REKOR SYSTEMS, INC.
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
10-K
(Mark
One)
☒
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal
year ended December 31, 2017
OR
☐TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
transition period
from to
Commission File
Number: 001-55833
Novume Solutions,
Inc.
(Exact name of
registrant as specified in its charter)
|
Delaware
|
8742
|
81-5266334
|
|
(State or other
jurisdiction of
incorporation or
organization)
|
(Primary Standard
Industrial
Classification
Code Number)
|
(I.R.S. Employer
Identification No.)
|
14420 Albemarle
Point Place, Suite 200,
Chantilly, VA,
20151
(703)
953-3838
(Address,
including ZIP code, and telephone number, including area code, of
registrant’s principal executive offices)
Corporation Trust
Company
1209 Orange
Street
Wilmington, DE
19801
(Name, address,
including ZIP code, and telephone number, including area code, of
registrant’s agent for service)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past
90 days. Yes
☒
No
☐
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
☒
No
☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
|
Large accelerated
filer
☐
|
Accelerated filer
☐
|
|
|
Non-accelerated
filer
☐
|
(Do not check if a smaller reporting
company)
|
Smaller reporting
company
☒
Emerging growth
company
☐
|
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act.
☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
☐
No
☒
The aggregate market value of the
registrant’s voting and non-voting stock held by
non-affiliates of the registrant as of August 29, 2017 was
approximately $41.8 million.
As of March 31, 2018, the Registrant
had 14,496,697
shares of
common stock, $0.0001 par value per share
outstanding.
TABLE OF
CONTENTS
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Page
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PART I
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4
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Item 1.
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Business
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4
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Item 1A.
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Risk
Factors
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11
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Item 1B.
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Unresolved Staff
Comments
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24
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Item 2.
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Properties
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24
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Item 3.
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Legal
Proceedings
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24
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Item 4.
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Mine Safety
Disclosures
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24
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PART II
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25
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Item 5.
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Market for
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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25
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Item 6.
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Selected Financial
Data
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26
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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27
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Item 7A.
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Quantitative and
Qualitative Disclosures about Market Risk
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43
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Item 8.
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Financial Statements
and Supplementary Data
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43
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Item 9.
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Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
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75
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Item 9A.
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Controls and
Procedures
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75
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Item 9B.
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Other
Information
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76
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PART III
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76
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Item 10.
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Directors, Executive
Officers and Corporate Governance
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76
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Item 11.
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Executive
Compensation
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84
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Item 12.
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Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
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88
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Item 13.
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Certain Relationships
and Related Transactions, and Director Independence
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89
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Item 14.
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Principal Accountant
Fees and Services
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89
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PART IV
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90
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Item 15.
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Exhibits, Financial
Statements Schedules
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90
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Item 16.
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Form 10-K
Summary
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92
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2
CERTAIN
DEFINITIONS
Unless the context requires
otherwise, all references in this Annual Report on Form 10-K
(the “Annual Report”) to “Novume Solutions,
Inc.,” “Novume,” “Company,”
“we,” “our” and “us” refer to
Novume Solutions, Inc. and its consolidated
subsidiaries.
SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report contains
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that involve substantial
risks and uncertainties. All statements other than statements of
historical facts contained in this Annual Report, including
statements regarding our future results of operations and financial
position, business strategy, prospective products and services,
timing and likelihood of success, plans and objectives of
management for future operations, and future results of current and
anticipated products and services, are forward-looking statements.
These statements involve known and unknown risks, uncertainties and
other important factors that may cause our actual results,
performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by
the forward-looking statements.
In some cases, you can identify
forward-looking statements by terms such as “may,”
“will,” “should,” “expect,”
“plan,” “anticipate,” “could,”
“intend,” “target,” “project,”
“contemplates,” “believes,”
“estimates,” “predicts,”
“potential” or “continue” or the negative
of these terms or other similar expressions. The forward-looking
statements in this Annual Report are only predictions. These
forward-looking statements are based largely on current
expectations and projections about future events and financial
trends that we believe may affect our business, financial condition
and results of operations. These forward-looking statements speak
only as of the date of this Annual Report and are subject to a
number of risks, uncertainties and assumptions described under the
sections in this Annual Report entitled “Risk Factors”
and elsewhere in this Annual Report. Because forward-looking
statements are inherently subject to risks and uncertainties, some
of which cannot be predicted or quantified and some of which are
beyond our control, you should not rely on these forward-looking
statements as predictions of future events. The events and
circumstances reflected in our forward-looking statements may not
be achieved or occur and actual results could differ materially
from those projected in the forward-looking statements. These
forward-looking statements may not be realized due to a variety of
factors, including, without limitation:
●
our history of losses;
●
difficulties in remaining competitive in the
markets the companies serve;
●
the
effects of future economic, business and market
conditions;
●
difficulties in
successfully managing our businesses;
●
difficulties in
achieving cost savings, operating efficiencies and new revenue
opportunities as a result of our acquisitions, and the incurrence
of unforeseen costs and expenses;
●
the
effects of the uncertainty of the acquisitions we complete on
relationships with customers, employees and suppliers;
●
consolidation in
the industries we serve;
●
limitations on
our ability to continue to develop, manufacture and market
innovative products and services;
●
costs and risks
associated with acquisitions;
●
our
failure to realize anticipated benefits from other acquisitions or
the possibility that such acquisitions could adversely affect us,
and risks relating to the prospects for future
acquisitions;
●
the
loss of key employees and the ability to retain and attract key
personnel, including technical and managerial
personnel;
●
quarterly and
annual fluctuations in results of operations;
●
the
diminished demand for our services;
●
the
effects of war, terrorism, natural disasters or other catastrophic
events; and
●
other risks and
uncertainties, including those listed under the heading “Risk
Factors” in this Annual Report.
3
As a
result of these and other factors, the events and circumstances
reflected in our forward-looking statements may not be achieved or
occur and actual results could differ materially from those
projected in the forward-looking statements. Moreover, we operate
in an evolving environment. New risk factors and uncertainties may
emerge from time to time, and it is not possible for us to predict
all risk factors and uncertainties. Except as required by
applicable law, we do not plan to publicly update or revise any
forward-looking statements contained herein, whether as a result of
any new information, future events, changed circumstances or
otherwise. A discussion of factors that could cause actual
conditions, events or results to differ materially from those
expressed in any forward-looking statements appears in
“Part 1-Item 1A-Risk Factors.”
Readers
are cautioned not to place undue reliance on forward-looking
statements in this Annual Report or that we make from time to time,
and to consider carefully the factors discussed in
“Part 1-Item 1A-Risk Factors” of this Annual
Report in evaluating these forward-looking statements. These
forward-looking statements are representative only as of the date
they are made, and we undertake no obligation to update any
forward-looking statement as a result of new information, future
events or otherwise.
Company Overview
We are
a leading provider of support services to the government
contracting market. Generally speaking, our clients are companies
that serve the government. We:
●
Capture
business by
helping our clients to win government contracts.
●
Manage
risk by
being prepared for, and responding to, disruptive events and
creating secure systems.
●
Run
client back-end
services by providing various managed services.
●
Perform
their
contract requirements by providing specialized staffing services
primarily in the aerospace and aviation industries.
We
support the government contracting industry that:
●
Represented over
$439 billion of U.S. federal government spending in FY 2017
according to USASpending.gov.
●
Has
proven to be relatively recession resistant.
●
Has,
according to the U.S. federal government’s SAM database, as
of January 2, 2018, over 528,000 government contractors of which
over 52,000 are located in Washington, DC, Maryland and Virginia,
many of which are located in an area commonly known as the
"Beltway" and are in close proximity to our
headquarters.
We see
the professional services support sector of the industry in which
we operate as:
●
Highly
fragmented
●
Comprised of
numerous small- and medium-sized businesses that are ripe for
consolidation.
We
believe these factors provide extraordinary growth opportunities
for us.
4
Description of Services
Government Contracting Support Solutions
Our
solutions assist government contractors with critical aspects of
their business. Our services include:
●
Market
intelligence and opportunity identification
●
Capture and
strategic advisory
●
Proposal
strategy and development
●
Teaming
support
●
Managed human
capital services
Our
services also help commercially-focused firms gain entry into the
government contracting market. Since 1983, we have assisted our
clients with over $170 billion of government contract
awards.
Risk
Mitigation and
Crisis Management
We
combine best practice consulting with proven crisis management
expertise, empowering clients to both anticipate and evaluate risks
and manage disruptive events when they occur. We assess, audit,
develop, train and test strategies and programs
encompassing:
●
Predictive
intelligence
●
Business
continuity
●
Risk
assessment
●
Crisis
management and communications
●
Emergency and
cyber incident response
●
Behavioral risk
and threat assessment
●
Workplace
violence prevention
We are
focused on prevention in addition to planning and response
initiatives. For example, our behavioral risk and threat assessment
program,
BERTHA
®
,
positions schools, businesses and other organizations to prevent
violence from occurring. This program helps our clients to identify
early warning signs that may be exhibited by an individual before
they are on a path to violence.
By
educating others on emerging threats and strategies to combat those
threats, we increase awareness of our initiatives through no-fee
webinars, stress tests, and social media and blog articles that
include analyses by members of our highly-credentialed expert
council. We partner with industry associations and aggregators to
deliver meaningful risk mitigation strategies and education. We
also serve clients ranging from some of the world’s largest
global companies to main street businesses across all industry
sectors. We offer services to clients that enhance their ability to
manage risk and respond to adverse events, thereby minimizing
people, brand, reputation, financial, legal and regulatory
impacts.
5
Specialty Staffing
We
provide quality specialized contract personnel, temp-to-hire
professionals, direct hires, and temporary or seasonal hires to the
Department of Defense and a diverse group of companies in the
aerospace and aviation industry nationally and have been
instrumental in placing highly-skilled technical professionals in
some of the world’s most prestigious engineering firms and
government facilities for over 20 years. Some of the professionals
that we place in the aerospace and aviation industry
include:
●
FAA
Certified Airframe & Power Plant Mechanics
●
Avionics and
Embedded Software Engineers
●
FCC
Certified Avionic Technicians
●
I.A.
Licensed Aircraft Inspectors
●
Flight Test
Engineers
●
Process/Repair
Engineers
●
Simulation
Engineers
Since
they operate as professional services companies, our recent
acquisitions of Global Technical Services, Inc. and Global Contract
Professionals, Inc. (collectively referred to as
“Global” or the "Global Entities") represented a
material change in our business operations, but were consistent
with our corporate strategy of acquiring and building professional
services companies that add to the product mix that we can provide
to our subsidiaries’ existing customer base. Because of the
time-sensitive aspects of their contracts, specialty staffing is a
service that most large aviation and aerospace companies need, and
our customers use specialty staffing to fulfill a variety of roles.
We believe Global also has the potential to provide specialty
staffing support to contractors outside of the aviation and
aerospace sectors, thereby supporting a wider spectrum of clients.
After completing the acquisition, we began, and are currently
continuing the integration of the administrative functions and
marketing efforts of Global into our operations.
Our Industry
According
to USASpending.gov, the U.S. federal government spent an average of
over $450 billion each year from FY 2013 through 2017 for goods and
services, creating one of the largest and most stable markets in
the world, and there are thousands of government contractors
providing these goods and services. We provide professional
services that offer scalable and compliant outsourced support to
companies that deliver these goods and services.
The
industry in which we operate is fragmented with many small firms
providing niche services.
A
unique characteristic of this industry is that many of these
companies are concentrated in the Beltway. The U.S. federal
government’s contract spending in Virginia, Maryland and the
District of Columbia was more than $92 billion in FY 2017,
according to USASpending.gov. This represents 21% of the $436
billion of total contract spending in FY 2017.
Because
of the geographic concentration of these clients, there is also a
large, but fragmented, concentration of service providers for these
companies. Although the businesses that provide resources to the
government contracting sector are diverse and highly fragmented,
their clients have many common needs resulting from the basic
qualifications and standard requirements inherent in the government
procurement process. We believe that there is a unique opportunity
for consolidation in this sector, both in the Washington, DC
market, and in other parts of the country.
While
our immediate goal is to improve our ability to serve this sector
by pooling our subsidiaries’ resources and client contacts,
our ultimate objective is to expand our ability to meet the unique
needs of this sector by assembling, through organic growth and
strategic acquisitions, a complimentary suite of service and
systems providers with demonstrated ability to satisfy its need for
high value talent and support services. In addition to the benefits
of shared costs and pooled resources, we expect to benefit from the
increased client involvement that targeted expansion of our market
segments can provide. Drawing on the insights and experience of our
combined leadership team, we expect to both increase our contact
with, and improve our understanding of, the needs of the
enterprises we serve. We would like to be recognized as the best
place to go for outsourced services when a government contractor
must meet an unusual need.
6
Clients
To be a
government contractor, a company must be able to meet rigid
standards. As a result, our clients are typically well-established,
financially-stable businesses with both a reputation for excellence
and high standards and a demonstrated ability to survive and
prosper through innovation and adaptation.
The
U.S. federal government’s SAM database as of March 23, 2018
includes over 529,000 government contractors and approximately
52,000 are located in Washington, DC, Maryland and Virginia.
Government contractors range from small privately-owned lifestyle
companies to members of the Fortune 100.
Since
1983, we have served thousands of these entities. In 2017, we
provided services to 14 of the Top 100 largest federal contractors
(based on their fiscal 2016 prime contracts in IT, systems
integration, professional services and telecommunications) as
identified by Washington Technology (
https://washingtontechnology.com/toplists/top-100-lists/2017.aspx
).
Marketing and Sales
We
obtain client engagements primarily through business development
efforts, cross-selling of our services to existing clients, and
maintaining client relationships, as well as referrals from
existing and former clients.
Our
business development efforts emphasize lead generation, industry
group networking and corporate visibility. Most of our business
development efforts are led by members of our professional teams,
who are also responsible for managing projects. Our business
development efforts are further supported by personnel located at
our corporate headquarters.
We are
working to position ourselves as a preferred, single-source
provider of specialized professional services to our clients. As
our service offerings become more diverse, we anticipate increasing
our cross-selling opportunities. Our goals are to offer a broader
range of services to existing clients and to broaden our client
base using our existing value-added solutions.
Competition
We
believe that the sectors in which we operate are highly fragmented
and characterized by many smaller companies generally having fewer
than ten employees. These companies tend to focus their operations
on local customers or specialized niche activities. As a result, we
compete with many smaller, more specialized companies that
concentrate their resources in particular areas of expertise. The
extent of our competition varies according to sectors and
geographic areas.
We
believe we compete on quality of service, relevant experience,
staffing capabilities, reputation, geographic presence, stability,
and price. Price differentiation remains an important element in
competitive tendering and is a significant factor in bidding for
contracts. The importance of the foregoing factors varies widely
based upon the nature, location, and scale of our clients’
needs. We believe that certain economies of scale can be realized
by service providers that establish a national presence and
reputation for providing high-quality and cost-effective services.
Our ability to compete successfully will depend upon the
effectiveness of our marketing efforts, the strength of our client
relationships, our ability to accurately estimate costs and bid for
work, the quality of the work we perform and our ability to hire
and train qualified personnel.
Competitive Strengths
We
believe we have the following competitive strengths:
●
Experienced, talented, and
motivated professionals
– We employ seasoned
professionals with a broad array of specialties, a strong customer
service orientation and in many cases, the required professional
certifications and advanced degrees. Our executive officers have
significant operating and management experience and have been
involved in analyzing potential acquisition transactions. We place
a high priority on attracting, motivating and retaining top
professionals to serve our clients, and our compensation system
emphasizes the use of performance-based incentives, including
opportunities for stock ownership, to achieve this
objective.
●
Niche expertise
– The services that we provide are highly-specialized
professional services that have high barriers to entry. While we
have a base of in-house professionals, we also have access to a
very large group of consultants who can provide subject matter
expertise for unique projects and who can supplement our workforce
based on client demand.
7
●
Industry-recognized
quality of service
– We believe that we have developed
a strong reputation for quality service based upon our
industry-recognized depth of experience, ability to attract and
retain quality professionals, and expertise across multiple service
sectors.
●
Strong, long-term client
relationships
–
Our combination of niche
market experience and professionals with requisite expertise has
enabled us to develop strong relationships with our core clients.
By serving clients on a long-term basis, we are able to gain a deep
understanding of their overall business needs as well as the unique
technical requirements of their projects. This increased
understanding gives us the opportunity to provide superior value to
our clients by allowing us to more fully assess and better manage
the risks inherent in their projects.
●
One-stop shop
– The combination of services we offer allows our clients to
focus on executing their contracts and getting more work by not
being encumbered with administrative functions required when doing
business with the government.
Growth Strategies
We
intend to use the following growth strategies as we seek to expand
our market share in our current areas of expertise and eventually
position ourselves as a preferred provider of comprehensive
specialized professional services to our clients:
●
Strategic
Acquisitions
–
We seek acquisitions that
allow us to expand or enhance our capabilities in our existing
service offerings. In analyzing new acquisitions, we pursue
opportunities that function as profitable stand-alone operations or
are complementary to our existing businesses. We believe that
expanding our business through strategic acquisitions will enable
us to exploit economies of scale in the areas of finance, human
resources, marketing, administration, information technology, and
legal, while also providing cross-selling opportunities among our
vertical service offerings.
●
Common Theme
– Most government contractors need the various services that
we provide. Our companies sell to the same client pool allowing for
one-stop-shop, cross selling opportunities.
●
Geographic
Expansion
– Parts of the country have substantial
government presence that allow for easy expansion of our footprint,
such as the U.S. Navy in San Diego and the U.S. Air Force in
Denver.
●
Business
Development
– With additional resources we intend to
grow our business by investing in a larger sales force and
integrated client relationship management tools.
The
universe of providers that service our clients is fragmented and
diverse. Drawing on the insights and experience of our combined
leadership team, we expect to both increase our contact with, and
improve our understanding of, the needs of the enterprises we
serve. By working together under common leadership, we believe our
combined companies can better identify the qualities in our
companies that the world’s leading businesses value most. We
will then work to further enhance each company’s ability to
perform in these areas by providing material support as well as
exchanges of talent and ideas. By using our increased contact with
our clients, we will also be working to enhance our clients’
awareness of these capabilities across our platform.
Through
our core businesses, we occasionally become aware of situations
where our resources can play a critical role in bringing an
organization to the next level in its development. Under
appropriate circumstances we may acquire, receive or retain an
interest in these organizations as part of our enterprise
initiative. Brekford Traffic Safety, Inc. (“Brekford”)
serves as a public safety technology services provider of fully
integrated automated traffic safety enforcement solutions,
including speed and red-light enforcement cameras, and a
comprehensive citation management software suite. Brekford has
recently announced the development of a first-of-its-kind camera
and data management system designed to track and monitor violations
of “move over laws.” The National Law Enforcement
Officers Memorial Fund reports that in the past decade, 126 police
officers have been killed when struck by vehicles. The Emergency
Responder Safety Institute estimates that about seven emergency
workers and 50 tow operators are killed annually by passing
vehicles. In addition, there are many unreported injuries and near
misses.
Our History
We are
a Delaware corporation that was formed in February 2017 to
effectuate the mergers of, and become a holding company for
KeyStone Solutions, Inc. (“KeyStone”) and Brekford. Our
services are provided through six wholly owned subsidiaries: AOC
Key Solutions, Inc.; Firestorm Solutions, LLC and Firestorm
Franchising, LLC (collectively referred to as
“Firestorm” or “Firestorm Entities”);
Global Technical Services, Inc. and Global Contract Professionals,
Inc. (collectively referred to as “Global” or the
"Global Entities"); and Novume Media, Inc. (“Novume
Media”).
8
We
conduct core operations through our primary operating
subsidiaries:
●
Government
Contracting Support Solutions
– AOC Key Solutions has
been helping government contractors to win business since
1983.
●
Risk
Mitigation and Crisis Management
– Firestorm has been
in business since 2005.
●
Specialty
Staffing
– Global provides these services and has been
supplying personnel to the aerospace/aviation industry since
1989.
Strategic Acquisitions
BC Management Acquisition
On
December 31, 2017, Novume completed its acquisition of certain
assets of BC Management, Inc. (“BC Management”). BC
Management provides staffing and research services for the business
continuity, disaster recovery, crisis management, risk management,
and information security sectors and will augment the risk
mitigation and crisis management services we provide to our
clients.
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.
As the BC Management acquisition has recently been completed, the
Company is currently in the process of completing the purchase
price allocation treating the BC Management acquisition as a
business combination. The 2017 financial statements include the
preliminary purchase price allocation for BC Management. Any
revision in the purchase price allocation will be included in the
Company’s consolidated financial statements in future
periods.
Global Acquisition
On
October 1, 2017 (the “Global Closing Date”), the
Company completed its acquisition of Global Technical Services,
Inc. (“GTS”) and Global Contract Professionals, Inc.
(“GCP) (collectively, the “Global Entities”) (the
“Global Merger”). Consideration paid as part Global
Merger included: (a) $750,000 in cash, (b) 375,000 shares of Novume
common stock and (c) 240,861 shares of Novume Series B Cumulative
Convertible Preferred Stock (the “Novume Series B Preferred
Stock”). In addition to the merger consideration, Novume paid
$365,037 to satisfy in full all of the outstanding debt of GTS and
GCP at closing, except for certain intercompany debt and ordinary
course debt, and amounts due under (a) the Secured Account Purchase
Agreement dated August 22, 2012 by and between GTS and Wells
Fargo Bank
, National Association (the
“GTS Wells Fargo Credit Facility”) and (b) the Secured
Account Purchase Agreement dated August 22, 2012 by and
between GCP and Wells Fargo Bank, National Association (the
“GCP Wells Fargo Credit Facility” and together with the
GTS Wells Fargo Credit Facility, the “Wells Fargo Credit
Facilities”), which will remain in effect following the
consummation of the Global Merger. In connection with the Wells
Fargo Credit Facilities, Novume has delivered to Wells Fargo Bank,
National Association, general continuing guaranties dated September
29, 2017 and effective upon the Global Closing Date of the Global
Merger (the “Wells Fargo Guaranty Agreements”),
guaranteeing the 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 the Global Closing Date.
As part
of the Global Merger, the Company created 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 the Global Merger. The Series B Preferred
Stock is entitled to quarterly cash dividends of 1.121% (4.484% per
annum) per share. The Series B Preferred Stock has a conversion
price of $5.00 per share. Each Series B Preferred Stock has an
automatic conversion feature based on the share price of
Novume.
Brekford Acquisition
On
August 28, 2017, the mergers by and among Novume, KeyStone,
Brekford, Brekford Merger Sub, Inc. (“Brekford Merger
Sub”), and KeyStone Merger Sub, LLC (“KeyStone Merger
Sub”) (the “Brekford Merger”),
were consummated. As a result, Brekford
became a wholly-owned subsidiary of the Novume, and Brekford Merger
Sub ceased to exist. KeyStone Merger Sub also became a wholly-owned
subsidiary of the Novume, and KeyStone Solutions, Inc. ceased to
exist. When KeyStone Merger Sub filed its certificate of merger
with the Secretary of State of the State of Delaware, it
immediately effectuated a name-change to KeyStone Solutions, LLC,
the name by which it is now known.
9
Upon completion of the Brekford Merger, the merger consideration
was issued in accordance with the
terms of the merger
agreement
. Immediately upon
completion of the Brekford Merger, the pre-merger stockholders of
KeyStone owned approximately 80% of the issued and outstanding
capital stock of the Novume on a fully-diluted basis, and the
pre-merger stockholders of Brekford owned approximately 20% of the
issued and outstanding capital stock of the Novume on a
fully-diluted basis.
Firestorm Acquisition
On
January 25, 2017 (the “Firestorm Closing Date”),
Novume acquired the Firestorm Entities. Pursuant to the terms of
the Membership Interest Purchase Agreement (the
“MIPA”), by and among Novume, each of the Firestorm
Entities, each of the Members of the Firestorm Entities, and a
newly created acquisition subsidiary of Novume, Firestorm Holdings,
LLC (“Firestorm Holdings”), Novume acquired all of the
membership interests in each of the Firestorm Entities for the
following consideration:
●
$500,000 in cash in
the aggregate paid by Novume as of the Firestorm Closing Date to
the three principals of Firestorm (“Firestorm
Principals”);
●
$1,000,000 in the
aggregate in the form of four unsecured, subordinated promissory
notes issued by Novume payable over five years after the Firestorm
Closing Date, to all the members (consisting of the Firestorm
Principals and the fourth member of the Firestorm Entities (the
“Fourth Member”). The notes payable to the Firestorm
Principals are individually referred to herein as a
“Firestorm Principal Note” and collectively, as the
“Firestorm Principal Notes”. The Firestorm Principal
Notes are payable at an interest rate of 2% and the Fourth Member
Note is payable at an interest rate of 7%;
●
Each of the
Firestorm Principals was issued 162,698 (315,625 post Brekford
Merger) shares of Novume common stock, par value $0.0001 per share,
for an aggregate issuance of 488,094 (946,875 post Brekford Merger)
shares of Novume common stock;
●
Each of the
Firestorm Principals received warrants to purchase 54,233 (105,209
post Brekford Merger) shares of Novume common stock, exercisable
over a period of five years after the Firestorm Closing Date, at an
exercise price of $2.58 per share; and
●
Each of the
Firestorm Principals received warrants to purchase 54,233 (105,209
post Brekford Merger) shares of Novume common stock, exercisable
over a period of five years after the Firestorm Closing Date, at an
exercise price of $3.60 per share.
