basic under two-class method
|
$(0.40)
|
$(0.46)
|
NOTE 17 – SUBSEQUENT EVENTS
Leasing Agreements
On
January 1, 2019, AOC Key Solutions entered into a new agreement as
sublessor for a portion of the original space occupied in
Chantilly, Virginia. This sublease includes annual increases in
base rent and expenses of 2.75% and expires on June 30, 2024, with
a right to renew subject to the sublessor renewing its
lease.
On
February 19, 2019, Secure Education entered into a lease assignment
transferring its interest in and to the lease for its office space
in Grand Rapids, Michigan, effective April 30, 2019.
Establishment of Novume 401(k) Plan
On
January 1, 2019, Novume established the Novume Solutions, Inc.
401(k) Plan (the “Novume 401(k) Plan”), a Qualified
Automatic Contribution Arrangement (QACA) safe harbor plan, and the
AOC 401(k) Plan, the Brekford 401(k) Plan, and the GCP 401(k) Plan
were amended and merged into the Novume 401(k) Plan (see Note 14).
Employees that satisfied the eligibility requirements became
participants in the Novume 401(k) Plan. Novume contributes an
amount equal to the sum of 100% of a participant’s elective
deferrals that do not exceed 1% of participant’s
compensation, plus 50% of the participant’s elective
deferrals that exceed 1% of the participants compensation, but do
not exceed 6% of the participant’s compensation. Employee contributions are fully vested and
matching contributions are subject to a two-year service vesting
schedule.
Amendments to the OpenALPR Asset Purchase Agreement
On
February 15, 2019, the Company entered into Amendment No. 1 to the
OpenALPR Asset Purchase Agreement, pursuant to which the parties
agreed to amend the Base Purchase Price to $7,000,000, subject to
adjustment after closing, issue a promissory note in the amount of
$5,000,000, and issue 600,000 shares of Novume common stock as
consideration for the acquisition of OpenALPR’s
assets.
On
March 8, 2019, the Company entered into Amendment No. 2 to the
OpenALPR Asset Purchase Agreement which eliminated the working capital adjustment
set forth in the OpenALPR Asset Purchase Agreement, as amended, and replaced it
with an adjustment for prepaid maintenance
contracts.
Series A Preferred Stock and Unit Warrants Designated as OTCQB
Securities
On
February 15, 2019, the Company’s Series A Preferred Stock and
Unit Warrants which had been designated as securities trading on
the OTC Markets OTCQX exchange were transferred to being designated
as trading on the OTC Markets OTCQB exchange.
Renaming of Brekford to Rekor Recognition Systems,
Inc.
On
February 28, 2019, the Company renamed Brekford to Rekor
Recognition Systems, Inc. (see Note 1).
2019 Promissory Note
On
March 12, 2019, Novume entered into a note purchase agreement
pursuant to which investors (the “2019 Lenders”) loaned
$20,000,000 to Novume (the “2019 Promissory Note”) and
the Company issued to the 2019 Lenders warrants to purchase
2,500,000 shares of Novume common stock (the “March 2019
Warrants”). The loan is due and payable on March 11, 2021 and
bears interest at 16% per annum, of which at least 10% per annum
shall be paid in cash. The full remaining portion of all interest,
if any, shall accrue and be paid-in-kind. The notes also require
(a) a premium, if paid before the maturity date, (b) a $1,000,000
exit fee due at maturity, and (c) compliance with affirmative,
negative and financial covenants. Transaction costs were
approximately $403,250 for a work fee payable over 10 months,
$290,000 in legal fees and a $200,000 closing fee. The loan is
secured by a security interest in substantially all of the assets
of Novume. The March 2019 Warrants are exercisable over a period of
five years, at an exercise price of $0.74 per share, and are valued
at $832,500. The warrants are exercisable commencing March 12, 2019
and expire on March 12, 2024. The 2019 Promissory Note has an
effective interest rate of 24.87%.
Payoff of $500,000 Avon Road Note
On
March 12, 2019, the $500,000 principal balance due on the Avon Road
Note was retired in its entirety (see Note 9).
Payoff of $2,000,000 Promissory Note
On
March 12, 2019, the $2,000,000 principal balance due on the 2018
Promissory Note was retired in its entirety and the Company paid to
the Lender $1,050,000 of consideration for the Lender’s
Participation and $50,000 of interest due through May 1, 2019 (see
Note 7).
OpenALPR Acquisition
On
March 12, 2019 and pursuant to the OpenALPR Asset Purchase
Agreement, as amended, the Company completed the acquisition of all
of the assets of OpenALPR, except for certain excluded assets, and
assumed certain liabilities, through Brekford. Consideration paid
as part of this acquisition was: (a) $7,000,000 in cash, subject to
adjustment after closing; (b) 600,000 shares of Novume common
stock, and (c) a promissory note in the principal amount of
$5,000,000 pursuant to the 2019 Promissory Note (as defined above),
together with an accompanying warrant to purchase 625,000 shares of
Novume common stock, exercisable over a period of five years at an
exercise price of $0.74 per share, valued at $208,125. As the
OpenALPR acquisition has recently been completed, the Company is
currently in the process of completing the purchase price
allocation treating the OpenALPR acquisition as a business
combination. The purchase price allocation for OpenALPR will be
included in the Company’s consolidated financial statements
in the first quarter of the year ending December 31, 2019. As of
March 31, 2019, there are 625,000 OpenALPR warrants
outstanding.
Hill Employment Agreement
On
March 12, 2019, concurrent with the execution of the OpenALPR
Purchase Agreement, the Hill Employment Agreement became effective,
pursuant to which Mr. Hill will serve as Chief Science Officer of
the Company (see Note 12).