Reportable Segments
Based
on its analysis of current operations, management has determined
that Novume has only one reportable segment, which is Novume.
Management will continue to reevaluate its segment reporting as the
Company grows and matures. However, the chief operating
decision-maker currently uses aggregate results to make operating
and strategic decisions, and, therefore, the Company believes its
entire operation is currently covered under a single reportable
segment.
Employees
As of
March 31, 2018, Novume had 120 employees, of which 110 were full
time, and access to approximately 400 consultants. We consider our
employee relations to be good. To date, we have been able to locate
and engage highly-qualified employees as needed and do not expect
our growth efforts to be constrained by a lack of qualified
personnel.
Trends and Seasonality
We
generate revenues from fees and reimbursable expenses for
professional services primarily billed on an hourly rate,
time-and-materials (“T&M”) basis. Clients are
typically invoiced monthly, with revenue recognized as the services
are provided. T&M contracts represent over 95% of our client
engagements and do not provide us with a high degree of
predictability of future period performance. In a few cases, a
fixed-fee engagement for our services may be entered into.
Fixed-fee engagements can be invoiced once for the entire job, or
there could be several “progress” invoices for
accomplishing various phases or reaching contractual
milestones.
Novume’s
financial results are impacted principally by the:
1)
demand by clients
for services;
2)
the degree to which
full-time staff can be kept occupied in revenue-generating
activities;
3)
success of the
sales team in generating client engagements; and
4)
number of business
days in each quarter.
10
The
number of business days on which revenue is generated by our staff
and consultants is affected by the number of vacation days taken,
as well as the number of holidays in each quarter. There are
typically fewer business work days available in the fourth quarter
of the year, which can impact revenues during that period. The
staff utilization rate can also be affected by seasonal variations
in the demand for services from clients. Since earnings may be
affected by these seasonal variations, results for any quarter are
not necessarily indicative of the results that may be achieved for
a full fiscal year.
Unexpected
changes in the demand for our services can result in significant
variations in revenues, and present a challenge to optimal hiring,
staffing and use of consultants. The volume of work performed can
vary from period to period.
Insurance and Risk Management
We maintain insurance covering professional liability and claims
involving bodily injury, property and economic loss. We consider
our present limits of coverage, deductibles, and reserves to be
adequate. Whenever possible, we endeavor to eliminate or reduce the
risk of loss on a project through the use of quality assurance and
control, risk management, workplace safety, and other similar
methods.
Risk management is an integral part of our project management
approach for fixed-price contracts and our project execution
process. We also evaluate risk through internal risk analyses in
which our management reviews higher-risk projects, contracts, or
other business decisions that require corporate legal and risk
management approval.
Regulation
We are
regulated in some of the fields in which we operate. When working
with governmental agencies and entities, we must comply with laws
and regulations relating to the formation, administration, and
performance of contracts. These laws and regulations contain terms
that, among other things may require certification and disclosure
of all costs or pricing data in connection with various contract
negotiations. We also work with U.S. federal government contractors
and have staff cleared to work on classified materials. One of our
leased facilities is cleared for classified material. We are
subject to the laws and regulations that restrict the use and
dissemination of information classified for national security
purposes.
To help
ensure compliance with these laws and regulations, our employees
are sometimes required to complete tailored ethics and other
compliance training relevant to their position and our
operations.
Risks Relating to Our Corporate Structure and Business
We are currently not profitable and we may be unable to become
profitable on a quarterly or annual basis.
For the
year ended December 31, 2017, we had a loss from operations
before taxes of $5,335,799. We cannot assure that we will be
profitable in the future. Our ability to become profitable in
future periods could be impacted by budgetary constraints,
government and political agendas, economic instability and other
items that are not in our control. We cannot assure that our
financial performance will sustain a sufficient level to completely
support operations. A significant portion of our expenses are fixed
in advance. As such, we generally are unable to reduce our expenses
significantly in the short-term to compensate for any unexpected
delay or decrease in anticipated revenues or increases in planned
investments. As a result, we may continue to experience operating
losses and net losses in the future, which would make it difficult
to fund operations and achieve our business plan and could cause
the market price of our common stock to decline.
If we experience declining or flat revenues and fail to manage such
declines effectively, we may be unable to execute our business
plans and may experience future weaknesses in operating
results.
To
achieve future growth, we will need to continue to add additional
qualified personnel, and invest in additional research and
development and sales and marketing activities, which could lead to
increases in our expenses and future declines in operating results.
In addition, our future expansion is expected to place a
significant strain on our managerial, administrative, operational,
financial and other resources. If we are unable to manage these
activities or any revenue declines successfully, our business,
financial condition and results of operations could be adversely
affected.
11
Our business has significant working capital needs and if we are
unable to satisfy those needs from cash generated from our
operations or borrowings under our revolving credit facility, our
financial condition will be adversely affected.
We
require significant amounts of working capital to operate our
business. If we experience a significant and sustained drop in
operating profits, or if there are unanticipated reductions in cash
inflows or increases in cash outlays, we may be subject to cash
shortfalls. If such a shortfall were to occur for even a brief
period, it could have a significant adverse effect on our business.
In particular, we use working capital to pay expenses relating to
our employees and temporary workers and to satisfy our
workers’ compensation liabilities. Generally, we pay our
workers on a biweekly basis while we generally receive payments
from our customers 30 to 60 days after billing. As a result,
we must maintain sufficient cash availability to pay employees and
independent contractors and fund related payroll liabilities prior
to receiving payment from customers.
We have
derived working capital for our operations through cash generated
by our operating activities and borrowings under our revolving
credit facility. We believe that our current sources of capital are
adequate to meet our working capital needs. However, our available
sources of capital are limited. If our working capital needs
increase in the future, we may be forced to seek additional sources
of capital, which may not be available on commercially reasonable
terms.
The
amount we are entitled to borrow under our revolving credit
facility is calculated monthly based on the aggregate value of
certain eligible trade accounts receivable generated from our
operations, which are affected by financial, business, economic and
other factors, as well as by the daily timing of cash collections
and cash outflows. The aggregate value of our eligible accounts
receivable may not be adequate to allow for borrowings for other
corporate purposes, such as capital expenditures or growth
opportunities, which could reduce our ability to react to changes
in the market or industry conditions.
Our
revolving credit facility includes various financial and other
covenants with which the Company must comply in order to maintain
borrowing availability and avoid penalties, including minimum fixed
charge coverage ratio and minimum working capital
ratio.
Any
future failure to comply with the covenants which may occur under
our revolving credit facility could result in an event of default
which, if not cured or waived, could trigger prepayment
obligations. There can be no assurance that any future lender will
waive defaults that may occur in the future. If we were forced to
refinance our revolving credit facility, there can be no assurance
that such refinancing would be available or that such refinancing
would not have a material adverse effect on our business and
financial condition. Even if such refinancing were available, the
terms could be less favorable, and our results of operations and
financial condition could be adversely affected by increased costs
and interest rates.
The success of our business will depend, in part, on the continued
services of certain key personnel and our ability to attract and
retain qualified personnel.
The
success of our business will depend, in part, on the continued
services of certain members of our management. In particular, the
loss of the services of any of Robert A. Berman as Chief Executive
Officer and our director, Harry Rhulen as President, and Suzanne
Loughlin as Chief Administrative Officer and General Counsel could
have a material adverse effect on our business, results of
operations, and financial condition. Our inability to attract and
retain qualified personnel could significantly disrupt our
business.
In addition, as a solutions provider that provides engineers,
certified technicians and other professionals, our business is
labor intensive and, therefore, our ability to attract, retain, and
expand our senior management, sales personnel, and professional and
technical staff is an important factor in determining our future
success. The market for qualified engineers, certified technicians,
and other professionals is competitive and we may not be able to
attract and retain such professionals. It may also be difficult to
attract and retain qualified individuals in the timeframe demanded
by our clients. Furthermore, some of our contracts may require us
to employ only individuals who have particular government security
clearance levels. Our failure to attract and retain key individuals
could impair our ability to provide services to our clients and
conduct our business effectively.
Our strategy of growth through acquisitions could excessively
burden or otherwise strain our business.
It is our intent to continue to grow through strategic
acquisitions. Investigation of target businesses, and negotiations
and financial arrangements to acquire them, require significant
management efforts and involve substantial costs for accountants,
attorneys and others. Successful integration of newly acquired
target companies may place a significant burden on our management
and internal resources, and may require the implementation of
additional internal controls and management and financial systems.
The diversion of management’s attention and any difficulties
encountered in the transition and integration processes could harm
our business, financial condition and operating results. In
addition, we may be unable to execute our acquisition strategy as
planned, resulting in under-utilized resources and a failure to
achieve anticipated growth. Our operating results and financial
condition will be adversely affected if we are unable to achieve,
or achieve on a timely basis, cost savings or revenue opportunities
from any future acquisitions, or incur unforeseen costs and
expenses or experience unexpected operating difficulties from the
integration of acquired businesses.
12
We may fail to realize the anticipated benefits of acquisitions
which we consummate.
We acquired Firestorm, Brekford, Global and BC Management in 2017,
and
Secure Education Consultants, LLC (“SEC
LLC”)
in January 2018. We have
only just begun to integrate the operations of these acquired
companies that previously operated independently. There can be no
assurance that we will not encounter significant difficulties in
integrating the respective operations of these
companies.
The difficulties of integrating the acquisitions may include, among
others:
●
unanticipated
issues in integration of information, communications, and other
systems;
●
unanticipated
incompatibility of logistics, marketing, and administration
methods;
●
integrating the
business cultures of both companies;
●
preserving
important strategic client relationships;
●
consolidating
corporate and administrative infrastructures and eliminating
duplicative operations; and
●
coordinating
geographically separate organizations.
The achievement of the benefits expected from integration of the
acquired companies may require us to incur significant costs. The
incurrence of any such costs, as well as any unexpected costs or
delays, in connection with such integration, could have a material
adverse effect on our business, operating results or financial
condition.
We are subject to business uncertainties following the consummation
of acquisitions that could adversely affect our
business.
Uncertainties
about the effect of our recent acquisitions on employees and
customers may have an adverse effect on our company. These
uncertainties may impair our ability to attract, retain and
motivate key personnel for a period of time after the acquisitions,
and could cause customers, suppliers and others that deal with us
to seek to change existing business relationships with us, which
may have an adverse effect on the Company. Employee retention may
be particularly challenging, as employees may experience
uncertainty about their future roles with the Company. If, despite
our retention efforts, key employees depart because of issues
relating to the uncertainty and difficulty of integration or a
desire not to remain with us, as the case may be, our business
could be seriously harmed.
Resources could be wasted in pursuing acquisitions that are not
completed, which could materially adversely affect subsequent
attempts to locate and acquire or merge with another
business.
We
anticipate that the investigation of each specific target business
and the negotiation, drafting and execution of relevant agreements,
disclosure documents and other instruments will require substantial
management time and attention and substantial costs for
accountants, attorneys and others. If we decide not to complete a
potential business combination, the costs incurred up to that point
for the proposed transaction likely would not be recoverable.
Furthermore, if we reach an agreement relating to a specific target
business, we may fail to complete a potential business combination
for any number of reasons including those beyond our control. These
may include terms and conditions which we are unable to satisfy or
actions on the part of an acquisition target that prevents us from
completing the acquisition on reasonable terms. Any such event will
result in a loss to us of the related costs incurred,
including fees and penalties for
non-performance,
which could materially adversely affect
subsequent attempts to locate and acquire or merge with another
business.
We may also experience
litigation intended to challenge or otherwise prevent the
consummation of an acquisition or as a result of non-consummation
of a planned merger. Such litigation may consume management
resources, distract our personnel and result in publicity which
affects our future acquisitions.
We may be required to write-down certain assets after completing
our required annual evaluations, which may affect our reported
financial results.
The
initial determination of the fair value of assets we acquire upon
consummation of an acquisition is based upon a
valuation
. We are required to analyze
the carrying value of our acquired intangibles and goodwill on an
annual basis going forward.
After we complete the detailed
annual evaluation of the carrying value of the intangible assets,
we may be required to make adjustments to our consolidated
balance sheet and/or statement of operations. Any adjustments will
affect our reported financial results.
13
We may issue additional notes or other debt securities, or
otherwise incur substantial additional debt which may adversely
affect our leverage and financial condition and thus negatively
impact the value of our stockholders’ investment in the
Company.
The
anticipated cash needs of our business could change significantly
as we pursue and complete business acquisitions, if our business
plans change, if economic conditions change from those currently
prevailing or from those now anticipated, or if other unexpected
circumstances arise that may have a material effect on the cash
flow or profitability of our business. As of December 31,
2017,
we had $1,405,994
of notes payable and $3,663,586 due on lines of credit. On April 3,
2018, Novume and Brekford entered into a transaction pursuant to
which an institutional investor loaned to $2,000,000 to Novume and
Brekford. If we require additional capital resources to grow our
business, either internally or through acquisition, we may need to
seek to secure additional debt financing. We may not be able to
obtain financing arrangements on acceptable terms or in amounts
sufficient to meet our needs in the future.
The
incurrence of debt could have a variety of negative effects,
including:
●
default and
foreclosure on our assets if our operating revenues are
insufficient to repay our debt obligations;
●
acceleration of
our obligations to repay the indebtedness even if we make all
principal and interest payments when due if we breach certain
covenants that require the maintenance of certain financial ratios
or reserves without a waiver or renegotiation of that
covenant;
●
our
immediate payment of all principal and accrued interest, if any, if
the debt security is payable on demand;
●
our
inability to obtain necessary additional financing if the debt
security contains covenants restricting our ability to obtain such
financing while the debt security is outstanding;
●
increased
vulnerability to adverse changes in general economic, industry and
competitive conditions and adverse changes in government
regulation; and
●
limitations on
our ability to borrow additional amounts for expenses, capital
expenditures, acquisitions, debt service requirements, execution of
our strategy and other purposes and other disadvantages compared to
our competitors who have less debt.
Improper disclosure of confidential and personal data could result
in liability and harm to our reputation.
We
store and processes increasingly large amounts of confidential
information concerning our employees, customers and vendors, as
well as confidential information on behalf of our customers and
must ensure that such storage and processing is compliant with our
contractual obligations and all applicable national and local
privacy laws, rules, and regulations. These laws, rules, and
regulations can vary significantly from country to country, with
many being more onerous than those in the U.S. The risk of failing
to comply with these laws, rules, and regulations increases as we
continue to expand globally and become subject to an increasing
number of foreign laws, rules, and regulations. Moreover, we must
ensure that all of our vendors who have access to such information
also have the appropriate privacy policies, procedures and
protections in place. Although we take appropriate measures to
protect such information, the continued occurrence of high-profile
data breaches provides evidence of an external environment
increasingly hostile to information security. If our security
measures are breached as a result of third-party action, employee
or subcontractor error, malfeasance or otherwise, and, as a result,
someone obtains unauthorized access to customer data, our
reputation may be damaged, our business may suffer and we could
incur significant liability. Techniques used to obtain unauthorized
access or to sabotage systems change frequently and are growing
increasingly sophisticated. As a result, we may be unable to
anticipate these techniques or to implement adequate preventative
measures.
This
environment demands that we continuously improve our design and
coordination of security controls throughout the Company. Despite
these efforts, it is possible that our security controls over data,
training, and other practices we follow may not prevent the
improper disclosure of personally identifiable or other
confidential information.
If an
actual or perceived breach of our security occurs, we could be
liable under laws and regulations that protect personal or other
confidential data resulting in increases costs or loss of revenues
and the market perception of our services could be
harmed.
14
Our business could be negatively impacted by cyber and other
security threats or disruptions.
We face
various cyber and other security threats, including attempts to
gain unauthorized access to sensitive information and networks;
insider threats; threats to the security of our facilities and
infrastructure; and threats from terrorist acts or other acts of
aggression. Cyber threats are constant and evolving and include,
but are not limited to, computer viruses, malicious software,
destructive malware, attacks by computer hackers attempts to gain
unauthorized access to data, disruption or denial of service
attacks, and other electronic security breaches that could lead to
disruptions in mission critical systems, unauthorized release or
loss of confidential, personal or otherwise protected information
(ours or that of our employees, customers or subcontractors), and
corruption of data, networks or systems. In addition, we could be
impacted by cyber threats or other disruptions or vulnerabilities
found in products we use or in our partners’ or
customers’ systems that are used in connection with our
business. Our clients and subcontractors face similar threats
and/or they may not be able to detect or deter them, or effectively
to mitigate resulting losses. These threats could damage our
reputation as well as our subcontractor’s ability to perform
and could affect our client’s ability to pay.
Although
we use various procedures and controls to monitor and mitigate the
risk of these threats to us, our clients and our partners, there
can be no assurance that these procedures and controls will be
sufficient. The impact of these factors is difficult to predict,
but one or more of them could result in the loss of information or
capabilities, harm to individuals or property, damage to our
reputation and/or require remedial actions or lead to loss of
business, regulatory actions potential liability and financial
loss, any one of which could have a material adverse effect on our
financial position, results of operations and/or cash
flows.
We are dependent upon technology services, and if we experience
damage, service interruptions or failures in our computer and
telecommunications systems, our customer and worker relationships
and our ability to attract new customers may be adversely
affected.
Our
business could be interrupted by damage to or disruption of our
computer, telecommunications equipment, or software systems. Our
customers’ businesses may be adversely affected by any system
or equipment failure we experience. As a result of any of the
foregoing, our relationships with our customers may be impaired, we
may lose customers, our ability to attract new customers may be
adversely affected and we could be exposed to contractual
liability. Precautions in place to protect us from, or minimize the
effect of, such events may not be adequate.
In
addition, the failure or disruption of mail, communications and/or
utilities could cause an interruption or suspension of our
operations or otherwise harm our business. Our property and
business interruption insurance may be inadequate to compensate us
for all losses that may occur as a result of any system or
operational failure or disruption and, as a result, revenue,
profits and operating results could be adversely
affected.
If we do not keep pace with rapid technological changes and
evolving industry standards, we will not be able to remain
competitive, and the demand for our services will likely
decline.
The
markets in which we operate are in general characterized by the
following factors:
●
changes due to
rapid technological advances;
●
additional
qualification requirements related to technological challenges;
and
●
evolving
industry standards and changes in the regulatory and legislative
environment.
Our
future success will depend upon our ability to anticipate and adapt
to changes in technology and industry standards, and to effectively
develop, introduce, market and gain broad acceptance of new product
and service enhancements incorporating the latest technological
advancements.
Improvements in communications technology could expand the pool of
potential competitors and diminish the demand for our traditional
services.
Based on recent technological developments, the market for
outsourced services may diminish. Some of our competitors are
beginning to advertise for various services on line, including
experts for sale, anonymous authors to complete certain proposal
sections for an “introductory fee,” and even selling
entire proposals on-line, sometimes by overseas vendors at
extremely low prices. If these companies are successful at
providing traditional consulting services at prices we cannot
compete with, it may diminish the demand for some of our services,
which may adversely affect our revenues, results of operations and
financial condition.
15
We operate in a highly competitive industry with low barriers to
entry, and may be unable to compete successfully against existing
or new competitors.
Our
business is highly competitive, and we compete with companies that
may have greater name recognition and financial resources, as well
as many independent sole proprietors who sell themselves as
outsourced resources. We also compete with providers of outsourcing
services, systems integrators, computer systems consultants and
other providers of services. We expect that the level of
competition will remain high, which could limit our ability to
maintain or increase our market share or
profitability.
The
needs of our clients change and evolve regularly. Accordingly, our
success depends on our ability to develop services and solutions
that address these changing needs of our clients, and to provide
people and technology needed to deliver these services and
solutions. In order to compete effectively in our markets, we must
target our potential customers carefully, continue to improve our
efficiencies and the scope and quality of our services, and rely on
our service quality, innovation, and client relations to provide
services on a cost-effective basis to our clients. Our competitors
may be able to provide clients with different or greater
capabilities or technologies or better contract terms than we can
provide, including technical qualifications, past contract
experience, geographic presence, price and the availability of
qualified professional personnel.
In
addition, heightened competition among our existing competitors,
especially on a price basis, or by new entrants into the market,
could create additional competitive pressures that may reduce our
margins and adversely affect our business. If our competitive
advantages are not compelling or sustainable, then we are unlikely
to increase or sustain profits and our stock price could
decline.
Our business is subject to risks associated with geographic market
concentration.
The
geographic concentration of revenue greater than 10% of our pro
forma consolidated revenue in fiscal years 2017 and 2016 was
generated in the following areas:
|
State
|
2017
|
2016
|
|
Texas
|
34.7%
|
36.4%
|
|
Virginia
|
29.5%
|
34.7%
|
Consequently,
economic conditions in these regions could reduce demand for our
products and services, increase costs or otherwise have a material
adverse effect on our financial position and results of future
operations.
A downturn of the U.S. or global economy could result in our
customers using fewer workforce solutions and services or becoming
unable to pay us for our services on a timely basis or at all,
which would materially adversely affect our business.
Because
demand for our solutions and services are sensitive to changes in
the level of economic activity, our business may suffer during
economic downturns. During periods of weak economic growth or
economic contraction, the demand for outsourced services could
decline. When demand drops, our operating profit could be impacted
unfavorably as we experience a deleveraging of our selling and
administrative expense base because expenses may not decline as
quickly as revenues. In periods of decline, we can only reduce
selling and administrative expenses to a certain level without
negatively impacting the long-term potential of our
business.
Additionally,
during economic downturns companies may slow the rate at which they
pay their vendors, or they may become unable to pay their
obligations. If our customers become unable to pay amounts owed to
us, or pay us more slowly, then our cash flow and profitability may
suffer significantly.
We may be exposed to employment-related claims and losses,
including class action lawsuits, which could have a material
adverse effect on our business.
We
typically place or assign personnel in the workplaces of other
businesses. The risks of these activities include possible claims
relating to:
●
discrimination
and harassment;
●
wrongful
termination or denial of employment;
●
violations of
employment rights related to employment screening or privacy
issues;
16
●
classification
of temporary workers;
●
assignment of
illegal aliens;
●
violations of
wage and hour requirements;
●
retroactive
entitlement to temporary worker benefits;
●
errors and
omissions by our independent contractors or temporary
workers;
●
misuse of
customer proprietary information;
●
misappropriation
of funds;
●
damage to
customer facilities due to negligence; and
●
criminal
activity.
We may
incur fines and other losses or negative publicity with respect to
these claims. In addition, these claims may give rise to
litigation, which could be time-consuming and expensive. New
employment and labor laws and regulations may be proposed or
adopted that may increase the potential exposure of employers to
employment-related claims and litigation. There can be no assurance
that the corporate policies we have in place to help reduce our
exposure to these risks will be effective or that we will not
experience losses as a result of these risks. There can also be no
assurance that the insurance policies we have purchased to insure
against certain risks will be adequate or that insurance coverage
will remain available on commercially reasonable terms or be
sufficient in amount or scope of coverage.
We are dependent on workers’ compensation insurance coverage
at commercially reasonable terms.
We
provide workers’ compensation insurance for our employees and
temporary workers and are contractually obligated to collateralize
our workers’ compensation obligations under our
workers’ compensation program through irrevocable letters of
credit, surety bonds or cash. A significant portion of our
workers’ compensation program renews annually on January 1 of
each year, and as part of the renewal, could be subject to an
increase in collateral. In addition, collateral requirements can be
significant and place pressure on our liquidity and working capital
capacity. Further, we cannot be certain we will be able to obtain
appropriate types or levels of insurance in the future or that
adequate replacement policies will be available on commercially
reasonable terms. Depending on future changes in collateral
requirements, we could be required to seek additional sources of
capital in the future, which may not be available on commercially
reasonable terms, or at all. The loss of our workers’
compensation insurance coverage would prevent us from doing
business in the majority of our markets
The spending cuts imposed by Congress could impact our operating
results.
The U.S. government continues to focus on developing and
implementing spending, tax, and other initiatives to stimulate the
economy, create jobs, and reduce the deficit. One of these
initiatives, the Budget Control Act of 2011 (the
“BCA”), imposed constraints around U.S. government
spending. In an attempt to balance decisions regarding defense,
homeland security, and other federal spending priorities, the BCA
imposed spending caps that contain approximately $487 billion
in reductions to the Department of Defense base budgets over a
seven-year period (to 2021). Additionally, the BCA triggered an
automatic sequestration process, effective March 1, 2013, that
would have reduced planned defense spending by an additional
$500 billion over a nine-year period that began in the U.S.
government’s 2013 fiscal year. In 2015, the Bipartisan Budget
Act of 2015 (“BBA 2015”) raised the limit on the U.S.
government’s debt until March 2017 and raised the sequester
caps imposed by the BCA. The Bipartisan Budget Act of 2013
(“BBA 2013”) suspended some budget cuts that would have
otherwise been instituted through sequestration in the U.S.
government’s 2014 and 2015 fiscal years. While BBA 2013 and
BBA 2015 (collectively, the “Bipartisan Budget Acts”),
taken together, increased discretionary spending limits through the
U.S. government’s 2017 fiscal year, the Bipartisan Budget
Acts retained sequestration cuts for the U.S. government’s
2018 through 2021 fiscal years.
17
In March
2018, the Consolidated Appropriations Act (the
“2018 Act”) was signed into law. It provides $1.3
trillion in funding through September 2018 and represents the
largest investment in national defense in 15 years. It also
anticipates $500 billion in new federal spending for defense and
domestic programs over two years. Although the 2018 Act included a
2.4% pay raise for military personnel it also provides for
significant increases military procurements. Furthermore, the 2018
Act seeks to maximize the participation of small and
socio-economically diverse companies, which may increase the number
of contractors offering goods and services to the federal
government.
There remains uncertainty regarding how, or if, sequestration cuts
will be applied in the U.S. government’s 2019 fiscal year and
beyond. Despite the increases provided for in the Bipartisan Budget
Act and the 2018 Act, in light of the budget restrictions under the
BCA that will be in effect through 2021 and other deficit reduction
pressures which may arise in the future, the degree of
congressional constraint on discretionary spending by the U.S.
government will remain a question for a number of
years.
If annual appropriations bills are not enacted on a timely basis
for the future fiscal years, the U.S. government may once again
operate under continuing resolution(s), thus abating RFP processes
and restricting new contracts or program starts and resulting in
government slowdowns, or even shutdowns. The uncertainty regarding
the volume of RFPs issued by the U.S. government could have
long-term impacts for our industry and our Company, including that
we may not have sufficient resources to handle any increase in
demand for services.
Since we generate significant revenues from clients that bid on
contracts with U.S. government agencies, our operating results
could be adversely affected by spending caps or changes in the
budgetary priorities of the U.S. government, as well as by delays
in RFP processes, program starts or the award of contracts or task
orders under contracts.
A delay in the completion of the budget process of the U.S.
government could delay procurement of our services and have an
adverse effect on our future revenue.
When the U.S. government does not complete its budget process
before its fiscal year-end on September 30 in any year,
government operations are typically funded by means of a continuing
resolution. Under a continuing resolution, the government
essentially authorizes agencies of the U.S. government to continue
to operate and fund programs at the prior year end but does not
authorize new spending initiatives. When the U.S. government
operates under a continuing resolution, government agencies may
delay the procurement of services, which could reduce our future
revenue.
If our contractors and subcontractors fail to satisfy their
obligations to us or other parties, or if we are unable to maintain
these relationships, our revenue, profitability, and growth
prospects could be adversely affected.
We depend on contractors and subcontractors in conducting our
business. There is a risk that we may have disputes with our
contractors or subcontractors arising from, among other things, the
quality and timeliness of work performed by the contractor or
subcontractor, client concerns about the contractor or
subcontractor, or our failure to extend existing task orders or
issue new task orders under a contract or subcontract. In addition,
if any of our subcontractors fail to perform the agreed-upon
services, go out of business, or fail to perform on a project, then
our ability to fulfill our obligations as a prime contractor may be
jeopardized and we may be contractually responsible for the work
performed by those contractors or subcontractors. Historically, our
relationship with our contractors and subcontractors have been
good, and we have not experienced any material failure of
performance by our contractors and subcontractors. However, there
can be no assurance that such experience will continue and the
absence of qualified subcontractors with which we have a
satisfactory relationship could adversely affect the quality of our
service and our ability to perform under some of our
contracts.
We also rely on relationships with other contractors when we act as
their subcontractor or joint venture partner. Our future revenue
and growth prospects could be adversely affected if other
contractors eliminate or reduce their subcontracts or teaming
arrangement relationships with us or if a government agency
terminates or reduces these other contractors’ programs, does
not award them new contracts, or refuses to pay under a
contract.
Due to the competitive process to obtain contracts and an increase
in bid protests, we may be unable to achieve or sustain revenue
growth and profitability.
We expect that some of the business that we seek in the foreseeable
future will be under service agreements awarded to our clients
through a competitive bidding process, including Indefinite
Delivery/Indefinite Quantity (“ID/IQ”) contracts. The
U.S. government has increasingly relied on contracts that are
subject to a competitive bidding process, which has resulted in
greater competition and increased pricing pressure. As a result,
there is a tendency for it to place emphasis on low price over
technical merit when selecting contractors. This in turn can result
in the U.S. government contracts market attracting extremely
low-priced competitors who expect consulting products and services
to be priced accordingly. Government contractors may decide that
they can prepare their bid responses with internal resources and
not engage outside organizations to assist this
process.
18
The competitive bidding process involves substantial costs and a
number of risks, including significant cost and managerial time to
prepare bids and proposals for contracts that may not be awarded to
our clients, and therefore puts our reputation at risk and may
affect our future contracts with these clients, or that may be
awarded but for which we customers do not receive meaningful task
orders which might make them less likely to bid for additional task
orders. For support contracts awarded to us, we also face the risk
of inaccurately estimating the resources and costs that will be
required to fulfill these engagements, which also could impact our
reputation and the likelihood of getting additional engagements for
capture and proposal support.
Our business is directly tied to the success of our government
contracting clients, which are increasingly reliant on ID/IQ
contracts. ID/IQ contracts are not firm orders for services, and we
may generate limited or no revenue from these contracts which could
adversely affect our operating performance.
ID/IQ contracts are typically awarded to multiple contractors, and
the award of an ID/IQ contract does not represent a firm order for
services. Generally, under an ID/IQ contract, the government is not
obligated to order a minimum of services or supplies from its
contractor, irrespective of the total estimated contract value. In
effect, an ID/IQ award acts as a “license,” permitting
a government contractor to bid on task orders issued under the
ID/IQ contract, but not guaranteeing the award of individual task
orders. Following an award under a multi-award ID/IQ program, the
customer develops requirements for task orders that are
competitively bid against all of the contract awardees. However,
many contracts also permit the U.S. government to direct work to a
specific contractor. Our clients may not win new task orders under
these contracts for various reasons, including price, past
performance and responsiveness, among others. We support our
government contractor clients both when they compete to get the
umbrella ID/IQ contract and subsequently when we help the winners
of those contracts compete for individual tasks. The proposals for
both stages can be relatively brief and require quick turn-arounds,
thus potentially reducing some opportunities to be awarded
significant turn-key engagements. While it is possible that the
increased importance of winning the umbrella ID/IQ contract will
prompt clients to hire outside firms to prepare their proposals, it
is also likely that government contractors will decide to prepare
ID/IQ proposals without the assistance from outside
experts.
We incur substantial costs as a result of operating as a public
company and our management is required to devote substantial time
to related compliance matters.
As a
public company, we incur significant legal, accounting, and other
expenses. under rules implemented by the United States Securities
and Exchange Commission (“SEC”), and The NASDAQ Stock
Market (“NASDAQ”). These impose various requirements on
public companies, including establishing and maintaining effective
disclosure and financial controls and corporate governance
practices. Our management team will need to devote a substantial
amount of time to these compliance requirements and we may need to
hire additional personnel. Moreover, these rules and regulations
will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly.
Pursuant
to Section 404 of the Sarbanes-Oxley Act, we are required to
furnish a report by our management on our internal control over
financial reporting. To achieve compliance with Section 404,
we engage in a process to document and evaluate our internal
control over financial reporting, which is both costly and
challenging. In this regard, we will need to continue to dedicate
internal resources, potentially engage outside consultants, and
adopt a detailed work plan to assess and document the adequacy of
internal control over financial reporting, continue steps to
improve control processes as appropriate, validate through testing
that controls are functioning as documented, and implement a
continuous reporting and improvement process for internal control
over financial reporting.
In
addition, changing laws, regulations, and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs, and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations, and standards, and this investment may
result in increased general and administrative expenses and divert
management’s time and attention from revenue-generating
activities to compliance activities. If our efforts to comply with
new laws, regulations and standards differ from the activities
intended by regulatory or governing bodies due to ambiguities
related to their application and practice, regulatory authorities
may initiate legal proceedings against us and our business may be
harmed.
As a public company, complying with applicable rules and
regulations will make it more expensive for us to obtain director
and officer liability insurance, and we may be required to incur
substantially higher costs to obtain and maintain the same or
similar coverage.
19
We have identified material weaknesses in our internal control over
financial reporting. If we fail to develop or maintain an effective
system of internal controls, we may not be able to accurately
report our financial results or prevent fraud. As a result, current
and potential stockholders could lose confidence in our financial
reporting, which would harm our business and the trading price of
our securities.
In
connection with the audit of our consolidated financial statements
for the years ended December 31, 2017 and 2016, our management
concluded that the Company had material weaknesses in its internal
controls because we did not have adequately designed internal
controls to ensure the timely preparation and review of the
accounting for certain complex, non-routine transactions by those
with appropriate technical expertise, which was necessary to
provide reasonable assurance that the Company’s consolidated
financial statements and related disclosures would be prepared in
accordance with generally accepted accounting principles in the
United States of America. In addition, we did not have adequately
designed and documented financial close and management review
controls to properly detect and prevent certain accounting errors
and omitted disclosures in the footnotes to the consolidated
financial statements. As defined in the Standards of the Public
Company Accounting Oversight Board, a material weakness is a
deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s
annual or interim consolidated financial statements will not be
prevented or detected on a timely basis. Our management is
developing a plan to remediate the material weaknesses although
there can be no assurance that such plans, when enacted, will be
successful.
Management continues to review and assess our internal controls to
ensure we have adequate internal financial and accounting controls.
However, any failure to maintain or implement required new or
improved controls, or any difficulties we encounter in their
implementation, could result in additional material weaknesses, and
cause us to fail to meet our periodic reporting obligations or
result in material misstatements in our financial statements. Any
such failure could also adversely affect the results of periodic
management evaluations regarding the effectiveness of our internal
control over financial reporting that are required with respect to
annual reports that we will file. The existence of a material
weakness could result in errors in our financial statements that
could cause us to fail to meet our reporting obligations and cause
investors to lose confidence in our reported financial information
which may lead to a decline in our stock price.
Our ability to use our net operating losses to offset future
taxable income may be subject to certain limitations, which could
subject our business to higher tax liability.
We may be limited in the portion of net operating loss
carry-forwards that we can offset future taxable income with for
U.S. federal and state income tax purposes.
As of December
31, 2017, we had federal and state net operating loss
carryforwards, or NOLs, of approximately $5.91 million and $0.27
million, respectively.
A lack of
future taxable income could adversely affect our ability to use
these NOLs. In addition, future changes in our stock ownership,
including through acquisitions, could result in ownership changes
under Section 382 of the Internal Revenue Code and may result in a
limitation on the amount of NOL carry-forwards that could be used
annually to offset future taxable income and taxes payable. Our
NOLs at December 31, 2017 may also be impaired under similar
provisions of state law, and may expire unused or underused, which
would prevent us from using our NOL carry-forwards to offset future
taxable income.
We may need to raise additional capital in the future, which may
not be available on acceptable terms, or at all.
We have
experienced volatility in earnings and cash flows from operations
from year to year. If our business declines, we may need to raise
additional capital to pursue acquisitions or expand our operations.
Such additional capital may be raised through bank borrowings, or
other debt or equity financings. We cannot assure you that any
additional capital will be available on a timely basis, on
acceptable terms, or at all, and such additional financing may
result in further dilution to our stockholders.
Our
capital requirements will depend on many factors, including, but
not limited to:
●
potential
acquisitions of businesses and product lines;
●
our
ability to control costs;
●
our
ability to increase revenue, reduce net losses or generate net
income;
●
increased
research and development expenses and sales and marketing
expenses;
●
our
need to respond to technological advancements and our
competitors’ introductions of new products, services or
technologies;
20
●
capital
improvements to new and existing facilities and enhancements to
subsidiaries’ infrastructure and systems;
●
market
acceptance of our services, and the overall level of sales of our
services;
●
our
relationships with customers and suppliers and the promptness of
their payments;
●
government
budgets, political agendas and other funding issues, including
potential delays in government contract awards;
●
our
ability to successfully negotiate arrangements with credit
providers and the state of the financial markets, in general;
and
●
general economic
conditions, including the level of economic activity and the
effects of international conflicts.
If our
capital requirements are materially different from those currently
planned, we may need additional capital sooner than anticipated. If
additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our
stockholders will be reduced and such securities may have rights,
preferences and privileges senior to our common stock. Additional
equity or debt financing may not be available on favorable terms,
on a timely basis, or at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to
continue our operations as planned, develop or enhance our
products, expand our sales and marketing programs, take advantage
of future opportunities or respond to competitive pressures, or we
may be forced to sell assets at prices below their stated
value.
Risks Relating to our Common Stock
There has been a limited public market for our common stock, the
stock price of our common stock may be volatile or may decline
regardless of our performance, and you may not be able to resell
your shares at or above the public offering price.
Our
common stock was previously quoted on the OTCQX and has been
trading on the Nasdaq Capital Market since January 10,
2018. There is no established trading market for some of our
securities and there has been a limited public market for our
common stock. The market prices of the securities of newly listed
companies can be highly volatile. The market price of our common
stock may fluctuate significantly in response to numerous factors,
many of which are beyond our control, including:
●
overall
performance of the equity markets;
●
variations in
our results of operations, cash flows, and other financial metrics
and non-financial metrics, and how those results compare to analyst
expectations;
●
changes in the
financial projections we may provide to the public or our failure
to meet those projections;
●
failure of
securities analysts to initiate or maintain coverage of us, changes
in financial estimates by any securities analysts who follow our
company, or our failure to meet these estimates or the expectations
of investors;
●
our
ability to raise additional capital
●
recruitment or
departure of key personnel;
●
variations in
general market, financial markets, economic, and political
conditions in the United States;
●
rumors and
market speculation involving us or other companies in our
industry;
●
announcements by
us or our competitors of significant technical innovations or new
business models;
●
acquisitions,
strategic partnerships, joint ventures, or capital
commitments;
●
new
laws, regulations, or executive orders, or new interpretations of
existing laws or regulations applicable to our
business;
●
lawsuits
threatened or filed against us, or unfavorable determinations or
settlements in any such suits;
●
developments or
disputes concerning our intellectual property or our technology, or
third-party proprietary rights;
21
●
changes in
accounting standards, policies, guidelines, interpretations, or
principles;
●
other events or
factors, including those resulting from war, incidents of
terrorism, or responses to these events;
●
the
expiration of contractual lock-up or market standoff
agreements;
●
sales of shares
of our common stock by us or our stockholders;
●
delays in
government contracts and funding from time to time and budgetary
constraints at the federal, state and local levels;
●
the
long lead times associated with government contracts;
●
our
ability to control costs;
●
our
ability to develop, introduce, patent, market and gain market
acceptance of new products, applications and product enhancements
in a timely manner, or at all;
●
market
acceptance of the products incorporating our technologies and
products;
●
the
introduction of new products by competitors;
●
the
availability and cost of components used in the manufacture of our
products;
●
our
success in expanding and implementing our sales and marketing
programs;
●
the
effects of technological changes in our target
markets;
●
the
nature of our government contracts;
●
decrease in
revenues derived from key or significant customers;
●
risks and
uncertainties associated with our international
business;
●
general economic
and political conditions;
●
other factors
beyond our control, including but not limited to, natural
disasters.
In
addition, the stock markets have experienced extreme price and
volume fluctuations that have affected and continue to affect the
market prices of equity securities of many companies. Stock prices
of many companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those companies.
In the past, stockholders have instituted securities class action
litigation following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to
substantial costs, divert resources and the attention of management
from our business, and harm our business.
If securities or industry analysts do not publish research or
publish inaccurate or unfavorable reports about our business, our
stock price and trading volume could decline.
The
trading market for our common stock will depend in part on the
research and reports that securities or industry analysts publish
about us or our business, our market and our competitors. We do not
have any control over these analysts. If one or more of the
analysts who cover us downgrade our shares or change their opinion
of our shares, our share price would likely decline. If one or more
of these analysts cease covering us or fail to regularly publish
reports on us, we could lose visibility in the financial markets,
which could cause our share price or trading volume to
decline.
22
Sales of a substantial number of shares of our common stock may
cause the price of our common stock to decline.
As of
as of March 31, 2018, we have outstanding a total of 14,496,697
shares of common stock and 1,322,913 warrants. Based on shares
outstanding as of March 31, 2018, 14,518,690 shares of common
stock, or 66.6%, are held by our officers, directors and their
affiliated entities, and will be subject to volume limitations
under Rule 144 under the Securities Act and various vesting
agreements. In addition, 2,585,021 shares of our common stock that
are subject to outstanding options and warrants as of March 31,
2018, as well as 811,514 shares issuable upon the conversion of our
Series A Preferred Stock, and 481,722 shares issuable upon the
conversion of our Series B Preferred Stock, will become eligible
for sale in the public market to the extent permitted by the
provisions of various vesting agreements, and Rules 144 and 701
under the Securities Act.
We
cannot predict what effect, if any, sales of our shares in the
public market or the availability of shares for sale will have on
the market price of our common stock. However, future sales of
substantial amounts of our common stock in the public market,
including shares issued on exercise of outstanding options, or the
perception that such sales may occur, could adversely affect the
market price of our common stock.
We also
expect that significant additional capital may be needed in the
future to continue our planned operations. To raise capital, we may
sell common stock, convertible securities or other equity
securities in one or more transactions at prices and in a manner we
determine from time to time. These sales, or the perception in the
market that the holders of a large number of shares intend to sell
shares, could reduce the market price of our common
stock.
We do not intend to pay dividends on our common stock for the
foreseeable future.
We have
never declared or paid any cash dividends on our common stock and
do not intend to pay any cash dividends on our common stock in the
foreseeable future. Our Series A Preferred Stock and our Series B
Preferred Stock are entitled to quarterly dividends as set forth in
more detail in the section entitled “Description of Capital
Stock.” We currently anticipate that for the foreseeable
future we will retain all of our future earnings for the
development, operation and growth of our business and for general
corporate purposes. Any future determination to pay dividends on
our common stock in will be at the discretion of our Board of
Directors. Accordingly, investors must rely on sales of their
common stock after price appreciation, which may never occur, as
the only way to realize any future gains on their
investments.
Our executive officers, directors, principal stockholders and their
affiliates will continue to exercise significant influence over our
company after this offering, which will limit your ability to
influence corporate matters and could delay or prevent a change in
corporate control.
As of
March 31, 2018, our executive officers, directors, five percent or
greater stockholders and their respective affiliates owned in the
aggregate approximately 79.0% of our common stock.
These
stockholders have the ability to influence us through this
ownership position and may be able to determine all matters
requiring stockholder approval. For example, these stockholders may
be able to control elections of directors, amendments of our
organizational documents, or approval of any merger, sale of
assets, or other major corporate transaction. This may prevent or
discourage unsolicited acquisition proposals or offers for our
common stock that you may feel are in your best interest as one of
our stockholders. The interests of this group of stockholders may
not always coincide with your interests or the interests of other
stockholders and they may act in a manner that advances their best
interests and not necessarily those of other stockholders,
including seeking a premium value for their common stock, and might
affect the prevailing market price for our common
stock.
We are a "smaller reporting company" and, as a result of the
reduced disclosure and governance requirements applicable to
smaller reporting companies, our common stock may be less
attractive to investors.
We are
a "smaller reporting company," meaning that we are not an
investment company, an asset-backed issuer, or a majority-owned
subsidiary of a parent company that is not a "smaller reporting
company," have a public float of less than $75 million and
have annual revenues of less than $50 million during the most
recently completed fiscal year. As a "smaller reporting company,"
we are subject to lesser disclosure obligations in our SEC filings
compared to other issuers. Specifically, "smaller reporting
companies" are able to provide simplified executive compensation
disclosures in their filings, are exempt from the provisions of
Section 404(b) of the Sarbanes-Oxley Act requiring that
independent registered public accounting firms provide an
attestation report on the effectiveness of internal control over
financial reporting and have certain other decreased disclosure
obligations in their SEC filings, including, among other things,
only being required to provide two years of audited consolidated
financial statements in annual reports. Decreased disclosures in
our SEC filings due to our status a "smaller reporting company" may
make it harder for investors to analyze our operating results and
financial prospects.
23
Delaware law and provisions in our certificate of incorporation and
bylaws could make a merger, tender offer or proxy contest
difficult, thereby depressing the trading price of our common
stock.
The anti-takeover provisions of the Delaware General
Corporation
Law, or the DGCL, may discourage, delay or
prevent a change of control by prohibiting us from engaging in a
business combination with stockholders owning in excess of 15% of
our outstanding voting stock for a period of three years after the
person becomes an interested stockholder, even if a change of
control would be beneficial to our existing
stockholders. In addition, our certificate of
incorporation and bylaws contain provisions that may make the
acquisition of our company more difficult,
including
:
●
the
vote of 66 2/3 of the voting power of the corporation entitled to
vote at an election of directors is required for the removal of a
member of our Board;
●
the
vote of 66 2/3 of the voting power of the corporation entitled to
vote at an election of directors is required before any of our
Bylaws may, at any annual meeting or at any special meeting called
for that purpose, be altered, amended, rescinded or repealed;
and
●
the
request of one or more stockholders holding shares in the aggregate
entitled to cast not less than 35% of the vote at a meeting is
required to call a stockholder meeting.
These
provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors of your
choosing and cause us to take certain actions you
desire.
Not
applicable for smaller reporting companies.
Our
principal executive offices are located at 14200 Albemarle Point
Place, Suite 200, Chantilly, Virginia. We do not own any real
property. We currently operate out of eight leased locations and
our lease terms are multiyear commitments. We do not consider any
of our leased properties to be materially important to us. While we
believe it is necessary to maintain offices through which our
services are coordinated, we feel there are sufficient available
office rental properties to adequately serve our needs should we
need to relocate or expand our operations.
In the
ordinary conduct of our business, we are subject to lawsuits,
arbitrations and administrative proceedings from time to time. We
expense legal costs as incurred.
Not
applicable.
24
In
January 2018, our common stock, par value $0.0001 per share,
commenced trading on the Nasdaq Capital Market (the
“NASDAQ”) under the symbol “NVMM”.
Previously, our common stock was quoted on the OTCQX under the
symbol “NVMM” commencing August 29, 2017.
Set
forth below are the high and low sales prices for our common stock,
as reported on the NASDAQ.
|
|
High
|
Low
|
|
Year
Ending December 31, 2017
|
|
|
|
Fourth
Quarter
|
$
5.50
|
$
1.51
|
|
Third
Quarter (1)
|
$
5.00
|
$
0.51
|
(1)
Our common stock
commenced trading on August 29, 2017.
Holders
As of
March 31, 2018, there were approximately 58 registered holders of
record of our common stock, excluding stockholders for whom shares
are held in "nominee" or "street name." The actual number of common
stockholders is greater than the number of record holders, and
includes stockholders who are beneficial owners, but whose shares
are held in street name by brokers and other nominees. This number
of holders of record also does not include stockholders whose
shares may be held in trust by other entities
.
Dividend Policy
We have
never declared or paid any cash dividends on our common stock and
we currently do not anticipate paying any cash dividends for the
foreseeable future. Instead, we anticipate that all of our earnings
will be used to provide working capital, to support our operations,
and to finance the growth and development of our business,
including potentially the acquisition of, or investment in,
businesses, technologies or products that complement our existing
business. Any future determination relating to dividend policy will
be made at the discretion of our Board of Directors and will depend
on a number of factors, including, but not limited to, our future
earnings, capital requirements, financial condition, future
prospects, applicable Delaware law, which provides that dividends
are only payable out of surplus or current net profits and other
factors our Board of Directors might deem
relevant.
25
Securities authorized for issuance under equity compensation
plans.
The
following table provides information about our equity compensation
plans as of December 31, 2017.
Equity Compensation Plan Information
|
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
(a)
|
Weighted-average exercise price of outstanding options, warrants
and rights
(b)
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
(c)
|
|
Equity
compensation plans approved by security holders
|
1,695,375
|
$
2.19
|
1,304,625
|
|
Total
|
1,695,375
|
$
2.19
|
1,304,625
|
Our
Board has adopted the 2017 Equity Award Plan (the “2017
Plan”). The purpose of the 2017 Plan is to promote the
interests of Novume (including its subsidiaries and affiliates, if
any) and its stockholders by using equity interests in Novume to
attract, retain and motivate its management, nonemployee directors
and other eligible persons and to encourage and reward their
contributions to our performance and profitability. The total
shares of our common stock issuable under the Plan is 3,000,000
shares.
Sales of Unregistered Securities
On
December 31, 2017, Novume completed its acquisition of certain
assets of BC Management. Consideration paid as part of this
acquisition included: 33,333 shares of Novume common stock valued
at $163,332; 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 warrants to
purchase 33,333 shares 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
foregoing issuances were issued in reliance upon the exemptions
from registration under the Securities Act of 1933, as amended,
provided by Section 4(a)(2) and Rule 506 of Regulation D
promulgated thereunder.
As a
“smaller reporting company” as defined by Item 10 of
Regulation S-K, the Company is not required to provide information
required by this Item.
26
Certain statements in Management’s Discussion and Analysis or
MD&A, other than purely historical information are
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, as amended, or the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. These include estimates, projections,
and statements relating to our business plans, objectives and
expected operating results, and the assumptions upon which those
statements are based. These forward-looking statements generally
are identified by the words “believe,”
“project,” “expect,”
“anticipate,” “estimate,”
“intend,” “strategy,” “plan,”
“may,” “should,” “will,”
“would,” “will be,” “will
continue,” “will likely result,” and similar
expressions. Historical results may not indicate future
performance. Our forward-looking statements reflect our current
views about future events. They are based on assumptions and
subject to known and unknown risks and uncertainties that could
cause actual results to differ materially from those contemplated
by these statements. Factors that may cause differences between
actual results and those contemplated by forward-looking statements
include, but are not limited to, those discussed in “Risk
Factors” in Item 1A of this Annual Report and in the S-1
registration statement file with the SEC on January 25, 2018. We
undertake no obligation to publicly update or revise any
forward-looking statements, including any changes that might result
from any facts, events or circumstances after the date hereof that
may bear upon forward-looking statements. Furthermore, we cannot
guarantee future results, events, levels of activity, performance
or achievements.
This MD&A is intended to assist in understanding and assessing
the trends and significant changes in our results of operations and
financial condition. As used in this MD&A, the words,
“we,” “our” and “us” refer to
Novume Inc. and its consolidated subsidiaries. This MD&A should
be read in conjunction with our condensed consolidated financial
statements and related notes included in this report, as well as
the consolidated financial statements and MD&A of our Annual
Report. The following overview provides a summary of the sections
included in our MD&A:
Executive Summary —
a general description of our
business and key highlights of the fiscal year ended December 31,
2017.
Key Trends, Developments and Challenges
— a discussion
of items and trends that may impact our business in the upcoming
year.
Results of Operations —
an analysis of our
results of operations in our condensed consolidated financial
statements.
Lease Obligations
—
a summary of current and future
lease obligations.
Liquidity and Capital Resources —
an analysis of
cash flows, sources and uses of cash, commitments and
contingencies, seasonality in the results of our operations and
quantitative and qualitative disclosures about market
risk.
Critical Accounting Policies and Estimates
— a
discussion of critical accounting policies requiring critical
judgments and estimates.
Executive Summary
Our Company
We were
formed in February 2017 and began operations upon the merger of
KeyStone Solutions, Inc. (“KeyStone”) and Brekford
Traffic Safety, Inc. (“Brekford”) in August 2017.
KeyStone was formed in March 2016 as a holding company for its
wholly-owned subsidiary AOC Key Solutions, Inc. (“AOC Key
Solutions”). On January 25, 2017, Novume (KeyStone) acquired
Firestorm Solutions, LLC and Firestorm Franchising, LLC
(collectively referred to as “Firestorm”). On October
1, 2017, the Company completed its acquisition of Global Technical
Services, Inc. (“GTS”) and Global Contract
Professionals, Inc. (“GCP) (collectively referred to as
“Global”). For narrative purposes, references to the
Company and Novume include the KeyStone, Firestorm, Brekford and
Global entities.
AOC Key
Solutions is based in Chantilly, Virginia and provides consulting
and technical support services to assist clients seeking U.S.
federal government contracts in the technology, telecommunications,
defense, and aerospace industries. AOC Key Solutions
provides consulting
and technical support services to assist clients seeking U.S.
Federal government contracts in the technology, telecommunications,
defense, and aerospace industries
.
27
Firestorm
is headquartered in Roswell, Georgia and is a nationally recognized
leader in crisis management, crisis communications, emergency
response, and business continuity, including workplace violence
prevention, cyber-breach response, communicable illness/pandemic
planning, predictive intelligence, and other emergency, crisis and
disaster preparedness initiatives. For example, its behavioral risk
and threat assessment program,
BERTHA
®
,
positions schools, businesses and other organizations to prevent
violence from occurring. This program helps our clients to identify
early warning signs that may be exhibited by an individual before
they are on a path to violence.
BERTHA
®
is an integral part of an innovative school violence prevention
program launched by Firestorm in partnership with the University of
Alabama in November of 2017. On December 31, 2017 and January 1,
2018, Firestorm completed the acquisition of all assets of BC
Management, Inc. ("BC Management") and Secure Education
Consultants, LLC ("SEC LLC"), respectively. BC Management is
internationally recognized as a leading executive search firm for
business continuity, disaster recovery, crisis management and risk
management professionals. Coupled with its staffing expertise, BC
Management is a recognized leader in business continuity research
with annual studies covering compensation assessments, program
maturity effectiveness, event impact management reviews, IT
resiliency and critical supply analyses. SEC LLC is comprised of an
expert team of highly trained, former U.S. Secret Service Agents
and assists clients by designing customized plans, conducting
security assessments, delivering training, and responding to
critical incidents.
Brekford
,
headquartered in Hanover, Maryland, is a leading public safety
technology service provider of fully integrated automated traffic
safety enforcement, or ATSE, solutions, including speed, red light,
and distracted driving cameras, as well as citation management
software and secure electronic evidence storage. Brekford is also
in the final stages of development of a new traffic safety product,
Argos Guardian, which is expected to be lunched in the summer of
2018. The patent pending system will combine leading edge camera
and radar technology with an advanced triggering mechanism to
detect, capture, and record "move over" law violations. It will
also include built-in artificial intelligence-based automated
license plate reader or ALPR capability. When combined with
Brekford’s comprehensive citation management software suite,
iP360, Argos Guardian will provide an innovative technology
solution that can assist law enforcement agencies in improving the
safety of officers and emergency response
personnel.
Global is headquartered in Fort Worth, Texas, and provides
the U.S. Department of Defense and the aerospace industry with
experienced maintenance and modification specialists. Global
provides specialized contract personnel, temp-to-hire
professionals, direct hires, and temporary or seasonal hires to a
diverse group of companies.
In an
effort to create specific awareness about us in the Government
Contracting, or GovCon, industry, we formed a subsidiary in 2017,
Novume Media, to develop a television show called
The Bridge
-- a weekly 30-minute
program featuring panel discussions and interviews with leaders
from the government, business, academia and associations. The show
premiered on April 2, 2017 in the Washington, DC market and the
first season is available on line. We have deferred development of
a second season in order to further evaluate the benefit to the
Company.
In
selective situations, we will also seek to serve as a partner or
incubator for businesses where an understanding of government
contracting and contacts with seasoned providers of government
services or products can be instrumental to success. In making
arrangements for the merger with Brekford, Novume assisted it in
arranging the sale Brekford’s legacy vehicle unfitting
business to LB&B Associates Inc., a long-term client of AOC Key
Solutions, retaining a 19.9% interest. We expect to continue our
efforts to find low-risk, high-reward opportunities by using our
knowledge base and strategic position to facilitate transactions
that can provide financial returns without significant operating or
balance sheet exposure.
General
The
information provided in this discussion and analysis of
Novume’s financial condition and results of operations covers
the years ended December 31, 2017 and 2016. Subsequent to December
31, 2016, the Company completed the acquisition of Firestorm, the
Brekford Merger, the acquisition of Global and the purchase of
certain assets of BC Management (described below).
The
financial information in this section for periods prior to
March 15, 2016 is for AOC Key Solutions prior to the
recapitalization into KeyStone. The financial information in this
section for all periods subsequent to March 15, 2016 and prior
to the January 25, 2017 acquisition of Firestorm is prepared on a
consolidated basis for KeyStone and AOC Key Solutions. The
financial information for periods subsequent to January 25, 2017 is
prepared on a consolidated basis for KeyStone, AOC Key Solutions
and Firestorm. For periods subsequent to the Brekford Merger on
August 28, 2017, the financial information is prepared on a
consolidated basis for Novume, AOC Key Solutions, Firestorm and
Brekford. For periods subsequent to the Global acquisition on
October 1, 2017, the financial information is prepared on a
consolidated basis for Novume, AOC Key Solutions, Firestorm,
Brekford and Global.
28
Historically,
the primary focus of our businesses has been on the federal
government contracting and aerospace industries. We provide
consulting, technical support, staffing and systems that help our
clients exploit opportunities and meet challenges more efficiently
and effectively than they can by relying on in-house resources
alone. Our clients are typically well-established,
financially-stable businesses. According to USASpending.gov,
between fiscal years 2013 and 2017, the federal government in the
United States spent an average of over $450 billion annually for
goods and services, creating one of the largest and most stable
markets in the world, and there are thousands of government
contractors providing these goods and services. These contractors
range from small privately-owned lifestyle companies to the Fortune
100. Since 1983, our subsidiaries have served thousands of these
entities. In 2017, we provided services to 14 of the Top 100
largest federal contractors (based on their fiscal 2016 prime
contracts in IT, systems integration, professional services and
telecommunications) as identified by Washington Technology
(
https://washingtontechnology.com/toplists/top-100-lists/2017.aspx
).
A
unique characteristic of the industry is that many of these
companies are concentrated in a geographic territory that stretches
from Southern Maryland to Northern Virginia, wrapping the
nation’s Capital in what is known as the Beltway. Because of
the geographic concentration of these clients, there is also a
large, but fragmented, concentration of service providers for these
companies. Although the businesses that provide resources to the
government contracting sector are diverse and highly fragmented,
their clients have many common needs resulting from the basic
qualifications and standard requirements inherent in the government
procurement process. We believe that there is a unique opportunity
for consolidation in this sector. While our immediate goal is to
improve our ability to serve this sector by pooling our resources
and client contacts, our ultimate objective is to expand our
ability to meet our unique needs by assembling, through organic
growth and strategic acquisitions, a complimentary suite of service
and systems providers with demonstrated ability to satisfy the
needs of this sector for high value talent and support services. In
addition to the benefits of shared costs and pooled resources, we
expect to benefit from the increased client involvement that
targeted expansion of our market segments can provide. We would
like to be recognized as the best place to go for outside help when
a company must meet an unusual need, whether it involves an unusual
opportunity or an unusual threat.
We
intend to fund organic growth and add both vertical and horizontal
capabilities by acquiring service providers through a
market-focused and disciplined strategy. Our efforts to identify
prospective target businesses will look for opportunities where the
combination of resources will be additive to our existing
capabilities and will not be limited to any geographic region or
any particular sector of the support or services industries. A
primary consideration will be to improve the level of support we
provide to our existing customers, as well as carefully considered
expansions of our customer base.
We are
an established provider of outsourced services to the GovCon market
that generates revenues from fees and reimbursable expenses for
professional services primarily billed on an hourly rate,
time-and-materials basis. Clients are typically invoiced monthly,
with revenue recognized as the services are provided. In a few
cases, we may enter into a fixed-fee engagement for our services.
Fixed-fee engagements can be invoiced once for the entire job, or
there could be several “progress” invoices for
accomplishing various phases or reaching contractual milestones.
Time-and-materials contracts represent most our client engagements
and do not provide us with a high degree of predictability of
future period performance.
Our
financial results are impacted principally by the:
1)
demand by clients
for our services;
2)
degree to which
full-time staff can be kept occupied in revenue-generating
activities;
3)
success of the
sales team in generating client engagements; and
4)
number of business
days in each quarter.
The
number of business days on which revenue is generated by our staff
and consultants is affected by the number of vacation days taken,
as well as the number of holidays in each quarter. There are
typically fewer business work days available in the fourth quarter
of the year, which can impact revenues during that period. The
staff utilization rate can also be affected by seasonal variations
in the demand for services from clients. Since earnings may be
affected by these seasonal variations, results for any quarter are
not necessarily indicative of the results that may be achieved for
a full fiscal year.
Unexpected
changes in the demand for our services can result in significant
variations in revenues, and present a challenge to optimal hiring,
staffing and use of consultants. The volume of work performed can
vary from period to period.
29
The
federal government fiscal year starts on October 1 and ends on
September 30. Thus, the bulk of our revenues for 2017 were based on
budget authorizations made in 2016. On March 23rd, 2018, the
Consolidated Appropriations Act (the “2018 Act”) was
signed into law. It provides $1.3 trillion in funding through
September 2018 and anticipates $500 billion in new federal spending
for defense and domestic programs over two years, including
significant increases military procurements. The Company believes
that increased defense spending will flow down to government
contractors and provide them with new opportunities to offer
national defense products and services to the federal government.
The 2018 Act also provides more than $2.3 billion in new funding
for threat identification, mental health, training, and school
safety programs at the Departments of Justice, Education, and
Health and Human Services. The legislation also lifts statutory
budget caps and increases funding for emergency disaster aid
funding. It also lifts the debt ceiling and extends certain health
care and tax authorizations. While we anticipate an increasing
demand for our services in 2018 based upon an expected increase in
the volume of federal government spending and as our clients elect
to outsource their bid and proposal activities, it is still not
clear how government spending will be impacted beyond
2018.
Although
the new administration has expressed a desire to reduce the federal
government bureaucracy, we cannot assume that this will reduce the
demand for our services. A short-term result of a program to reduce
bureaucracy may be to increase privatization initiatives. Moreover,
the new administration’s emphasis on renewing the
nation’s infrastructure, which appears to enjoy broad-based
support, may result in a significant long-term increase in federal
procurements.
Thus,
while changes and adjustments can undoubtedly be anticipated, we
believe the overall outlook for the GovCon sector remains
promising. This is in part due to the changing nature of the
contracting process. The volume and frequency of requests for
proposals has been increasing during recent years as outdated and
ill-conceived programs have been eliminated in favor of higher
priority programs. Moreover, Low Price Technically Acceptable
contracts have increasingly fallen into disfavor as the true
long-term costs of these contracts have become apparent, and a more
rigorous approach to government contracting has gained
favor.
The
statements of operations and other information provided in this
discussion and analysis of the financial condition and results of
operations of Novume should be read in conjunction with the Novume
audited consolidated financial statements and the historical
financial statements of Brekford, KeyStone, Firestorm and Global,
and the related notes thereto.
Recent Acquisitions
BC Management Acquisition
On
December 31, 2017, Novume completed its acquisition of certain
assets of 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. As the BC
Management acquisition has recently been completed, the Company is
currently in the process of completing the purchase price
allocation treating the BC Management acquisition as a business
combination. The preliminary purchase price allocation for BC
Management is included in the balance sheet for the Company’s
consolidated financial statements at December 31, 2017, but results
of operations for BC Management for the year ending December 31,
2017 have not been included in our statements of operations for
such period. BC Management future results, however, will be
included in our statement of operations for the period beginning
after December 31, 2017.
Global Acquisition
On
October 1, 2017 (the “Global Closing Date”), the
Company completed its acquisition of Global Technical Services,
Inc. (“GTS”) and Global Contract Professionals, Inc.
(“GCP) (collectively, the “Global Entities”) (the
“Global Merger”). Consideration paid as part Global
Merger included: (a) $750,000 in cash, (b) 375,000 shares of Novume
common stock and (c) 240,861 shares of Novume Series B Cumulative
Convertible Preferred Stock (the “Novume Series B Preferred
Stock”). In addition to the merger consideration, Novume paid
$365,037 to satisfy in full all of the outstanding debt of GTS and
GCP at closing, except for certain intercompany debt and ordinary
course debt, and amounts due under (a) the Secured Account Purchase
Agreement dated August 22, 2012 by and between GTS and Wells
Fargo Bank
, National Association (the
“GTS Wells Fargo Credit Facility”) and (b) the Secured
Account Purchase Agreement dated August 22, 2012 by and
between GCP and Wells Fargo Bank, National Association (the
“GCP Wells Fargo Credit Facility” and together with the
GTS Wells Fargo Credit Facility, the “Wells Fargo Credit
Facilities”), which will remain in effect following the
consummation of the Global Merger. In connection with the Wells
Fargo Credit Facilities, Novume has delivered to Wells Fargo Bank,
National Association, general continuing guaranties dated September
29, 2017 and effective upon the Global Closing Date of the Global
Merger (the “Wells Fargo Guaranty Agreements”),
guaranteeing the 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 the Global Closing Date.
30
As part
of the Global Merger, the Company created 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 the Global Merger. The Series B Preferred
Stock is entitled to quarterly cash dividends of 1.121% (4.484% per
annum) per share. The Series B Preferred Stock has a conversion
price of $5.00 per share. Each Series B Preferred Stock has an
automatic conversion feature based on the share price of
Novume.
Brekford Acquisition
On
August 28, 2017, the mergers by and among Novume, KeyStone,
Brekford, Brekford Merger Sub, Inc. (“Brekford Merger
Sub”), and KeyStone Merger Sub, LLC (“KeyStone Merger
Sub”),
were consummated (the
“Brekford Merger”) as a result of a merger agreement
(the “Brekford Merger Agreement”). As a result,
Brekford became a wholly owned subsidiary of the Novume, and
Brekford Merger Sub ceased to exist. KeyStone Merger Sub also
became a wholly owned subsidiary of the Novume, and KeyStone
Solutions, Inc. ceased to exist. When KeyStone Merger Sub filed its
certificate of merger with the Secretary of State of the State of
Delaware, it immediately effectuated a name-change to KeyStone
Solutions, LLC, the name by which it is now known. For the purpose
of this document any references to KeyStone are to KeyStone
Solutions, Inc. prior to August 28, 2017 and to KeyStone Solutions,
LLC on and after August 28, 2017.
Upon completion of the Brekford Merger, the merger consideration
was issued in accordance with the terms of the Merger Agreement.
Immediately upon completion of the Brekford Merger, the pre-merger
stockholders of KeyStone owned approximately 80% of the issued and
outstanding capital stock of the Novume on a fully-diluted basis,
and the pre-merger stockholders of Brekford owned approximately 20%
of the issued and outstanding capital stock of the Novume on a
fully-diluted basis.
Firestorm Acquisition
Pursuant
to the terms of the Membership Interest Purchase Agreement (the
“MIPA”), by and among Novume, each of the Firestorm
Entities, each of the Members of the Firestorm Entities (described
below), and a newly-created acquisition subsidiary of Novume,
Firestorm Holdings, LLC, a Delaware limited liability company
(“Firestorm Holdings”), Novume acquired all of the
membership interests in each of the Firestorm Entities for the
following consideration:
●
$500,000 in cash in
the aggregate paid by Novume as of the Firestorm Closing Date to
the three principals (Harry W. Rhulen, Suzanne Loughlin, and James
W. Satterfield, collectively the “Firestorm
Principals”) of Firestorm. Of that aggregate amount $250,000
was paid to Mr. Satterfield, and $125,000 was paid to each of
Mr. Rhulen and Ms. Loughlin;
●
$1,000,000 in the
aggregate in the form of four unsecured, subordinated promissory
notes issued by Novume payable over five years after the Firestorm
Closing Date, to all the Members of the Firestorm Entities
(consisting of the Firestorm Principals and Lancer Financial Group,
Inc. (“Lancer”)). The principal amount of the note
payable to Lancer is $500,000 (the “Lancer Note”). The
principal amount of the note payable to Mr. Rhulen is
$166,666.66. The principal amount of the notes payable to each of
Mr. Satterfield and Ms. Loughlin is $166,666.67. (The
notes payable to Mr. Rhulen, Ms. Loughlin and
Mr. Satterfield are individually referred to herein as a
“Firestorm Principal Note” and collectively, as the
“Firestorm Principal Notes”). The Firestorm Principal
Notes are payable at an interest rate of 2% and the Lancer Note is
payable at an interest rate of 7%. $907,407 was recorded to notes
payable to reflect the net fair value of the notes issued due to
the difference in interest rates. The Lancer Note also has a capped
subordination of $7,000,000, subject to the consent of
Lancer;
●
Each of the
Firestorm Principals was issued 162,698 (315,625 post Brekford
Merger) shares of Novume common stock, par value $0.0001 per share,
for an aggregate issuance of 488,094 (946,875 post Brekford Merger)
shares of Novume common stock;
●
Each of the
Firestorm Principals received warrants to purchase 54,233 (105,209
post Brekford Merger) Novume Common Shares, exercisable over a
period of five years after the Firestorm Closing Date, at an
exercise price of $2.58 per share; and
●
Each of the
Firestorm Principals received warrants to purchase 54,233 (105,209
post Brekford Merger) Novume Common Shares, exercisable over a
period of five years after the Firestorm Closing Date, at an
exercise price of $3.60 per share.
31
Key Trends, Developments and Challenges
U.S. Government Spending and the Government Contractor Industry
Generally
On
March 23, 2018, the Consolidated Appropriations Act (the
“2018 Act”) was signed into law. It provides $1.3
trillion in funding through September 2018. It also anticipates
$500 billion in new federal spending for defense and domestic
programs over two years. The 2018 Act provides more than $2.3
billion in new funding for threat identification, mental health,
training, and school safety programs at the Departments of Justice,
Education, and Health and Human Services. The legislation also
lifts statutory budget caps and increases funding for emergency
disaster aid funding, lifts the debt ceiling and extends certain
health care and tax authorizations. We believe that these increases
in federal funding will increase demand for our
services.
While
we anticipate an increasing demand for our services based upon an
expected increase in the volume of federal government spending and
as our clients elect to outsource their bid and proposal
activities, it is still not clear how government spending will be
impacted beyond 2018. The administration does have some discretion
to delay spending on programs previously authorized.
Impact of Current Federal Budget on Defense Spending
The
2018 Act represents the largest investment in national defense in
15 years. Although the 2018 Act included a 2.4 % pay raise for
military personnel it also provides for significant increases
military procurements, it also provides for significant increases
in military procurements. The Company believe that increased
defense spending will flow down to government contractor and
provide them with new opportunities to offer national defense
product and services to the federal government.
The
Department of Defense is experimenting with a type of simplified
acquisition process known as Other Transactional Authority (OTA). A
purpose of OTA is to encourage nontraditional defense contractors
to develop innovative technologies, though more traditional defense
contractors can also participate. Furthermore, the 2018 Act seeks
to maximize the participation of small and socio-economically
diverse companies, which may increase the number of contractors
offering goods and services to the federal government. We believe
that these increases in federal funding will increase demand for
our services.
NeoSystems Merger
The Company filed a Form S-1 with the SEC on January 25, 2018. A
portion of the proceeds from the proposed offering are to be used
for the planned acquisition of NeoSystems LLC
(“NeoSysems”) through a forward merger under an
agreement entered into on November 16, 2017. The proposed offering
was for $12.5 million of Units, with each Unit consisting of one
share of our common stock and a warrant to purchase one share of
our common stock. A significant portion of the proceeds of the
offering were expected to be used in connection with the
contemplated acquisition of NeoSystems. The consummation of the
merger is subject to, among other things, the completion of the
Qualifying Offering by February 28, 2018. We have not yet completed
this offering and may elect not to complete the offering described
in the S-1.
On March 7, 2018, we 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
provide that upon termination, the Company is 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 Company reserves all rights under
applicable law with respect to the NeoSystems Merger Agreement,
including such notice.
Sale of Note
On February 13, 2018, Brekford sold a note receivable from Global
Public Safety, LLC (“Global Public Safety”), which it
had received as part of the purchase price consideration in
connection with the sale of its legacy upfitting business prior to
its acquisition by Novume as a result of the merger with KeyStone
in 2017. On December 31, 2017, based on the decision to sell the
note receivable to an unrelated third party, the Company
reclassified the note receivable balance to a current asset and
wrote down $450,000 as other expense, thus reducing the balance to
$1,475,000. (See Note 17). Brekford continues to retain a 19.9%
interest in Global Public Safety.
Other
than as discussed above and elsewhere in this Annual Report on Form
10-K, we are not aware of any trends, events or uncertainties that
are likely to have a material effect on our financial
condition.
32
Components of Revenues and Expenses
Revenues
We
principally derive revenues from fees for services generated on a
time and materials (T&M) basis. Revenues for T&M 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
standard rate sheets or as written from time to time in 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.
Costs of Revenues
Direct costs of revenues consist primarily of that portion of
technical and non-technical salaries and wages and payroll-related
costs incurred in connection with fee generating projects. Direct
costs of revenues also include production expenses, sub-consultant
services, and other expenses that are incurred in connection with
our fee generating projects. Direct costs of revenues exclude that
portion of technical and non-technical salaries and wages related
to marketing efforts, vacations, holidays, and other time not spent
directly generating fees under existing contracts. Such costs are
included in operating expenses. We expense direct costs of revenues
when incurred.
Selling, General and Administrative Expenses
Operating expenses include the costs of the marketing and support
staffs, other marketing expenses, management and administrative
personnel costs, payroll taxes, bonuses and employee benefits for
these employees and the portion of salaries and wages not allocated
to direct costs of revenues for those employees who provide our
services. Operating expenses also include facility costs,
depreciation and amortization, professional services, legal and
accounting fees, and administrative operating costs. We expense
operating costs when incurred.
Results of Operations – Comparison of the Years Ended
December 31, 2017 and 2016
Consolidated
operating results for year ended December 31, 2017 include
Firestorm operations for the period from January 25, 2017 through
December 31, 2017, Brekford operations for the period from August
28, 2017 through December 31, 2017 and Global operations for the
period from October 1, 2017 through December 31, 2017.
Novume Solutions, Inc.
For the Years Ended December 31, 2017 and 2016
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
Revenue
|
$
22,135,818
|
$
12,128,406
|
|
Cost
of revenue
|
13,792,473
|
6,959,514
|
|
Gross
profit
|
8,343,345
|
5,168,892
|
|
|
|
|
|
Operating
expense
|
|
|
|
Selling,
general, and administrative expenses
|
12,981,744
|
5,262,768
|
|
Loss
from operations
|
(4,638,399
)
|
(93,876
)
|
|
Other
expense
|
|
|
|
Interest
expense
|
(213,492
)
|
(165,079
)
|
|
Other
expense
|
(483,909
)
|
-
|
|
Total
other expense
|
(697,401
)
|
(165,079
)
|
|
Loss
before taxes
|
(5,335,800
)
|
(258,955
)
|
|
Income
tax benefit
|
294,666
|
219,971
|
|
Net
loss
|
$
(5,041,134
)
|
$
(38,984
)
|
33
Year Ended December 31, 2017 compared to year ended December 31,
2016
Revenue
Revenue
increased by $10,007,412, or 82.5%, to $22,135,818 for the fiscal
year ended December 31, 2017, compared to $12,128,406 for the
fiscal year ended December 31, 2016. Revenue attributable to
Firestorm was $2,150,273 for the period from January 25, 2017
through December 31, 2017. Revenue attributable to Brekford was
$914,345 for the period from August 28, 2017 through December 31,
2017. Revenue attributable to Global was $5,645,747 for the period
from October 1, 2017 through December 31, 2017. The $1,297,047
increase in revenue attributable to legacy Novume was due to an
increase in the number, duration and dollar volume of contracts in
AOC Key Solutions.
Cost of Revenue
Total
cost of revenue for the fiscal year ended December 31, 2017
increased $6,832,959, or 98.2%, to $13,792,473 compared to
$6,959,514 for the fiscal year ended December 31, 2016. Cost of
revenue attributable to Firestorm was $704,668 for the period from
January 25, 2017 through December 31, 2017. Cost of revenue
attributable to Brekford was $445,082 for the period from August
28, 2017 through December 31, 2017. Cost of revenue attributable to
Global was $4,983,044 for the period from October 1, 2017 through
December 31, 2017. The $700,165 increase in the cost of revenue of
the legacy Novume was mostly attributable to increased revenue for
AOC Key Solutions noted above.
Gross Profit
Gross
profit for fiscal year ended December 31, 2017 increased by
$3,174,453, or 61.4%, to $8,343,345 compared to $5,168,892 for the
fiscal year ended December 31, 2016. Gross profit attributable to
Firestorm was $1,445,605 for the period from January 25, 2017
through December 31, 2017. Gross profit attributable to Brekford
was $469,263 for the period from August 28, 2017 through December
31, 2017. Gross profit attributable to Global was $662,703 for the
period from October 1, 2017 through December 31, 2017. The $596,882
increase in the gross profit of the legacy Novume was consistent
with the increased revenue and costs of revenues at AOC Key
Solutions noted above.
The
gross profit margin was 37.7% for the fiscal year ended December 31
2017, compared to 42.6% for the fiscal year ended December 31,
2016. Excluding the gross profit margin for Firestorm, Brekford and
Global, the gross profit margin for legacy Novume for the fiscal
years ended December 31, 2017 and 2016 was relatively consistent at
42.7% and 42.6%, respectively. Due to the nature of staffing
companies, such as Global, having greater costs of services as
compared to professional services support providers such as AOC Key
Solutions, the addition of Global has a natural impact of lowering
the consolidated gross profit.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses for the fiscal year ended
December 31, 2017, increased by $7,718,976, or 146.7%, to
$12,981,744 compared to $5,262,768 for the fiscal year ended
December 31, 2016. Selling, general and administrative expenses
attributable to Firestorm was $1,733,380 for the period from
January 25, 2017 through December 31, 2017. Selling, general and
administrative expenses attributable to Brekford was $890,627 for
the period from August 28, 2017 through December 31, 2017. Selling,
general and administrative expenses attributable to Global was
$726,006 for the period from October 1, 2017 through December 31,
2017. The Company also launched a new television show in the second
quarter which increased operating costs and expenses by
approximately $689,226 through the fiscal year ended December 31,
2017. This television show airs locally in the Washington DC
market. The increase of $4,551,496 in selling, general and
administrative expenses of legacy Novume was primarily due to an
increase in holding company salaries, professional and legal
services, expenses related to acquisitions and ramp up of
operations and expenses related to maintaining compliance with
applicable listing rules and SEC requirements that were lower
during the year ended December 31, 2016 because the Company was
formed in mid-March 2016 and spending increased during the year
ended December 31, 2017. As percentage of revenue, our selling,
general and administrative expenses for the fiscal year ended
December 31, 2017 increased to 58.6% compared to 43.4% for the
fiscal year ended December 31, 2016.
Novume
anticipates that its general and administrative expenses may
continue to increase, however at a reduced pace, in future periods.
These increases may include costs related to hiring of personnel
and fees to outside consultants, lawyers and accountants as well as
expenses related to maintaining compliance with applicable listing
rules and SEC requirements, insurance, and investor relations
activities.
34
Other Expense
Other
expense for the fiscal year ended December 31, 2017 was $697,401
compared to other expense of $165,079 for the fiscal year ended
December 31, 2016. This increase was primarily related to a
$450,000 write-down related to the fiscal year 2018 sale of the
note receivable from Global Public Safety, interest expense and
change in derivative liability of $60,000, offset by rental
income.
Income Tax Expense
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
October 1, 2017 acquisition by Novume, and are therefore, subject
to corporate income taxes. Firestorm is a single-member LLC with
KeyStone as the sole member.
The
income tax benefit for the fiscal year ended December 31, 2017, was
$294,666 and is due primarily to the deferred tax benefit
recognized related to the NOL generated in the current period as
compared to an income tax benefit of $219,971 for the fiscal year
ended December 31, 2016. As of December 31, 2017 and 2016, we had
federal and state NOL carryforwards to utilize in the U.S. of
approximately $5.9 million and $0.3 million, respectively, that
more likely than not will not be realized. These NOLs are scheduled
to begin to expire in 2036 and are grandfathered under the new tax
law; thus, these NOLs are not subject to the annual 80 percent
limitation. As of December 31, 2017 and 2016, we had a remaining
valuation allowance of approximately $1.3 million and $0.0 million,
respectively.
Net Loss
Net
loss for the fiscal year ended December 31, 2017, was $5,041,134
compared to a net loss of $38,984 for the fiscal year ended
December 31, 2016. The net loss per common share was $(0.46) for
the fiscal year ended December 31, 2017, compared to a net loss
margin of $(0.01) for the fiscal year ended December 31, 2016. In
order to accommodate organic growth, Firestorm added both line and
senior staff in 2017. In addition, the planned asset purchases of
BC Management and SEC LLC added expense and took place later than
anticipated, thus delaying their integration and ability to
increase revenue. As such, Firestorm’s expense increases
exceeded its revenue increases. Brekford incurred additional
marketing and R&D expenses which resulted in a net loss. Global
incurred expenses related to its integration with Novume which
contributed to its net loss.
Cash Flow
Novume
expects to finance its operations over the next twelve months from
the date of this Form 10-K primarily through existing cash flow,
supplemented as necessary by funds available through access to
credit and through access to additional capital.
The net
cash flows from operating, investing and financing activities for
the periods below were as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
Net
cash provided by (used in):
|
|
|
|
Operating
activities
|
$
(3,167,146
)
|
$
(136,079
)
|
|
Investing
activities
|
(289,657
)
|
(36,833
)
|
|
Financing
activities
|
2,625,428
|
2,393,633
|
|
Net
(decrease) increase in cash and cash equivalents:
|
$
(831,375
)
|
$
2,220,721
|
Cash Used in Operating Activities
For the
fiscal year ended December 31, 2017, net cash used in operating
activities was $3,167,146. Cash was used primarily to fund our loss
from operations of $5,041,134 and was affected by the increase in
current liabilities of $730,720, offset by an increase in current
assets of $350,138. Novume also incurred non-cash expenses of
$1,493,405 including depreciation and amortization, bad debt
expense, note receivable write-down, share-based compensation,
warrant expense and financing related costs. Novume also incurred
non-cash benefits including deferred taxes and deferred
rent.
35
For the
fiscal year ended December 31, 2016, net cash used in operating
activities was $136,079. Cash was used primarily to fund our
operations and was affected by increases in accounts payable and
accrued expenses, offset by increases in accounts receivable. The
Company also incurred non-cash expenses including depreciation and
amortization.
Cash Used in Investing Activities
For the
fiscal year ended December 31, 2017, net cash used in investing
activities of $289,657 related to the purchase of equipment and
computer hardware.
For the
fiscal year ended December 31, 2016, net cash used in investing
activities of $36,833 related to the purchase of computer hardware
and equipment.
Cash Provided by Financing Activities
For the
fiscal year ended December 31, 2017, net cash provided by financing
activities of $2,625,428 related to the net proceeds from the
issuance of preferred stock, net proceeds from short-term
borrowings, cash acquired by the acquisition of Brekford and
proceeds from the exercise of warrants, offset by the acquisitions
of Firestorm, Global and BC Management, net of cash acquired, and
the payment of Series A Preferred Stock dividends.
For the
fiscal year ended December 31, 2016, net cash provided by financing
activities of $2,393,633 related to proceeds from the issuance of
preferred stock and a note payable, offset by stockholders’
distributions and payments of offering and finance
costs.
Non-Cash Financing Activities
In
March 2016, the AOC Key Solutions stockholders exchanged 100% of
their outstanding shares of common stock in AOC Key Solutions for
proportionate shares of KeyStone’s outstanding common stock
and $1,192,844 of undistributed earnings were contributed to
KeyStone.
In
January 2017, KeyStone acquired Firestorm as described above. The
non-cash consideration for this acquisition included notes payable
of $907,407 and the issuance of 946,875 shares (post merger
exchange) of Novume common stock and 631,254 warrants valued at
$1,203,986.
In
August 2017, the Company merged with Brekford as described above.
The non-cash consideration for the Brekford Merger included the
issuance of 3,287,187 shares of Novume common stock valued at
$5,851,193.
In
October 2017, the Company acquired Global as described above. The
non-cash consideration for this acquisition included a holdback
liability of $200,000, the issuance of 375,000 shares of Novume
common stock valued at $566,288 and the issuance of 240,861 shares
of Novume Series B preferred stock valued at
$2,408,610.
In
December 2017, the Company acquired the assets of BC Management,
Inc. The non-cash consideration for this acquisition included the
issuance of 33,333 shares of Novume common stock valued at $163,332
and the issuance of 66,666 Novume common stock warrants valued at
$123,472.
Lease Obligations
The
Company leases office space in Chantilly, Virginia under the terms
of a ten-year lease expiring October 31, 2019. The lease
contains one five-year renewal option. The lease terms include an
annual increase in base rent and expenses of 2.75%, which have been
amortized ratably over the lease term. The Company also leases
office space in New Orleans, Louisiana under a three-year lease
expiring May 31, 2018, in Roswell, Georgia under a lease
expiring January 31, 2022 and in Fort Worth, Texas under a
three-year lease expiring in March 2018. In addition, the Company
leases office space from Global Public Safety on a month-to-month
basis and it leases space under an operating lease expiring on May
31, 2018. Also, the Company leases office space in Grand Rapids,
Michigan under a seven-year lease expiring in October
2023.
Rent
expense for the years ended December 31, 2017 and 2016 was $605,264
and $507,815, respectively, and is included in selling, general and
administrative expenses.
36
The
Company is the lessor in an agreement to sublease office space in
Chantilly, Virginia with an initial term of two years with eight
one-year options to renew the lease through October 31, 2019.
The lease provides for an annual increase in base rent and expenses
of 2.90%. The initial term ended October 31, 2011 and the
Company exercised the renewal options through 2014. On
April 7, 2015, the lease was amended to sublease more space to
the subtenant and change the rental calculation. The sublease
agreement provided for an offset of $182,534 to rent expense for
each of the years ended December 31, 2017 and 2016.
As of
December 31, 2017, the future obligations over the primary terms of
the long-term leases expiring through 2023 are as
follows:
|
2018
|
$
902,158
|
|
2019
|
812,938
|
|
2020
|
255,074
|
|
2021
|
101,386
|
|
2022
|
38,873
|
|
Thereafter
|
30,393
|
|
Total
|
$
2,140,822
|
Liquidity and Capital Resources
The
Company has funded its operations primarily through cash from
operating activities from its subsidiaries, the $500,000 Avon Note
(see below), and the Reg A offering. As of December 31, 2017, we
had unrestricted cash and cash equivalents of $1,957,212 and
working capital of $2,750,577, as compared to unrestricted cash and
cash equivalents of $2,788,587 and working capital of $3,714,958 as
of December 31, 2016.
In the
Fall of 2016, the Company commenced its Regulation A Offering (the
"Reg A Offering") of up to 3,000,000 Units. At the initial closing
of the Reg A Offering, on December 23, 2016, the Company sold
301,570 Units and received aggregate gross proceeds of $3,015,700.
At the second closing of the Reg A Offering, on January 23,
2017, the Company sold 119,757 Units and received aggregate gross
proceeds of $1,197,570. At the third and final closing of the Reg A
Offering, on March 21, 2017, the Company sold 81,000 Units and
received aggregate gross proceeds of $810,000. As reported by
Novume in its Current Report on Form I-U, as filed with the SEC on
March 22, 2017, the Reg A Offering is now closed, effective as
of the third closing.
Following
the Brekford Merger, all outstanding shares of KeyStone Series A
Preferred Stock were exchanged for the right to receive one share
of Novume Series A Preferred Stock. Novume Series A Preferred Stock
will be entitled to quarterly dividends in the amount of $0.175 (7%
per annum) per share, being an identical per annum percentage per
share dividend as received by holders of KeyStone Series A
Preferred Stock prior to the Brekford Merger. We anticipate that
Novume will pay the quarterly cash dividends through cash flow from
Novume, potential business growth from other acquired entities and
access to additional credit or capital. The quarterly dividend
payments are due within five (5) business days following the
end of a quarter. On April 7, 2017, Novume paid cash dividends
of $76,695 to holders of record of Novume Series A Preferred Stock
as of March 30, 2017. On July 8, 2017, the Company paid cash
dividends of $87,907 to shareholders of record of Novume Series A
Preferred Stock as June 30, 2017. On October 7, 2017, the
Company paid cash dividends of $87,907 payable to shareholders of
record of Novume Series A Preferred Stock as September 30, 2017. On
December 31, 2017, the Company declared and accrued dividends of
$87,907 payable to shareholders of record as of December 31,
2017.
As part
of the Global Merger, the Company issued 240,861 shares of $.0001
par value Novume Series B Cumulative Convertible Preferred Stock
(the “Series B Preferred Stock”). All Series B
Preferred Stock was issued at a price of $10.00 per share as part
of the acquisition of the Global Merger. The Series B Preferred
Stock is entitled to quarterly cash dividends of 1.121% (4.484% per
annum) per share. The Series B Preferred Stock has a conversion
price of $5.00 per share. Each Series B Preferred Stock has an
automatic conversion feature based on the share price of Novume. On
December 31, 2017, the Company declared and accrued dividends of
$27,001 payable to shareholders of record as of December 31,
2017
Operating
assets and liabilities consist primarily of receivables from billed
and unbilled services, accounts payable, accrued expenses, and
accrued payroll and related benefits. The volume of billings and
timing of collections and payments affect these account
balances.
37
AOC Key
Solutions was a party to a business loan agreement (the “2015
Loan Agreement”) with Sandy Spring Bank (“SSB”)
dated as of September 25, 2015. The primary credit facility
was an asset based revolving line of credit up to $1,000,000 which
was due to mature on September 30, 2016. To secure its
obligations under the 2015 Loan Agreement, AOC Key Solutions had
granted to SSB a security interest in its accounts receivable. SSB
was required to advance funds to AOC Key Solutions up to the lesser
of (1) $1,000,000 or (2) eighty percent (80%) of the
aggregate amount of all of its accounts receivable aged 90 days or
less which contained selling terms and conditions acceptable to
SSB. AOC Key Solutions did not draw any funds from this credit
facility in 2015. Pursuant to First Amendment to Business Loan
Agreement (Asset Based), dated May 9, 2016, SSB had waived the
restrictions in the 2015 Loan Agreement on AOC Key Solutions’
ability to make dividends to the Company. There was no outstanding
balance on the 2015 Loan Agreement at December 31,
2016.
On
August 11, 2016, Novume entered into a Loan and Security
Agreement (the “2016 Line of Credit”) with SSB that
replaced the 2015 Loan Agreement. The 2016 Line of Credit was
comprised of: 1) an asset-based revolving line of credit up to
$1,000,000 for short-term working capital needs and general
corporate purposes which matured on July 31, 2017, bore
interest at the Wall Street Journal Prime Rate, floating, plus
0.50% and was secured by a first lien on all of Novume’s
business assets; and 2) an optional term loan of $100,000, which
was for permanent working capital, bore interest at the Wall Street
Journal Prime Rate, floating, plus 0.75%, required monthly payments
of principal plus interest to fully amortize the loan over four
years, was secured by a first lien on all of Novume’s
business assets, cross-collateralized and cross-defaulted with the
revolving line of credit, and was to mature on February 15,
2019.
The
borrowing base for the 2016 Line of Credit was up to the lesser of
(1) $1,000,000 or (2) eighty percent (80%) of the
aggregate amount of all eligible accounts receivable as defined by
SSB. The borrowing base for the $100,000 term loan was fully
reserved under the borrowing base for the revolving line of credit.
The 2016 Line of Credit had periodic reporting requirements and
balance sheet covenants, as well as affirmative and negative
operational and ownership covenants. Novume was in compliance with
all 2016 Line of Credit covenants at December 31, 2016. In
August 2017, the Company terminated the 2016 Line of Credit with
SSB. As such, there was no outstanding balance on the 2016 Line of
Credit at December 31, 2017.
As of
December 31, 2017 and 2016, Novume had no balances due for the 2016
Line of Credit or the 2015 Loan Agreement and there were no amounts
outstanding as of the date of this Form 10-K. When Novume replaced
the 2015 Loan Agreement with the 2016 Line of Credit on
August 11, 2016, neither line of credit had a balance due. The
Company terminated the 2016 Line of Credit in August
2017.
Global
has revolving lines of credit with Wells Fargo Bank, National
Association (“WFB”) (“the Global Wells
Agreements”).
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 Global Wells Agreements 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 current terms of the
Global Wells Agreements run through December 31, 2018, with
automatic renewal terms of 12 months.
WFB or Global
may terminate the Global Wells
Agreements upon at least 60 days’ written notice prior to the
last day of the current term.
The principal balance at
December 31, 2017 totaled $2,057,259. As part of the lines of
credit agreements, Global must maintain certain financial
covenants. Global met all financial covenant requirements during
and as of the year ended December 31, 2017.
On November 12, 2017,
AOC Key Solutions
entered into an Account Purchase Agreement and
related agreements (the “KSI Wells Agreement”) with
WFB. Pursuant to the KSI 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 KSI 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 KSI Wells Agreement at a
monthly rate equal to the Daily One Month LIBOR in effect from time
to time plus 5%. The KSI 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 KSI 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 KSI 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 KSI 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, 2017 totaled
$1,606,327.
38
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 fair value was determined to be
$58,520 and was recorded as a debt discount and additional paid-in
capital in the accompanying consolidated balance sheet as of
December 31, 2016. The debt discount is being amortized as
interest expense on a straight-line basis, which approximates the
effective interest method, through the maturity date of the note
payable.
The
Avon Road Note is subordinated to the Novume’s 2016 Line of
Credit with SSB and any successor financing facility. Simple
interest accrues on the unpaid principal of the note at a rate
equal to the lower of (a) 9% per annum, or (b) the
highest rate permitted by applicable law. Interest is payable
monthly, and the note matures on March 16, 2019. The Company
terminated the 2016 Line of Credit in August 2017.
The Company has generated losses since its inception in August 2017
and has relied on cash on hand, external bank lines of credit and
the sale of a note to support cashflow from operations. The Company
attributes the 2017 losses to public company corporate overhead and
losses generated by some of our subsidiary operations. As of and
for the year ended December 31, 2017, the Company had a
net
loss of approximately $
5.04
million
and positive working capital of approximately
$
2.75 million
.
The Company’s cash position was
increased in April 2018 by the receipt of $2 million related to the
issuance of a promissory note. Management believes that
based on
relevant conditions and events that are known and reasonably
knowable
that its forecasts,
for one year from the date of the filing of the consolidated
financial statements in this Annual Report on Form 10-K, indicate
improved operations and the Company’s ability to continue
operations as a going concern. The Company has contingency plans to
reduce or defer expenses and cash outlays should operations not
improve in the look-forward period.
As of
December 31, 2017, Novume did not have any material commitments for
capital expenditures.
Recent Events
On
April 3, 2018, Novume and Brekford entered into a transaction
pursuant to which an institutional investor (the "Lender") loaned
to $2,000,000 to Novume and Brekford. The loan is due and payable
on May 1, 2019 and bears interest at 15% per annum, with a minimum
of 15% interest payable regardless of when the loan is
repaid. The loan is secured by a security interest in all of
the assets of Brekford. In addition, Novume agreed to issue
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 is
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. 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, of which this amount would be credited against
proceeds from the sale of Brekford, if any.
Off-Balance Sheet Arrangements, Contractual Obligations and
Commitments
As of
the date of this Annual Report on Form 10-K, we did not have any
off-balance sheet arrangements that have had or are reasonably
likely to have a material effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital
resources or capital expenditures.
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of
operations is based upon Novume’s consolidated financial
statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”). The preparation of these consolidated
financial statements requires the management of Novume to make
estimates and judgments that affect the reported amounts in our
consolidated financial statements.
We
believe the application of accounting policies, and the estimates
inherently required therein, are reasonable. These accounting
policies and estimates are periodically reevaluated, and
adjustments are made when facts and circumstances dictate a change.
Novume bases its estimates on historical experience and on various
other assumptions that management of Novume believes to be
reasonable under the circumstances, the results of which form
management’s basis for making judgments about the carrying
values of assets and liabilities that may not be readily apparent
from other sources. Actual results may differ from these estimates
under different assumptions or conditions, or if management made
different judgments or utilized different estimates.
Novume’s
accounting policies are further described in its historical audited
consolidated financial statements and the accompanying notes
included elsewhere in this Form 10-K. Novume has identified the
following critical accounting policies:
39
Revenue Recognition
We
recognize its revenues for the provision of services when
persuasive evidence of an arrangement exists, services have been
rendered or delivery has occurred, the fee is fixed or
determinable, and the collectability of the related revenue is
reasonably assured. Novume principally derives revenues from fees
for services generated on a project by project basis. Revenues for
time-and-materials contracts are recognized based on the number of
hours worked by our employees or consultants at an agreed upon rate
per hour set forth in our standard rate sheet or as written from
time to time in our contracts or purchase orders. These costs are
recognized in the period in which services are
performed.
Revenues
related to firm-fixed-price contracts are recognized upon
completion of the project as these projects are typically
short-term in nature.
The
agreements entered into in connection with a project, whether on a
time-and-materials basis or firm-fixed-price basis, typically allow
our clients to terminate early due to breach or for convenience
with 30-days’ notice. In the event of termination, the client
is contractually required to pay for all time, materials and
expenses incurred by us through the effective date of the
termination.
For automated traffic safety enforcement revenue, we recognize the
revenue when the required collection efforts, from citizens, are
completed and posted to the municipality’s account. The
respective municipality is then billed depending on the terms of
the respective contract, typically 15 days after the preceding
month while collections are reconciled. For contracts where we
receive a percentage of collected fines, revenue is calculated
based upon the posted payments from citizens multiplied by our
contractual percentage. For contracts where we receive a specific
fixed monthly fee regardless of citations issued or collected,
revenue is recorded once the amount collected from citizens exceeds
the monthly fee per camera. Our fixed fee contracts typically have
a revenue neutral provision whereby the municipality’s
payment to us cannot exceed amounts collected from citizens within
a given month.
Accounts Receivable
Accounts
receivable are customer obligations due under normal trade terms.
We perform continuing credit evaluations of its clients’
financial condition, and Novume generally does not require
collateral.
Management
reviews accounts receivable to determine if any receivables will
potentially be uncollectible. Factors considered in the
determination include, among other factors, number of days an
invoice is past due, client historical trends, available credit
ratings information, other financial data and the overall economic
environment. Collection agencies may also be utilized if management
so determines.
We
record an allowance for doubtful accounts based on specifically
identified amounts that are believed to be uncollectible. We also
record as an additional allowance a certain percentage of aged
accounts receivable, based on historical experience and our
assessment of the general financial conditions affecting its
customer base. If actual collection experience changes, revisions
to the allowance may be required. After all reasonable attempts to
collect an account receivable have failed, the amount of the
receivable is written off against the allowance. The balance in the
allowance for doubtful accounts was $24,000 and $0 as of December
31, 2017 and 2016, respectively. However, actual write-offs might
exceed the recorded allowance.
Income Taxes
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 more
likely than not that their benefits will not 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.
40
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, 2017 and 2016, our evaluation revealed no uncertain
tax positions that would have a material impact on the financial
statements. The 2014 through 2016 tax years remain subject to
examination by the IRS, as of December 31, 2017. 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.
New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Not Yet Adopted
In August 2017, the Financial Accounting Standards Board
(“FASB”) issued new guidance related to accounting for
hedging activities. This guidance expands strategies that qualify
for hedge accounting, changes how many hedging relationships are
presented in the financial statements, and simplifies the
application of hedge accounting in certain situations. The standard
will be effective for us beginning July 1, 2019, with early
adoption permitted for any interim or annual period before the
effective date. Adoption of the standard will be applied using a
modified retrospective approach through a cumulative-effect
adjustment to retained earnings as of the effective date. We are
currently evaluating the impact of this standard on our
consolidated financial statements, including accounting policies,
processes, and systems.
In May 2017, the FASB issued Accounting Standards Update
(“ASU”) No. 2017-09,
Compensation - Stock
Compensation: Scope of Modification Accounting
, which provides guidance about which changes to
the terms or conditions of a share-based payment award require an
entity to apply modification accounting. An entity will account for
the effects of a modification unless the fair value of the modified
award is the same as the original award, the vesting conditions of
the modified award are the same as the original award and the
classification of the modified award as an equity instrument or
liability instrument is the same as the original award. The update
is effective for fiscal year 2019. The update is to be adopted
prospectively to an award modified on or after the adoption date.
Early adoption is permitted. We are currently evaluating the effect
of this update but do not believe it will have a material impact on
its financial statements and related
disclosures.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles -
Goodwill and Other: Simplifying the Test for Goodwill
Impairment
. To simplify the
subsequent measurement of goodwill, the update requires only a
single-step quantitative test to identify and measure impairment
based on the excess of a reporting unit's carrying amount over its
fair value. A qualitative assessment may still be completed first
for an entity to determine if a quantitative impairment test is
necessary. The update is effective for fiscal year 2021 and is to
be adopted on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes:
Intra-Entity Transfers of Assets Other Than
Inventory
, as part of its
simplification initiatives. The update requires that an entity
recognize the income tax consequences of an intra-entity transfer
of an asset other than inventory when the transfer occurs, rather
than deferring the recognition until the asset has been sold to an
outside party as is required under current GAAP. The update is
effective for fiscal year 2019. The new standard will require
adoption on a modified retrospective basis through a
cumulative-effect adjustment to retained earnings, and early
adoption is permitted. We are currently evaluating the effect that
this update will have on our financial statements and related
disclosures.
In June
2016, the FASB issued ASU 2016-13
Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments
which requires the measurement and recognition of expected credit
losses for financial assets held at amortized cost. ASU 2016-13
replaces the existing incurred loss impairment model with an
expected loss methodology, which will result in more timely
recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years beginning
after December 15, 2019. We are currently in the process of
evaluating the impact of the adoption of ASU 2016-13 on our
consolidated financial statements.
41
In
February 2016, the FASB issued ASU 2016-02,
Leases
. This ASU is a comprehensive new
leases standard that amends various aspects of existing guidance
for leases and requires additional disclosures about leasing
arrangements. It will require companies to recognize lease assets
and lease liabilities by lessees for those leases classified as
operating leases under previous GAAP. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The ASU is
effective for annual periods beginning after December 15,
2018, including interim periods within those fiscal years; earlier
adoption is permitted. In the financial statements in which the ASU
is first applied, leases shall be measured and recognized at the
beginning of the earliest comparative period presented with an
adjustment to equity. Practical expedients are available for
election as a package and if applied consistently to all leases. We
are currently evaluating the impact of the adoption of this
guidance on our consolidated financial condition, results of
operations and cash flows.
In May
2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
,
as a new Topic, Accounting Standards Codification
(“ASC”) Topic 606, which supersedes existing accounting
standards for revenue recognition and creates a single framework.
Additional updates to Topic 606 issued by the FASB in 2015 and 2016
include the following:
●
ASU
No. 2015-14,
Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective
Date
, which defers the effective date of the new guidance
such that the new provisions will now be required for fiscal years,
and interim periods within those years, beginning after
December 15, 2017.
●
ASU
No. 2016-08,
Revenue from
Contracts with Customers (Topic 606): Principal versus Agent
Considerations
, which clarifies the implementation guidance
on principal versus agent considerations (reporting revenue gross
versus net).
●
ASU
No. 2016-10,
Revenue from
Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensin
g, 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 relate 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
will remain substantially unchanged.
There
are currently no other accounting standards that have been issued
but not yet adopted that will have a significant impact on our
consolidated financial position, results of operations or cash
flows upon adoption.
Recently Adopted
In
November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred
Taxes
. ASU 2015-17 is aimed at reducing complexity in
accounting standards. Currently, GAAP requires the deferred taxes
for each jurisdiction to be presented as a net current asset or
liability and net noncurrent asset or liability. This requires a
jurisdiction-by-jurisdiction analysis based on the classification
of the assets and liabilities to which the underlying temporary
differences relate, or, in the case of loss or credit
carryforwards, based on the period in which the attribute is
expected to be realized. Any valuation allowance is then required
to be allocated on a pro rata basis, by jurisdiction, between
current and noncurrent deferred tax assets. To simplify
presentation, the new guidance requires that all deferred tax
assets and liabilities, along with any related valuation allowance,
be classified as noncurrent on the balance sheet. As a result, each
jurisdiction will now only have one net noncurrent deferred tax
asset or liability. The guidance does not change the existing
requirement that only permits offsetting within a jurisdiction;
companies are still prohibited from offsetting deferred tax
liabilities from one jurisdiction against deferred tax assets of
another jurisdiction. The new guidance is effective in fiscal years
beginning after December 15, 2016, including interim periods
within those years, with early adoption permitted. We early adopted
and applied the new standard retrospectively to the prior period
presented in the accompanying consolidated balance sheets and it
did not have a material impact.
42
In
April 2015, the FASB issued ASU 2015-03,
Interest – Imputation of Interest:
Simplifying the Presentation of Debt Issuance Costs
. The
update requires that deferred debt issuance costs be reported as a
reduction to long-term debt (previously reported in other
noncurrent assets). We adopted ASU 2015-03 in 2016 and for all
retrospective periods, as required, and the impact of the adoption
was not material to our consolidated financial
statements
In
August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements –
Going Concern,
which requires management to perform interim
and annual assessments of an entity’s ability to continue as
a going concern within one year of the date the financial
statements are issued and provides guidance on determining when and
how to disclose going concern uncertainties in the financial
statements. Certain disclosures will be required if conditions give
rise to substantial doubt about an entity’s ability to
continue as a going concern. This accounting standard update
applies to all entities and was effective for the annual period
ending after December 15, 2016, and for annual periods and
interim periods thereafter, with early adoption permitted. We
adopted this standard during fiscal year 2016 and it did not have a
material impact on our consolidated results of operations,
financial position or cash flows.
In
March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment
Accounting
. The standard reduces complexity in several
aspects of the accounting for employee share-based compensation,
including the income tax consequences, classification of awards as
either equity or liabilities, and classification on the statement
of cash flows. The ASU is effective for fiscal years beginning
after December 15, 2016, and interim periods within those
fiscal years, with early adoption permitted. We adopted this
standard and the impact of the adoption was not material to our
consolidated financial statements.
We do
not believe that any recently issued accounting standards, in
addition to those referenced above, would have a material effect on
our consolidated financial statements.
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 provides guidance
to evaluate whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. If
substantially all of the fair value of the gross assets acquired
(or disposed of) is concentrated in a single asset or a group of
similar assets, the assets acquired (or disposed of) are not
considered a business. We adopted ASU 2017-01 as of January 1,
2017.
As a
“smaller reporting company” as defined by Item 10 of
Regulation S-K, the Company is not required to provide information
required by this Item.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
44
|
|
Consolidated
Balance Sheets as of December 31, 2017 and 2016
|
45
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2017
and 2016
|
46
|
|
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2017 and 2016
|
47
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2017 and
2016
|
48
|
|
Notes
to Consolidated Financial Statements
|
49
|
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
Novume
Solutions, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Novume
Solutions, Inc. (the "Company") as of December 31, 2017 and 2016,
the related consolidated statements of operations, stockholders'
equity, and cash flows, for the years then ended, and the related
notes (collectively referred to as the "financial statements"). In
our opinion, the consolidated financial statements present fairly,
in all material respects, the consolidated financial position of
the Company as of December 31, 2017 and 2016, and the consolidated
results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on the Company's consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and
arerequired to be independent with respect to the Company in
accordance with theU.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
s/s BD & Company, Inc.
BD
& Company, Inc.
We have
served as the Company's auditor since 2017.
Owings
Mills, MD
April 12,
2018
44
Novume Solutions, Inc. and Subsidiaries
|
|
December 31, 2017
|
December 31, 2016
|
|
Assets
|
|
|
|
Current Assets
|
|
|
|
Cash
and cash equivalents
|
$
1,957,212
|
$
2,788,587
|
|
Accounts
receivable, net
|
6,707,294
|
1,997,831
|
|
Inventory
|
155,716
|
-
|
|
Notes
receivable
|
1,475,000
|
-
|
|
Other
current assets
|
687,966
|
81,011
|
|
Total
current assets
|
10,983,188
|
4,867,429
|
|
Property
and Equipment
|
|
|
|
Furniture
and fixtures
|
211,885
|
137,784
|
|
Office
equipment
|
524,131
|
463,937
|
|
Camera
systems
|
462,399
|
-
|
|
Vehicles
|
10,020
|
-
|
|
Leasehold
improvements
|
72,918
|
33,259
|
|
Total
fixed assets
|
1,281,353
|
634,980
|
|
Less:
accumulated depreciation
|
(633,014
)
|
(515,911
)
|
|
Net
property and equipment
|
648,339
|
119,069
|
|
Goodwill
|
3,092,616
|
-
|
|
Intangibles,
net
|
5,468,874
|
-
|
|
Other Assets
|
|
|
|
Deferred
tax asset
|
-
|
219,982
|
|
Investment
at cost
|
262,140
|
-
|
|
Deferred
offering and financing costs
|
-
|
236,963
|
|
Deposits
and other long-term assets
|
143,583
|
39,282
|
|
Total
other assets
|
405,723
|
496,227
|
|
Total
assets
|
$
20,598,740
|
$
5,482,725
|
|
Liabilities and Stockholders' Equity
|
|
|
|
Current Liabilities
|
|
|
|
Accounts
payable
|
$
1,390,877
|
$
577,268
|
|
Accrued
expenses
|
3,060,512
|
575,203
|
|
Lines
of credit
|
3,663,586
|
-
|
|
Deferred
revenue
|
117,636
|
-
|
|
Total
current liabilities
|
8,232,611
|
1,152,471
|
|
Long-Term Liabilities
|
|
|
|
Notes
payable
|
1,405,994
|
457,289
|
|
Deferred
rent
|
53,217
|
56,709
|
|
Total
long-term liabilities
|
1,459,211
|
513,998
|
|
Total
liabilities
|
9,691,822
|
1,666,469
|
|
|
|
|
|
Series
A Cumulative Convertible Redeemable Preferred stock, $0.0001 par
value, 505,000 and 500,000 shares designated, 502,327 and 301,570
shares issued and outstanding as of December 31, 2017 and 2016,
respectively
|
4,396,580
|
2,269,602
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
Common
stock, $0.0001 par value, 30,000,000 and 25,000,000 shares
authorized, and 14,463,364 and 5,000,000 shares issued and
outstanding as of December 31, 2017 and 2016,
respectively
|
1,447
|
500
|
|
Preferred
stock, $0.0001 par value, 2,000,000 and zero shares authorized,
505,000 and 500,000 shares designated as Series A as of December
31, 2017 and 2016, respectively, and 240,861 and zero shares
designated as Series B as of December 31, 2017 and 2016,
respectively.
|
-
|
-
|
|
Series
B Cumulative Convertible Preferred stock, $0.0001 par value,
240,861 and zero shares designated, issued and outstanding as of
December 31, 2017 and 2016, respectively
|
2,408,610
|
-
|
|
Additional
paid-in capital
|
9,933,941
|
1,976,549
|
|
Accumulated
deficit
|
(5,833,660
)
|
(430,395
)
|
|
Total
stockholders’ equity
|
6,510,338
|
1,546,654
|
|
Total
liabilities and stockholders’ equity
|
$
20,598,740
|
$
5,482,725
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
45
Novume Solutions, Inc. and Subsidiaries
Consolidated Statements of Operations
|
|
For the Years ended December 31,
|
|
|
|
2017
|
2016
|
|
Revenue
|
$
22,135,818
|
$
12,128,406
|
|
Cost
of revenue
|
13,792,473
|
6,959,514
|
|
Gross
profit
|
8,343,345
|
5,168,892
|
|
|
|
|
|
Operating
expenses
|
|
|
|
Selling,
general, and administrative expenses
|
12,981,744
|
5,262,768
|
|
Loss
from operations
|
(4,638,399
)
|
(93,876
)
|
|
Other
expense
|
|
|
|
Interest
expense
|
(213,492
)
|
(165,079
)
|
|
Other
expense
|
(483,909
)
|
-
|
|
Total
other expense
|
(697,401
)
|
(165,079
)
|
|
Loss
before income taxes
|
(5,335,800
)
|
(258,955
)
|
|
Benefit
from income taxes
|
294,666
|
219,971
|
|
Net
loss
|
$
(5,041,134
)
|
$
(38,984
)
|
|
|
|
|
|
Loss
per common share - basic
|
$
(0.46
)
|
$
(0.01
)
|
|
Loss
per common share - diluted
|
$
(0.46
)
|
$
(0.01
)
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
Basic
|
11,767,304
|
7,679,501
|
|
Diluted
|
11,767,304
|
7,679,501
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
46
Novume Solutions, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’
Equity
|
|
Shares of Common Stock
|
Common Stock
|
Shares of Series B Preferred Stock
|
Series B Preferred Stock
|
Additional Paid-In Capital
|
Retained Earnings
|
Total Stockholders’ Equity (Accumulated Deficit)
|
|
Balance
as of January 1, 2016
|
1,370
|
$
-
|
-
|
$
-
|
$
597,704
|
$
932,334
|
$
1,530,038
|
|
Stockholders’
distributions
|
-
|
-
|
-
|
-
|
-
|
(125,615
)
|
(125,615
)
|
|
Net
income of AOC Key Solutions through March 14, 2016
|
-
|
-
|
-
|
-
|
-
|
386,125
|
386,125
|
|
Contribution
of undistributed earnings from AOC Key Solutions
|
-
|
-
|
-
|
-
|
1,192,844
|
(1,192,844
)
|
-
|
|
Net
common stock issued in recapitalization
|
4,998,630
|
500
|
-
|
-
|
(500
)
|
-
|
-
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
26,844
|
-
|
26,844
|
|
Issuance
of warrants
|
-
|
-
|
-
|
-
|
159,657
|
-
|
159,657
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(5,286
)
|
(5,286
)
|
|
Net
loss from March 15, 2016 through December 31, 2016
|
-
|
-
|
-
|
-
|
-
|
(425,109
)
|
(425,109
)
|
|
Balance
as of December 31, 2016
|
5,000,000
|
500
|
-
|
-
|
1,976,549
|
(430,395
)
|
1,546,654
|
|
Net
common stock issued in Firestorm acquisition
|
488,094
|
49
|
-
|
-
|
976,237
|
-
|
976,286
|
|
Effect
of contribution to Novume Solutions, Inc. on August 28,
2017
|
5,158,503
|
516
|
-
|
-
|
(516
)
|
-
|
-
|
|
Net
common stock issued in Brekford acquisition
|
3,287,187
|
329
|
-
|
-
|
5,850,864
|
-
|
5,851,193
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
408,465
|
-
|
408,465
|
|
Issuance
of warrants
|
-
|
-
|
-
|
-
|
418,424
|
-
|
418,424
|
|
Exercise
of warrants
|
121,247
|
12
|
-
|
-
|
124,994
|
-
|
125,006
|
|
Equity
issued in Global acquisition
|
375,000
|
38
|
240,861
|
2,408,610
|
566,250
|
-
|
2,974,898
|
|
Net
common stock issued in BC Management acquisition
|
33,333
|
3
|
-
|
-
|
163,329
|
-
|
163,332
|
|
Preferred
stock dividends
|
-
|
-
|
-
|
-
|
-
|
(362,131
)
|
(362,131
)
|
|
Accretion
of Series A preferred stock
|
-
|
-
|
-
|
-
|
(550,655
)
|
-
|
(550,655
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(5,041,134
)
|
(5,041,134
)
|
|
Balance
as of December 31, 2017
|
14,463,364
|
$
1,447
|
240,861
|
$
2,408,610
|
$
9,933,941
|
$
(5,833,660
)
|
$
6,510,338
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
47
Novume Solutions, Inc. and Subsidiaries
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Cash Flows from Operating Activities
|
|
|
|
Net
loss
|
$
(5,041,134
)
|
$
(38,984
)
|
| Adjustment to reconcile net loss to net cash used in operating activities: | ||
|
Depreciation
and amortization
|
142,545
|
51,870
|
|
Provision
for losses on accounts receivable
|
24,000
|
-
|
|
Deferred
taxes
|
(294,666
)
|
(219,982
)
|
|
Share-based
compensation
|
408,465
|
26,844
|
|
Deferred
financing costs
|
109,236
|
28,703
|
|
Deferred
rent
|
(20,076
)
|
4,330
|
|
Warrant
expense
|
67,491
|
101,634
|
|
Change
in fair value of derivative liability
|
60,000
|
-
|
|
Amortization
of intangibles
|
546,410
|
-
|
|
Loss
on notes receivable writedown
|
450,000
|
-
|
|
Changes
in operating assets and liabilities
|
|
|
|
Accounts
receivable
|
(158,512
)
|
(263,809
)
|
|
Inventory
|
12,056
|
-
|
|
Deposits
|
(95,060
)
|
-
|
|
Prepaid
expenses and other current assets
|
(183,622
)
|
(7,258
)
|
|
Accounts
payable
|
(398,315
)
|
157,786
|
|
Accrued
expenses and other current liabilities
|
1,033,893
|
22,787
|
|
Deferred
revenue
|
95,143
|
-
|
|
Notes
receivable
|
75,000
|
-
|
|
Net
cash used in operating activities
|
(3,167,146
)
|
(136,079
)
|
|
Cash Flows from Investing Activities
|
|
|
|
Capital
expenditures
|
(289,657
)
|
(36,833
)
|
|
Net
cash used in investing activities
|
(289,657
)
|
(36,833
)
|
|
Cash Flows from Financing Activities
|
|
|
|
Stockholders'
distributions
|
-
|
(125,615
)
|
|
Proceeds
from short-term borrowings
|
7,761,384
|
-
|
|
Repayments
of short-term borrowings
|
(7,111,163
)
|
-
|
|
Proceeds
from notes payable
|
-
|
500,000
|
|
Acquisition
of Firestorm - net of cash acquired
|
(417,704
)
|
-
|
|
Acquisition
of Brekford - net of cash acquired
|
1,943,760
|
-
|
|
Acquisition
of Global - net of cash required
|
(1,069,693
)
|
-
|
|
Acquisition
of BC Management
|
(100,000
)
|
-
|
|
Net
proceeds from exercise of warrants
|
125,006
|
-
|
|
Net
proceeds from issuance of preferred stock
|
1,745,347
|
2,269,602
|
|
Payment
of deferred offering costs
|
-
|
(216,842
)
|
|
Payment
of preferred dividends
|
(251,509
)
|
-
|
|
Payment
of financing costs
|
-
|
(33,512
)
|
|
Net
cash provided by financing activities
|
2,625,428
|
2,393,633
|
|
Net
(decrease) increase in cash and cash equivalents
|
(831,375
)
|
2,220,721
|
|
Cash
and cash equivalents at beginning of year
|
2,788,587
|
567,866
|
|
Cash
and cash equivalents at end of year
|
$
1,957,212
|
$
2,788,587
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
48
Novume Solutions, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
Nature of Operations
Novume
Solutions, Inc. (the “Company” or “Novume”)
was formed in February 2017 to effectuate the mergers of, and
become a holding company for KeyStone Solutions, Inc.
(“KeyStone”) and Brekford Traffic Safety, Inc.
(“Brekford”).
For the purpose of this
document any references to KeyStone are to KeyStone Solutions, Inc.
prior to August 28, 2017 and to KeyStone Solutions, LLC on and
after August 28, 2017.
Our services are provided through
seven wholly owned subsidiaries: AOC Key Solutions, Inc.; Firestorm
Solutions, LLC and Firestorm Franchising, LLC (collectively
referred to as “Firestorm” or “Firestorm
Entities”); Brekford; Global Technical Services, Inc. and
Global Contract Professionals; Inc. (collectively referred to as
“Global” or the "Global Entities"); and Novume Media,
Inc. (“Novume Media”).
The
financial results of Brekford are included in the results of
operations from August 28, 2017 through December 31, 2017. For
narrative purposes, Company and Novume references include the
Brekford, KeyStone, Firestorm and Global entities.
The historical financial statements for Novume
prior to the merger with Brekford reflect the historical financial
statements of KeyStone.
KeyStone
was formed in March 2016 as a holding company for its wholly owned
subsidiary AOC Key Solutions, Inc. (“AOC Key
Solutions”), which is headquartered in Chantilly, Virginia.
AOC Key Solutions provides consulting and technical support
services to assist clients seeking U.S. Federal government
contracts in the technology, telecommunications, defense, and
aerospace industries.
On
January 25, 2017, Novume (KeyStone) acquired Firestorm (See Note
2), a nationally-recognized leader in crisis management, crisis
communications, emergency response, and business continuity,
including workplace violence prevention, cyber-breach response,
communicable illness/pandemic planning, predictive intelligence,
and other emergency, crisis and disaster preparedness initiatives.
Firestorm is headquartered in Roswell, Georgia.
Brekford
,
headquartered in Hanover, Maryland, is a leading public safety
technology service provider of fully-integrated automated traffic
safety enforcement or ATSE solutions, including speed, red light,
move-over and distracted driving camera
systems.
On October 1, 2017, Novume acquired Global (See Note 2). Global
provides temporary contract professional and skilled labor to
businesses throughout the United States. Contracts to provide such
services vary in length, usually less than one year. Global’s
corporate offices are located in Fort Worth, Texas.
Additionally, on December 31, 2017 we acquired certain assets of BC
Management, as described below.
Recapitalization
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. On that same date AOC Key
Solutions entered into a merger agreement (the “AOC Key
Solutions Merger Agreement”) with KeyStone and KCS Merger
Sub, Inc. (“Merger Sub”), a wholly owned subsidiary of
KeyStone with no activity. Pursuant to the AOC Key Solutions Merger
Agreement, on March 15, 2016, Merger Sub was merged with and
into AOC Key Solutions, and thus AOC Key Solutions became a wholly
owned subsidiary of KeyStone (the “AOC Key Solutions
Merger”). To complete the AOC Key Solutions Merger, the
stockholders exchanged 100% of the outstanding common stock of AOC
Key Solutions for newly issued common stock of KeyStone,
representing 100% of the outstanding common stock. This effectively
transferred 100% of the voting equity interest and control of AOC
Key Solutions to KeyStone. The undistributed earnings totaling
$1,192,844 of AOC Key Solutions as of that date were considered a
capital contribution to KeyStone and were therefore reclassified to
additional paid-in capital. The operations of AOC Key Solutions did
not change, nor have any assets or operations transferred to either
KeyStone or Merger Sub. The AOC Key Solutions Merger transaction
resulted in no gain or loss to either entity. The
stockholders’ proportionate ownership of KeyStone remained
the same as it was for AOC Key Solutions. KeyStone accounted for
the merger transaction as a recapitalization in the accompanying
consolidated financial statements.
49
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 is currently in the process of completing the preliminary
purchase price allocation as an acquisition of certain assets. The
final purchase price allocation for BC Management will be included
in the Company’s financial statements in future periods. The
table below shows preliminary analysis for the BC Management asset
purchase:
|
Cash
paid
|
$
100,000
|
|
Common
stock issued
|
163,331
|
|
Warrants
issued, at $5.44
|
65,988
|
|
Warrants
issued, at $6.53
|
57,484
|
|
Total
consideration
|
386,803
|
|
Less
intangible and intellectual property
|
(386,803
)
|
|
Net
goodwill recorded
|
$
-
|
Global Entities Acquisition
On
October 1, 2017 (the “Global Closing Date”), Novume
completed its acquisition of Global Technical Services, Inc.
(“GTS”) and Global Contract Professionals, Inc.
(“GCP) (collectively, the “Global Entities”) (the
“Global Acquisition”). 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 Wells
Fargo Bank
, National Association (the
“GTS Wells Fargo Credit Facility”) and (b) the Secured
Account Purchase Agreement dated August 22, 2012 by and
between GCP and Wells Fargo Bank, National Association (the
“GCP Wells Fargo Credit Facility” and together with the
GTS Wells Fargo Credit Facility, the “Wells Fargo Credit
Facilities”), which 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 Wells Fargo Bank, National
Association, 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 the Global Closing Date. 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 the Global Entities. 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). Furthermore, as of December 31, 2017, the Company had
$200,000 of holdback consideration included in accrued
expenses.
50
The
Company has completed its analysis of the purchase price
allocation. 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 $1.6 million
of goodwill.
Brekford Acquisition
On
August 28, 2017, the mergers by and among Novume, KeyStone,
Brekford, Brekford Merger Sub, Inc. (“Brekford Merger
Sub”), and KeyStone Merger Sub, LLC (“KeyStone Merger
Sub”),
were consummated (the
“Brekford Merger”) as a result of a merger agreement
(the “Brekford Merger Agreement”). As a result,
Brekford became a wholly-owned subsidiary of Novume, and Brekford
Merger Sub ceased to exist. KeyStone Merger Sub also became a
wholly-owned subsidiary of Novume, and KeyStone Solutions, Inc.
ceased to exist. When KeyStone Merger Sub filed its certificate of
merger with the Secretary of State of the State of Delaware, it
immediately effectuated a name-change to KeyStone Solutions, LLC,
the name by which it is now known.
Upon completion of the Brekford Merger, the merger consideration
was issued in accordance with the terms of the Brekford Merger
Agreement. Immediately upon completion of the Brekford Merger, the
pre-merger stockholders of KeyStone owned approximately 80% of the
issued and outstanding capital stock of Novume on a fully-diluted
basis, and the pre-merger stockholders of Brekford owned
approximately 20% or 3,287,187 shares of the issued and outstanding
capital stock of Novume on a fully-diluted basis.
The
Company has completed its analysis of the purchase price
allocation. 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 “Firestorm Closing Date”),
Novume acquired Firestorm Solutions, LLC and Firestorm Franchising,
LLC (collectively, the “Firestorm Entities” or
“Firestorm”).
51
Membership Interest Purchase Agreement
Pursuant
to the terms of the Membership Interest Purchase Agreement (the
“MIPA”), by and among Novume, each of the Firestorm
Entities, each of the Members of the Firestorm Entities (described
below), and a newly-created acquisition subsidiary of Novume,
Firestorm Holdings, LLC, a Delaware limited liability company
(“Firestorm Holdings”), Novume acquired all of the
membership interests in each of the Firestorm Entities for the
following consideration:
●
$500,000 in cash in
the aggregate paid by Novume as of the Firestorm Closing Date to
the three principals (Harry W. Rhulen, Suzanne Loughlin, and James
W. Satterfield, collectively the “Firestorm
Principals”) of Firestorm. Of that aggregate amount $250,000
was paid to Mr. Satterfield, and $125,000 was paid to each of
Mr. Rhulen and Ms. Loughlin;
●
$1,000,000 in the
aggregate in the form of four unsecured, subordinated promissory
notes issued by Novume payable over five years after the Firestorm
Closing Date, to all the Members of the Firestorm Entities
(consisting of the Firestorm Principals and Lancer Financial Group,
Inc. (“Lancer”)). The principal amount of the note
payable to Lancer is $500,000 (the “Lancer Note”). The
principal amount of the note payable to Mr. Rhulen is
$166,666.66. The principal amount of the notes payable to each of
Mr. Satterfield and Ms. Loughlin is $166,666.67. (The
notes payable to Mr. Rhulen, Ms. Loughlin and
Mr. Satterfield are individually referred to herein as a
“Firestorm Principal Note” and collectively, as the
“Firestorm Principal Notes”). The Firestorm Principal
Notes are payable at an interest rate of 2% and the Lancer Note is
payable at an interest rate of 7%. $907,407 was recorded to notes
payable to reflect the net fair value of the notes issued due to
the difference in interest rates. The Lancer Note also has a capped
subordination of $7,000,000, subject to the consent of
Lancer;
●
Each of the
Firestorm Principals was issued 162,698 (315,625 post Brekford
Merger) shares of Novume common stock, par value $0.0001 per share,
for an aggregate issuance of 488,094 (946,875 post Brekford Merger)
shares of Novume common stock;
●
Each of the
Firestorm Principals received warrants to purchase 54,233 (105,209
post Brekford Merger) Novume Common Shares, exercisable over a
period of five years after the Firestorm Closing Date, at an
exercise price of $2.5744 per share; and
●
Each of the
Firestorm Principals received warrants to purchase 54,233 (105,209
post Brekford Merger) Novume Common Shares, exercisable over a
period of five years after the Firestorm Closing Date, at an
exercise price of $3.6048 per share.
The
Company has completed its analysis of the purchase price
allocation. The table below shows the final breakdown related to
the Firestorm acquisition:
|
Cash
paid
|
$
500,000
|
|
Notes
payable issued
|
907,407
|
|
Common
stock issued
|
976,286
|
|
Warrants
issued, at $2.58
|
125,411
|
|
Warrants
issued, at $3.61
|
102,289
|
|
Total
consideration
|
2,611,393
|
|
Less
cash received
|
(82,296
)
|
|
Less
other assets
|
(137,457
)
|
|
Less
intangible and intellectual property
|
(2,497,686
)
|
|
Plus
liabilities assumed
|
106,046
|
|
Net
goodwill recorded
|
$
-
|
The
determination of the fair value of the assets acquired and
liabilities assumed includes approximately $2.5 million of
intangible and intellectual property. In connection with the
acquisition, Novume has also entered into employment agreements
with three of the founders of the Firestorm Entities as set forth
below.
52
Harry W. Rhulen Employment Agreement
The
Rhulen Employment Agreement provides that upon the Firestorm
Closing Date his employment agreement will become effective for an
initial five-year term as President of Novume Solutions, Inc. His
base salary will be $275,000 per annum, and he will be eligible for
a bonus as determined by Novume’s Compensation Committee.
Mr. Rhulen will also be eligible to receive all such other
benefits as are provided by Novume to other management employees
that are consistent with Novume’s fringe benefits available
to any other officer or executive of Novume. Mr. Rhulen has
been granted options to purchase 155,195 Novume Common Shares,
which shall begin vesting on the one-year anniversary of the
Firestorm Closing Date and continue vesting monthly over the
following two years, at an exercise price of $1.55 per
share.
Suzanne Loughlin Employment Agreement
The
Loughlin Employment Agreement provides that upon the Firestorm
Closing Date her employment agreement will become effective for an
initial five-year term as General Counsel and Chief Administrative
Officer of Novume Solutions, Inc. Her base salary will be $225,000
per annum, and she will be eligible for a bonus as determined by
Novume’s Compensation Committee. Ms. Loughlin will also
be eligible to receive all such other benefits as are provided by
Novume to other management employees that are consistent with
Novume’s fringe benefits available to any other officer or
executive of Novume. Ms. Loughlin has been granted options to
purchase 155,195 Novume Common Shares, which shall begin vesting on
the one-year anniversary of the Firestorm Closing Date and continue
vesting monthly over the following two years, at an exercise price
of $1.55 per share.
James W. Satterfield Employment Agreement
The
Satterfield Employment Agreement provides that upon the Firestorm
Closing Date his employment agreement will become effective for an
initial five-year term as President and Chief Executive Officer of
each of the Firestorm Entities. His base salary will be $225,000
per annum, and he will be eligible for a bonus as determined by
Novume’s Compensation Committee. Mr. Satterfield will
also be eligible to receive all such other benefits as are provided
by Novume to other management employees that are consistent with
Novume’s fringe benefits available to any other officer or
executive of Novume or its subsidiaries. Mr. Satterfield has
been granted options to purchase 96,997 Novume Common Shares, which
shall begin vesting on the one-year anniversary of the Firestorm
Closing Date and continue vesting monthly over the following two
years, at an exercise price of $1.55 per share, in connection with
the acquisition of Firestorm.
Operations of Combined Entities
The
following 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, 2016. This unaudited pro-forma financial
information is presented for information purposes only and is not
intended to present actual results that would have been attained
had the acquisition been completed as of January 1, 2016 (the
beginning of the earliest period presented) or to project potential
operating results as of any future date or for any future
periods.
|
|
Years ended December 31,
|
|
|
|
2017
|
2016
|
|
Revenues
|
$
42,828,709
|
$
40,247,097
|
|
Net
income (loss)
|
$
(6,183,910
)
|
$
(2,177,836
)
|
|
Basic
earnings (loss) per share
|
$
(0.56
)
|
$
(0.28
)
|
|
Diluted
earnings (loss) per share
|
$
(0.56
)
|
$
(0.28
)
|
|
|
|
|
|
Basic
Number of Shares
|
11,767,304
|
7,679,501
|
|
Diluted
Number of Shares
|
11,767,304
|
7,679,501
|
Principles of Consolidation
The
consolidated financial statements include the accounts of Novume,
the parent company, and its wholly owned subsidiaries AOC Key
Solutions, Inc., Brekford Traffic Safety Inc., Novume Media, Inc.,
Chantilly Petroleum, LLC, Firestorm Solutions, LLC, Firestorm
Franchising, LLC, Global Technical Services Inc. and Global
Contract Professionals, Inc.
53
The
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”) and in accordance with the
accounting rules under Regulation S-X, as promulgated by the
Securities and Exchange Commission (“SEC”). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash Equivalents
Novume
considers all highly liquid debt instruments purchased with the
maturity of three months or less to be cash
equivalents.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts
receivable are customer obligations due under normal trade terms.
The Company performs continuing credit evaluations of its
clients’ financial condition, and the Company generally does
not require collateral.
Management
reviews accounts receivable to determine if any receivables will
potentially be uncollectible. Factors considered in the
determination include, among other factors, number of days an
invoice is past due, client historical trends, available credit
ratings information, other financial data and the overall economic
environment. Collection agencies may also be utilized if management
so determines.
The
Company records an allowance for doubtful accounts based on
specifically identified amounts that are believed to be
uncollectible. The Company also considers recording as an
additional allowance a certain percentage of aged accounts
receivable, based on historical experience and the Company’s
assessment of the general financial conditions affecting its
customer base. If actual collection experience changes, revisions
to the allowance may be required. After all reasonable attempts to
collect an account receivable have failed, the amount of the
receivable is written off against the allowance. Based on the
information available, the Company determined that an allowance for
loss of $24,000 and $0 was required at December 31, 2017 and 2016,
respectively.
Accounts
receivable at December 31, 2017 and 2016 included $1,259,089 and
$752,482 in unbilled contracts respectively related to work
performed in the year in which the receivable was recorded. The
amounts were billed in the subsequent year.
Inventory
Inventory
principally consists of parts held temporarily until installed for
service. Inventory is valued at the lower of cost or market value.
The cost is determined by the lower of first-in, first-out
(“FIFO”) method, while market value is determined by
replacement cost for components and replacement parts.
Property and Equipment
The
cost of furniture and fixtures and office equipment is depreciated
over the useful lives of the related assets. Leasehold improvements
are amortized over the shorter of their estimated useful lives or
the terms of the lease. Depreciation and amortization is recorded
on the straight-line basis.
The
range of estimated useful lives used for computing depreciation are
as follows:
|
Furniture and fixtures
|
2 - 10 years
|
|
Office equipment
|
2 - 5 years
|
|
Leasehold improvements
|
3 - 15 years
|
|
Automobiles
|
3 - 5 years
|
|
Camera systems
|
3 years
|
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, 2017 and 2016 was $142,545 and $51,870,
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.
54
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. The BC Management 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. 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 Global Technical Services and Global
Contract Professional goodwill and intangible assets resulted in a
fair value of $1.6 million and $2.6 million, respectively, and
corresponding net deferred tax liability. 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. As
discussed above, the fair value of these assets may change and
require subsequent adjustments.
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 December 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.
Acquired identifiable
intangible assets are amortized over the following
periods:
|
Acquired Intangible Asset
|
|
Amortization Basis
|
Expected Life
(years)
|
|
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 standard rate sheet or as
written from time to time in the Company’s contracts or
purchase orders. Revenues related to firm-fixed-price contracts are
primarily recognized upon completion of the project as these
projects are typically short-term in nature. Revenue from the sale
of individual franchises is recognized when the contract is signed
and collectability is assured, unless the franchisee is required to
perform certain training before operations commence. The franchisor
has no obligation to the franchisee relating to 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.
55
Advertising
The
Company expenses all non-direct-response advertising costs as
incurred. Such costs were not material for the years ended December
31, 2017 and 2016.
Use of Estimates
Management
uses estimates and assumptions in preparing financial statements.
Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual amounts
may differ from these estimates. On an on-going basis, the Company
evaluates its estimates, including those related to collectability
of accounts receivable, fair value of debt and equity instruments
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 Global Contract Professionals,
Inc. initially elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code. Under those provisions,
neither AOC Key Solutions nor Global Contract Professionals 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 Global Contract Professionals 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, 2017 the
Company has gross federal and state NOL carry forwards of $5.9
million and $0.3 million, respectively. The Company also has a
valuation allowance of $1.3 million recorded against its net
deferred tax assets as of December 31, 2017.
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, 2017 and 2016, our evaluation revealed no uncertain
tax positions that would have a material impact on the financial
statements. The 2014 through 2016 tax years remain subject to
examination by the IRS, as of December 31, 2017. 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.
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, 2017 and 2016 was
$408,465 and $26,844, respectively.
56
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, 2017 and
2016:
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
Risk-free
interest rate
|
1.00% - 2.17%
|
1.14%
|
|
Expected
term
|
0.3 – 6.1 years
|
5
years
|
|
Volatility
|
70%
|
70%
|
|
Dividend
yield
|
0%
|
0%
|
|
Estimated
annual forfeiture rate at time of grant
|
0% - 30%
|
0%
|
Risk-Free Interest Rate
–
The yield on actively traded
non-inflation indexed U.S. Treasury notes with the same maturity as
the expected term of the underlying grants was used as the average
risk-free interest rate.
Expected Term
–
The expected term of
options granted 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, 2017 and 2016 because of
the relatively short-term maturity of these financial instruments.
The carrying amount reported for long-term debt approximates fair
value as of December 31, 2017, given management’s evaluation
of the instrument’s current rate compared to market rates of
interest and other factors.
The
determination of fair value is based upon the fair value framework
established by Accounting Standards Codification
(“ASC”) Topic 820,
Fair Value Measurements and Disclosures
(“ASC 820”). Fair value is defined as the exit price,
or the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants as of the measurement date. ASC 820 also establishes a
hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs market participants would
use in valuing the asset or liability and are developed based on
market data obtained from sources independent of the Company.
Unobservable inputs are inputs that reflect our assumptions about
the factors market participants would use in valuing the asset or
liability. The guidance establishes three levels of inputs that may
be used to measure fair value:
Level 1
–
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.
57
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 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 due to the proximity of the date of the sale of the
Series A Preferred Stock to independent third-parties. There were
no changes in levels during the year ended December 31, 2017 and
the Company did not have any financial instruments prior to
2016.
Concentrations of Credit Risk
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents,
and accounts receivable. Concentrations of credit risk with respect
to accounts receivable are minimal due to the collection history
and due to the nature of the Company’s client base. The
Company limits its credit risk with respect to cash by maintaining
cash balances with high-quality financial institutions. At times,
the Company’s cash may exceed U.S. Federally insured limits,
and as of December 31, 2017 and 2016, the Company had
$1,707,212 and $2,538,587, respectively, of cash and cash
equivalents on deposit that exceeded the federally insured
limit.
Earnings per Share
Basic
earnings per share, or EPS, is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS
is computed using the weighted average number of common and
potentially dilutive securities outstanding during the period,
except for periods of net loss for which no potentially dilutive
securities are included because their effect would be
anti-dilutive. Potentially dilutive securities consist of common
stock issuable upon exercise of stock options or warrants using the
treasury stock method. Potentially dilutive securities issuable
upon conversion of the Series A Preferred Stock are calculated
using the if-converted method.
The
Company calculates basic and diluted earnings per common share
using the two-class method. Under the two-class method, net
earnings are allocated to each class of common stock and
participating security as if all of the net earnings for the period
had been distributed. Participating securities consist of preferred
stock that contain a nonforfeitable right to receive dividends and
therefore are considered to participate in undistributed earnings
with common stockholders. The Company does not have any
participating securities at this time.
On
August 28, 2017, the Company effected a 1.9339-to-1 stock exchange
related to its acquisition of Brekford Traffic Safety, Inc. 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 both years for the quarterly financial statements of the
Company. The impact of the stock exchange is also shown on the
Company’s Statement of Changes in Stockholders’
Equity.
Foreign Currency Transactions
Brekford
has certain revenue and expense transactions with a functional
currency in Mexican pesos and the Company's reporting currency is
the U.S. dollar. Assets and liabilities are translated from the
functional currency to the reporting currency at the exchange rate
in effect at the balance sheet date and equity at the historical
exchange rates. Revenue and expenses are translated at rates in
effect at the time of the transactions. Any resulting translation
gains and losses are accumulated in a separate component of
stockholders' equity
–
other comprehensive
income (loss). For the period of August 28, 2017 through December
31, 2017, there were no unrealized gains or losses. Realized
foreign currency transaction gains and losses are credited or
charged directly to operations.
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.
58
Going Concern Assessment
Beginning
with the year ended December 31, 2017 and all annual and
interim periods thereafter, management will assess going concern
uncertainty in the Company’s consolidated financial
statements to determine whether there is sufficient cash on hand
and working capital, including available borrowings on loans, to
operate for a period of at least one year from the date the
consolidated financial statements are issued or available to be
issued, which is referred to as the “look-forward
period”, as defined in GAAP. As part of this assessment,
based on conditions that are known and reasonably knowable to
management, management will consider various scenarios, forecasts,
projections, estimates and will make certain key assumptions,
including the timing and nature of projected cash expenditures or
programs, its ability to delay or curtail expenditures or programs
and its ability to raise additional capital, if necessary, among
other factors. Based on this assessment, as necessary or
applicable, management makes certain assumptions around
implementing curtailments or delays in the nature and timing of
programs and expenditures to the extent it deems probable those
implementations can be achieved and management has the proper
authority to execute them within the look-forward
period.
The Company has generated losses since its inception in August 2017
and has relied on cash on hand, external bank lines of credit and
the sale of a note to support cashflow from operations. The Company
attributes the 2017 losses to public company corporate overhead and
losses generated by some of our subsidiary operations. As of and
for the year ended December 31, 2017, the Company had a
net
loss of approximately $
5.04
million
and positive working capital of approximately
$
2.75 million
.
The Company’s cash position was
increased in April 2018 by the receipt of $2 million related to the
issuance of a promissory note. Management believes that
based on
relevant conditions and events that are known and reasonably
knowable
that its forecasts,
for one year from the date of the filing of the consolidated
financial statements in this Annual Report on Form 10-K, indicate
improved operations and the Company’s ability to continue
operations as a going concern. The Company has contingency plans to
reduce or defer expenses and cash outlays should operations not
improve in the look-forward period.
New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Not Yet Adopted
In August 2017, the FASB issued new guidance related to accounting
for hedging activities. This guidance expands strategies that
qualify for hedge accounting, changes how many hedging
relationships are presented in the financial statements and
simplifies the application of hedge accounting in certain
situations. The standard will be effective for us beginning July 1,
2019, with early adoption permitted for any interim or annual
period before the effective date. Adoption of the standard will be
applied using a modified retrospective approach through a
cumulative-effect adjustment to retained earnings as of the
effective date. The Company is currently evaluating the impact of
this standard on our consolidated financial statements, including
accounting policies, processes, and systems.
In May 2017, the FASB issued Accounting Standards Update
(“ASU”) No. 2017-09,
Compensation - Stock
Compensation: Scope of Modification Accounting
, which provides guidance about which changes to
the terms or conditions of a share-based payment award require an
entity to apply modification accounting. An entity will account for
the effects of a modification unless the fair value of the modified
award is the same as the original award, the vesting conditions of
the modified award are the same as the original award and the
classification of the modified award as an equity instrument or
liability instrument is the same as the original award. The update
is effective for fiscal year 2019. The update is to be adopted
prospectively to an award modified on or after the adoption date.
Early adoption is permitted. The Company is currently evaluating
the effect of this update but does not believe it will have a
material impact on its financial statements and related
disclosures.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles -
Goodwill and Other: Simplifying the Test for Goodwill
Impairment.
To simplify the
subsequent measurement of goodwill, the update requires only a
single-step quantitative test to identify and measure impairment
based on the excess of a reporting unit's carrying amount over its
fair value. A qualitative assessment may still be completed first
for an entity to determine if a quantitative impairment test is
necessary. The update is effective for fiscal year 2021 and is to
be adopted on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company will
test
goodwill for impairment within one year of the acquisition or
annually as of December 1, and whenever indicators of
impairment exist.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes:
Intra-Entity Transfers of Assets Other Than
Inventory
, as part of its
simplification initiatives. The update requires that an entity
recognize the income tax consequences of an intra-entity transfer
of an asset other than inventory when the transfer occurs, rather
than deferring the recognition until the asset has been sold to an
outside party as is required under current GAAP. The update is
effective for fiscal year 2019. The new standard will require
adoption on a modified retrospective basis through a
cumulative-effect adjustment to retained earnings, and early
adoption is permitted. The Company is currently evaluating the
effect that this update will have on its financial statements and
related disclosures.
59
In
February 2016, the FASB issued ASU 2016-02,
Leases
. This ASU is a comprehensive new
leases standard that amends various aspects of existing guidance
for leases and requires additional disclosures about leasing
arrangements. It will require companies to recognize lease assets
and lease liabilities by lessees for those leases classified as
operating leases under previous GAAP. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The ASU is
effective for annual periods beginning after December 15,
2018, including interim periods within those fiscal years; earlier
adoption is permitted. In the financial statements in which the ASU
is first applied, leases shall be measured and recognized at the
beginning of the earliest comparative period presented with an
adjustment to equity. Practical expedients are available for
election as a package and if applied consistently to all leases.
The Company is currently evaluating the impact of the adoption of
this guidance on its consolidated financial condition, results of
operations and cash flows.
In June
2016, the FASB issued ASU 2016-13
Financial Instruments-Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments
which requires the measurement and recognition of expected credit
losses for financial assets held at amortized cost. ASU 2016-13
replaces the existing incurred loss impairment model with an
expected loss methodology, which will result in more timely
recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years beginning
after December 15, 2019. We are currently in the process of
evaluating the impact of the adoption of ASU 2016-13 on our
consolidated financial statements.
In 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 Licensin
g, 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 relate 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
will remain substantially unchanged.
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.
60
Recently Adopted
In
November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred
Taxes
. ASU 2015-17 is aimed at reducing complexity in
accounting standards. Currently, GAAP requires the deferred taxes
for each jurisdiction to be presented as a net current asset or
liability and net noncurrent asset or liability. This requires a
jurisdiction-by-jurisdiction analysis based on the classification
of the assets and liabilities to which the underlying temporary
differences relate, or, in the case of loss or credit
carryforwards, based on the period in which the attribute is
expected to be realized. Any valuation allowance is then required
to be allocated on a pro rata basis, by jurisdiction, between
current and noncurrent deferred tax assets. To simplify
presentation, the new guidance requires that all deferred tax
assets and liabilities, along with any related valuation allowance,
be classified as noncurrent on the balance sheet. As a result, each
jurisdiction will now only have one net noncurrent deferred tax
asset or liability. The guidance does not change the existing
requirement that only permits offsetting within a jurisdiction;
companies are still prohibited from offsetting deferred tax
liabilities from one jurisdiction against deferred tax assets of
another jurisdiction. The new guidance is effective in fiscal years
beginning after December 15, 2016, including interim periods
within those years, with early adoption permitted. The Company
early adopted and applied the new standard retrospectively to the
prior period presented in the consolidated balance sheets and it
did not have a material impact.
In
April 2015, the FASB issued ASU 2015-03,
Interest
–
Imputation of Interest: Simplifying the
Presentation of Debt Issuance Costs
. The update requires
that deferred debt issuance costs be reported as a reduction to
long-term debt (previously reported in other noncurrent assets).
The Company adopted ASU 2015-03 in 2016 and for all retrospective
periods, as required, and the impact of the adoption was not
material to the consolidated financial statements
In
August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements –
Going Concern
, which requires management to perform interim
and annual assessments of an entity’s ability to continue as
a going concern within one year of the date the financial
statements are issued and provides guidance on determining when and
how to disclose going concern uncertainties in the financial
statements. Certain disclosures will be required if conditions give
rise to substantial doubt about an entity’s ability to
continue as a going concern. This accounting standard update
applies to all entities and was effective for the annual period
ending after December 15, 2016, and for annual periods and
interim periods thereafter, with early adoption permitted. The
Company adopted this standard during fiscal year 2016.
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 provides guidance
to evaluate whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. If
substantially all of the fair value of the gross assets acquired
(or disposed of) is concentrated in a single asset or a group of
similar assets, the assets acquired (or disposed of) are not
considered a business. We adopted ASU 2017-01 as of January 1,
2017.
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
(“GPS”).
61
The
closing for the transaction set forth in the CUP Agreement occurred
on February 28, 2017 (the “GPS Closing”) and on such
date the Company contributed substantially all of the assets and
certain liabilities related to its vehicle services business to
GPS.
On the GPS Closing, the Company
sold units representing 80.1% of the units of GPS to LB&B for
$6,048,394, after certain purchase price adjustments of prepaid
expenses and unbilled customer deposits. $4,048,394 was paid in
cash, including a $250,000 deposit that was paid on February 6,
2017, and $2,000,000 was paid by LB&B issuing the Company a
promissory note receivable (the “GPS Promissory Note”).
After the GPS Closing, the Company continues to own 19.9% of the
units of GPS after the transaction. The Company is accounting for
this as an investment at cost.
The GPS Promissory Note ($2,000,000) 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 GPS 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 $1,475,000 and $0 as of December 31, 2017 and 2016,
respectively.
The following provides a breakdown of identifiable intangible
assets as of December 31, 2017:
|
|
Customer Relationships
|
Marketing Related
|
Technology Based
|
Total
|
|
Identifiable
intangible assets, gross
|
$
5,201,872
|
$
730,000
|
$
83,412
|
$
6,015,284
|
|
Accumulated
amortization
|
(494,200
)
|
(52,210
)
|
-
|
(546,410
)
|
|
Identifiable
intangible assets, net
|
$
4,707,672
|
$
677,790
|
$
83,412
|
$
5,468,874
|
In connection with the acquisition of Firestorm, Global and
Brekford, the Company identified intangible assets of $2,497,686,
$2,574,000 and $558,412, respectively, representing trade names,
customer relationships and technology. In addition, as of December
31, 2017, intangibles attributable to the asset acquisition of BC
Management totaled $386,804. These assets are being amortized on a
straight-line basis over their weighted average estimated useful
life of 9.2 years and amortization expense amounted to $456,410 for
the year ended December 31, 2017.
As of December 31, 2017, the estimated annual amortization expense
for each of the next five fiscal years is as follows:
|
2018
|
$
938,382
|
|
2019
|
952,284
|
|
2020
|
952,284
|
|
2021
|
886,160
|
|
2022
|
238,155
|
|
Thereafter
|
1,501,609
|
|
Total
|
$
5,468,874
|
62
Supplemental
disclosures of cash flow information for the years ended
December 31, 2017 and 2016 was as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
Cash
paid for interest
|
$
281,015
|
$
48,957
|
|
Cash
paid for taxes
|
$
-
|
$
-
|
|
|
|
|
|
Warrants
issued in connection with note payable
|
$
-
|
$
58,520
|
|
Warrants
issued in connection with issuance of Series A Preferred
Stock
|
$
67,491
|
$
101,634
|
|
|
|
|
|
Business
Combinations:
|
|
|
|
Current
Assets
|
$
5,263,445
|
$
-
|
|
Property
and equipment
|
$
382,159
|
$
-
|
|
Intangible
assets
|
$
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
|
$
(7,784,560
)
|
$
-
|
|
Issuance
of Series B preferred stock
|
$
(2,408,610
)
|
$
-
|
|
Notes
payable
|
$
(1,117,253
)
|
$
-
|
|
Issuance
of common stock warrants
|
$
(123,473
)
|
$
-
|
On
April 7, 2017, Novume paid cash dividends of $76,695 to
holders of record of Novume Series A Preferred Stock as of
March 30, 2017. On July 8, 2017, the Company paid cash
dividends of $87,907 to shareholders of record of Novume Series A
Preferred Stock as June 30, 2017. On October 7, 2017, the
Company paid cash dividends of $87,907 payable to shareholders of
record of Novume Series A Preferred Stock as September 30, 2017. On
December 31, 2017, the Company declared and accrued dividends of
$87,907 payable to Series A Preferred Stock shareholders of record
as of December 31, 2017. On December 31, 2017, the Company declared
and accrued dividends of $27,001 payable to Series B Preferred
Stock shareholders of record as of December 31, 2017.
Line of Credit
AOC Key
Solutions was a party to a business loan agreement (the “2015
Loan Agreement”) with Sandy Spring Bank (“SSB”)
dated as of September 25, 2015. The primary credit facility
was an asset-based revolving line of credit up to $1,000,000 which
was due to mature on September 30, 2016. To secure its
obligations under the 2015 Loan Agreement, AOC Key Solutions had
granted to SSB a security interest in its accounts receivable. SSB
was required to advance funds to AOC Key Solutions up to the lesser
of (1) $1,000,000 or (2) eighty percent (80%) of the
aggregate amount of all of its accounts receivable aged 90-days or
less which contained selling terms and conditions acceptable to the
SSB. AOC Key Solutions did not draw any funds from this credit
facility in 2015 and there was no outstanding balance on the 2015
Loan Agreement at December 31, 2016.
On
August 11, 2016, Novume entered into Loan and Security
Agreement (the “2016 Line of Credit”) with SSB that
replaced the 2015 Loan Agreement. The 2016 Line of Credit was
comprised of: 1) an asset-based revolving line of credit up to
$1,000,000 for short-term working capital needs and general
corporate purposes maturing on July 31, 2017, which bore
interest at the Wall Street Journal Prime Rate, floating, plus
0.50% and was secured by a first lien on all of Novume’s
business assets; and 2) an optional term loan of $100,000 for
permanent working capital, which bore interest at the Wall Street
Journal Prime Rate, floating, plus 0.75%, required monthly payments
of principal plus interest to fully amortize the loan over four
(4) years, was secured by a first lien on all of
Novume’s business assets, cross-collateralized and
cross-defaulted with the revolving line of credit, and was to
mature on February 15, 2019. The 2016 Line of Credit does not
require any personal guarantees.
63
The
borrowing base for the 2016 Line of Credit was up to the lesser of
(1) $1,000,000 or (2) eighty percent (80%) of the
aggregate amount of all of Novume’s eligible accounts
receivable as defined by SSB. The borrowing base for the $100,000
term loan was fully reserved under the borrowing base for the
revolving line of credit. The 2016 Line of Credit had periodic
reporting requirements, balance sheet and profitability covenants,
as well as affirmative and negative operational and ownership
covenants. The Company was in compliance with all 2016 Line of
Credit covenants at December 31, 2016. In August 2017, the
Company terminated the 2016 Line of Credit with SSB. As such, there
was no outstanding balance on the 2016 Line of Credit at December
31, 2017.
As of
December 31, 2017 and 2016, Novume had no balances due for the 2016
Line of Credit and the 2015 Loan Agreement. When Novume replaced
the 2015 Loan Agreement with the 2016 Line of Credit on
August 11, 2016, neither line of credit had a balance due. The
Company terminated the 2016 Line of Credit in August
2017.
Global
has revolving lines of credit with Wells Fargo Bank, National
Association (“WFB”) (“the Global Wells
Agreements”).
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 Global Wells Agreements 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 current terms of the
Global Wells Agreements run through December 31, 2018, with
automatic renewal terms of 12 months.
WFB or Global
may terminate the Global Wells
Agreements upon at least 60 days’ written notice prior to the
last day of the current term.
The principal balance at
December 31, 2017 totaled $2,057,259. As part of the lines of
credit agreements, Global must maintain certain financial
covenants. Global met all financial covenant requirements during
and as of the year ended December 31, 2017.
On November 12, 2017,
AOC Key Solutions
entered into an Account Purchase Agreement and
related agreements (the “KSI Wells Agreement”) with
WFB. Pursuant to the 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 KSI 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 KSI Wells Agreement at a monthly rate equal to the Daily One
Month LIBOR in effect from time to time plus 5% (the
“Contract Rate”). The KSI Wells Agreement also provides
for a deficit interest rate equal to the then applicable interest
rate plus 50% of the Contract Rate and a default interest rate
equal to the then applicable interest rate or deficit interest
rate, plus 50% of the Contract Rate. The initial term of the KSI
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
KSI 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 KSI 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 KSI Wells Agreement) after the
expiration of any grace or cure period.
The principal
balance at December 31, 2017 totaled $1,606,327.
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 fair value was determined to be
$58,520 and was as a debt discount and additional paid-in capital
in the accompanying consolidated balance sheet as of
December 31, 2016. The debt discount is being amortized as
interest expense on a straight-line basis through the maturity date
of the note payable.
The
Avon Road Note is subordinated to the Novume’s 2016 Line of
Credit with SSB and any successor financing facility. Simple
interest accrues on the unpaid principal of the note at a rate
equal to the lower of (a) 9% per annum, or (b) the
highest rate permitted by applicable law. Interest is payable
monthly, and the note is to mature on March 16, 2019. The
Company terminated the 2016 Loan Agreement in August
2017.
64
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 all the Members of the Firestorm
Entities. The principal amount of the note payable to Lancer is
$500,000. The principal amount of the note payable to
Mr. Rhulen is $166,666.66. The principal amount of the notes
payable to each of Mr. Satterfield and Ms. Loughlin is
$166,666.67. The Firestorm Principal Notes are payable at an
interest rate of 2% and the Lancer Note is payable at an interest
rate of 7%. The notes mature on January 25, 2022. The balance of
these notes payable was $924,383 net of unamortized interest as of
December 31, 2017 to reflect the amortized fair value of the notes
issued due to the difference in interest rates of
$75,617.
The
principal amounts due for long-term notes payable are shown
below:
|
2018
|
$
-
|
|
2019
|
500,000
|
|
2020
|
-
|
|
2021
|
-
|
|
2022
|
1,000,000
|
|
Thereafter
|
-
|
|
Total
|
$
1,500,000
|
|
|
|
|
Less
unamortized interest
|
(75,617
)
|
|
Less
unamortized financing costs
|
(18,389
)
|
|
Long-term
debt
|
$
1,405,994
|
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.
Pursuant
to U.S. GAAP, changes in tax rates and tax laws are accounted for
in the period of enactment, and the resulting effects are recorded
as discrete components of the income tax provision related to
continuing operations in the same period. The changes in the tax
law have been accounted for in our income tax provision for the
December 31, 2017 year-end provision. As a result of the change in
the U.S. tax rates the Company revalued it’s ending deferred
tax assets and liabilities, which has an approximate 16.9% impact
on our provision for income taxes.
The
benefit from income taxes for the years ended December 31, 2017 and
2016 consists of the following:
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
Current:
|
|
|
|
State
|
$
23,919
|
$
11
|
|
Deferred:
|
|
|
|
Federal
|
$
(311,211
)
|
$
(196,826
)
|
|
State
|
(7,374
)
|
(23,156
)
|
|
Benefit
from income taxes
|
$
(294,666
)
|
$
(219,971
)
|
65
The
components of deferred income tax assets and liabilities are as
follows at December 31, 2017 and 2016:
|
|
As of December 31,
|
|
|
|
2017
|
2016
|
|
Deferred
tax assets:
|
|
|
|
Fixed
assets
|
$
14,604
|
$
-
|
|
Amortizable
start-up costs
|
-
|
117,340
|
|
Accrual
and others
|
507,052
|
52,345
|
|
Net
operating loss carryforward
|
1,513,921
|
89,944
|
|
Valuation
allowance
|
(1,342,108
)
|
-
|
|
|
693,469
|
259,629
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Goodwill
and Intangibles
|
(693,469
)
|
-
|
|
Fixed
assets
|
-
|
(39,647
)
|
|
Total
deferred tax assets, net
|
$
-
|
$
219,982
|
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, 2017 and 2016:
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
U.S.
statutory federal rate
|
34.0%
|
34.0%
|
|
(Decrease)
increase in taxes resulting from:
|
|
|
|
State
income tax rate, net of U.S. Federal benefit
|
5.1%
|
4.0%
|
|
Other
temporary and permanent differences arising from S Corp
years
|
0.0%
|
-13.2%
|
|
S
Corp income prior to merger
|
0.0%
|
62.8%
|
|
Acquisition
related costs
|
-6.8%
|
0.0%
|
|
Impact
of changes in tax rates
|
-16.9%
|
0.0%
|
|
Other
|
-4.0%
|
-2.7%
|
|
Valuation
allowance
|
-5.8%
|
0.0%
|
|
Effective
tax rate
|
5.6%
|
84.9%
|
The
Company files income tax returns in the United States and in
various state and foreign jurisdictions. No U.S. Federal, state or
foreign income tax audits were in process as of December 31,
2017.
As more
fully disclosed in Note 2, through March 15, 2016, AOC Key
Solutions elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code. Under those provisions, AOC Key
Solutions did not pay federal corporate income taxes, and in most
instances state income tax, on its taxable income. Thus, for the
year ended December 31, 2016, AOC Key Solutions did not have
any provision for income taxes.
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, 2017, Novume had gross net operating loss
carryforwards of approximately $5,909,378, Novume also had a
valuation allowance of $1,342,108 recorded against its net deferred
net assets at December 31, 2017.
For the
years ended December 31, 2017 and 2016, Novume did not record any
interest or penalties related to unrecognized tax benefits. It is
the Company’s policy to record interest and penalties related
to unrecognized tax benefits as part of income tax expense. The
2014 through 2016 tax years remain subject to examination by the
IRS.
66
Common Stock
The
formation of Novume provided for 30,000,000 authorized shares of
Novume $0.0001 par value common stock. As of December 31, 2017 and
December 31, 2016, the issued and outstanding common shares of
Novume were 14,463,364 and 5,000,000 (9,699,720 post Brekford
merger exchange), respectively.
As
described in more detail in Note 1, 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, consideration was issued in accordance with the terms of the
Brekford
Merger
Agreement
. Immediately upon
completion of the Brekford Merger, the pre-merger stockholders
of
AOC Key Solutions
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.
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.
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 KeyStone
Series A Cumulative Convertible Redeemable Preferred Stock (the
“Series A Preferred Stock”). The number of designated
shares of the Series A Preferred Stock was increased to 505,000
shares on March 20, 2017.
In
November 2016, Novume commenced its Regulation A Offering (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 the
Novume’s common stock at an exercise price of $1.03 per
share. The Series A Preferred Stock holders are entitled to
quarterly dividends of 7.0% per annum per share.
The
Series A Preferred Stock holder has a put right to convert each
share into common stock at an initial conversion price and a
specified price which increases annually based on the passage of
time beginning in November 2019. The Series A Preferred Stock
holder also has put right after 60 months from the issuance date to
redeem any or all of the Series A Preferred Stock at a redemption
price of $7.73 (post merger exchange) per share plus any accrued
but unpaid dividends. Novume has a call right after 36 months from
the issuance date to redeem all of the Series A Preferred Stock at
a redemption price which increases annually based on the passage of
time beginning in November 2019. The Series A Preferred Stock
contains an automatic conversion feature based on a qualified
initial public offering in excess of $30,000,000 or a written
agreement by at least two-thirds of the Series A Preferred Stock
holders at an initial conversion price and a specified price which
increases annually based on the passage of time beginning in
November 2016. Based on the terms of the Series A Preferred Stock,
the Company concluded that the Series A Preferred Stock should be
classified as temporary equity in the accompanying consolidated
balance sheet as of December 31, 2017 and 2016.
67
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 Offering for
the issuance of 119,757 shares of Series A Preferred Stock and
119,757 Unit Warrants with the Company receiving aggregate gross
proceeds of $1,197,570.
On
March 20, 2017, the Company increased the total number of
designated shares of the Series A Preferred Stock from 500,000 to
505,000 shares.
On
March 21, 2017, the Company completed its third and final
closing of the Reg A Offering. The third and final sale 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
$550,655 and $0 for the years ended December 31, 2017 and 2016,
respectively.
As of
December 31, 2017, 502,327 shares of Series A Preferred Stock were
issued and outstanding. As of December 31, 2016, 301,570 shares of
Series A Preferred Stock were issued and outstanding.
The
Novume Series A Preferred Stock is entitled to quarterly cash
dividends of $0.175 (7% per annum) per share, of which $252,509 and
$0 were paid in 2017 and 2016, respectively. On April 7, 2017,
the Company paid cash dividends of $76,695 to shareholders of
record as of March 30, 2017. On July 8, 2017, the Company paid
cash dividends of $87,907 to shareholders of record as of
June 30, 2017. On October 7, 2017, the Company paid cash
dividends of $87,907 payable to shareholders of record of Novume
Preferred Stock as September 30, 2017. On December 31, 2017, the
Company declared and accrued dividends of $87,907 payable to
shareholders of record as of December 31, 2017.
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, 2017 and 2016,
502,327 and 301,570 Unit Warrants, respectively, were
outstanding.
Series B Cumulative Convertible Preferred Stock
Of the
2,000,000 authorized shares of preferred stock, 240,861 shares were
initially 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 is entitled to quarterly cash dividends of 1.121% (4.484% per
annum) per share. On December 31, 2017, the Company declared and
accrued dividends of $27,001 payable to shareholders of record as
of December 31, 2017. 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.
Warrants
The
Company has a total of 1,256,247 warrants issued and outstanding as
of December 31, 2017. These warrants are exercisable and
convertible for a total of 997,575 shares of Novume common stock as
of December 31, 2017.
As part
of its acquisition of Brekford on August 29, 2017, the Company
assumed warrants to purchase 56,000 shares of Novume common stock
(See Note 10). The exercise price for these warrants is $7.50 and
they expire on March 31, 2020. As of December 31, 2017, there are
56,000 Brekford warrants outstanding.
As part
of the Reg1A offering in fiscal year 2016 and 2017, Novume issued
502,327 Unit Warrants to the Series A Preferred Stock holders. 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,
2017, there are 502,327 Unit Warrants outstanding.
68
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 Partners, L.P.
(“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, 2017.
Pursuant
to its acquisition of Firestorm on January 24, 2017, Novume issued
warrants to purchase 315,627 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 $3.6048 per
share. The expiration date of the Firestorm warrants is January 24,
2022. As of December 31, 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 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, 2017, there are 66,666 BC
Management warrants outstanding.
On
March 17, 2015, Brekford issued a Warrant (“Brekford
Warrant”), which permits the holder to purchase 56,000 shares
of common stock with an exercise price of $7.50 per share and a
life of five years.
The
Brekford Warrant exercise price is subject to anti-dilution
adjustments that allow for its reduction in the event the Company
subsequently issues equity securities, including shares of common
stock or any security convertible or exchangeable for shares of
common stock, for no consideration or for consideration less than
$7.50 a share. The Company accounted for the conversion option of
the Brekford Warrant in accordance with ASC Topic 815. Accordingly,
the conversion option is not considered to be solely indexed to the
Company’s own stock and, as such, is recorded as a liability.
The derivative liability associated with the Brekford Warrant has
been measured at fair value at December 31, 2017 and
December 31, 2016 using the Black Scholes option-pricing
model. The assumptions used in the Black-Scholes model are as
follows: (i) dividend yield of 0%; (ii) expected
volatility of 70.0% - 81.6%; (iii) weighted average risk-free
interest rate of 1.89%; (iv) expected life of 2.21-2.71 years;
and (v) estimated fair value of the common stock of
$1.80-$4.90 per share.
At
December 31, 2017 and 2016, the outstanding fair value of the
derivative liability was $78,228 and $0, respectively.
On
March 16, 2016, two stockholders of the Company entered into
an option agreement with Avon Road (collectively, the “Avon
Road Parties”). Under the terms of this agreement Avon Road
paid the stockholders $10,000 each (a total of $20,000) for the
right to purchase, on a simultaneous and pro-rata basis, up to
4,318,856 shares of Novume’s common stock owned by those two
shareholders at $0.52 per share, which was determined to be the
fair value. The option agreement had a two-year term which expires
on March 16, 2018. On September 7, 2017, the Avon Road Parties
entered into an amended and restated option agreement which
extended the right to exercise the option up to and including March
21, 2019.
Operating Leases
AOC Key
Solutions leases office space in Chantilly, Virginia under the
terms of a ten-year lease expiring October 31, 2019. The lease
contains one five-year renewal option. The lease terms include an
annual increase in base rent and expenses of 2.75%%, which have
been amortized ratably over the lease term. AOC Key Solutions also
leases office space in New Orleans, Louisiana under the terms of a
three-year lease expiring May 31, 2018.
Firestorm
leases office space in Roswell, Georgia under the terms of a lease
expiring on January 31, 2022.
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 March 31, 2018.
Global
leases office space in Fort Worth, Texas under the terms of a lease
expiring on January 31, 2022.
69
Rent
expense for the years ended December 31, 2017 and 2016 was $605,264
and $507,815, respectively, and is included in selling, general and
administrative expenses. As of December 31, 2017, the future
obligations over the primary terms of Novume’s long-term
leases expiring through 2023 are as follows:
|
2018
|
$
902,158
|
|
2019
|
812,938
|
|
2020
|
255,074
|
|
2021
|
101,386
|
|
2022
|
38,873
|
|
Thereafter
|
30,393
|
|
Total
|
$
2,140,822
|
The
Company is the lessor in an agreement to sublease office space in
Chantilly, Virginia with an initial term of two years with eight
one-year options to renew the sublease through October 31,
2019. The lease provides for an annual increase in base rent and
expenses of 2.90%. The initial term ended October 31, 2011 and
the Company exercised the renewal options through 2015. On
April 7, 2015, the lease was amended to sublease more space to
the subtenant and change the rental calculation.
The
sublease agreement provided for an offset of $182,534 to rent
expense for each of the years ended December 31, 2017 and
2016.
In
August 2017, the Company approved and adopted the 2017 Equity Award
Plan (the “2017 Plan”) which replaced the 2016 Equity
Award Plan (the “2016 Plan”). The 2017 Plan permits the
granting of stock options, stock appreciation rights, restricted
and unrestricted stock awards, phantom stock, performance awards
and other stock-based awards for the purpose of attracting and
retaining quality employees, directors and consultants. Maximum
awards available under the 2017 Plan were initially set at
3,000,000 shares. To date, only stock options have been issued
under the 2016 Plan and the 2017 Plan.
Stock Options
Stock
options granted under the 2017 Plan may be either incentive stock
options (“ISOs”) or non-qualified stock options
(“NSOs”). ISOs may be granted to employees and NSOs may
be granted to employees, directors, or consultants. Stock options
are granted at exercise prices as determined by the Board of
Directors. The vesting period is generally three to four years with
a contractual term of 10 years.
The
2017 Plan is administered by the Administrator, which is currently
the Board of Directors of the Company. The Administrator has the
exclusive authority, subject to the terms and conditions set forth
in the 2017 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.
70
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 and 2016 Plan for the years ended December 31, 2017 and 2016
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, 2016
|
-
|
$
-
|
-
|
|
|
Granted
|
58,499
|
1.68
|
10.00
|
|
|
Exercised
|
-
|
-
|
-
|
|
|
Canceled
|
-
|
-
|
-
|
|
|
Outstanding
Balance at December 31, 2016
|
58,499
|
$
1.68
|
9.29
|
|
|
Granted
|
1,638,331
|
2.21
|
9.29
|
|
|
Exercised
|
-
|
-
|
-
|
|
|
Canceled
|
(1,455
)
|
(1.55
)
|
(9.07
)
|
|
|
Outstanding
Balance at December 31, 2017
|
1,695,375
|
$
2.19
|
9.26
|
$
4,590,714
|
|
Exercisable
at December 31, 2017
|
389,979
|
$
1.85
|
8.81
|
$
1,189,824
|
|
Vested
and expected to vest at December 31, 2017
|
1,503,087
|
$
2.08
|
9.21
|
$
4,236,854
|
Stock
compensation expense for the year ended December 31, 2017 and 2016
was $408,465 and $26,844, respectively, and is included in selling,
general and administrative expenses in the accompanying
consolidated statements of operations. The weighted average fair
value at grant date for the years ended December 31, 2017 and 2016
was $1.45 and $0.92, respectively.
The
intrinsic value of the stock options granted during the year ended
December 31, 2017 was $4,399,570. No stock options were granted or
outstanding prior to 2016. The total fair value of shares that
became vested after grant during the year ended December 31, 2017
was $1,624,252.
71
As of
December 31, 2017, there was $1,139,005 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 2.56 years.
AOC Key
Solutions has a defined contribution savings plan under Section
401(k) of the Internal Revenue Code (the “Code”) (the
“401(k) Plan”) which was amended on January 1, 2013, as
required by the Code. Pursuant to the amended 401(k) Plan, 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. The
amount of contributions recorded by Novume during the years ended
December 31, 2017 and 2016 were $144,932 and $140,612,
respectively.
GCP
also maintains a 401(k) plan, which was amended September 15, 2014.
However, GCP has not historically made matching contributions to
the plan.
As of December 31, 2017 and December 31, 2016, inventory consisted
entirely of parts of
$155,716
and $0, respectively.
The
following table provides information relating to the calculation of
earnings (loss) per common share:
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
Basic
and diluted (loss) earnings per share
|
|
|
|
Net
(loss) earnings from continuing operations
|
$
(5,041,134
)
|
$
(38,984
)
|
|
Less:
preferred stock dividends
|
(362,131
)
|
(5,286
)
|
|
Net
income (loss) attributable to shareholders
|
(5,403,265
)
|
(44,270
)
|
|
Weighted
average common shares outstanding - basic
|
11,767,304
|
7,679,501
|
|
Basic
(loss) earnings per share
|
$
(0.46
)
|
$
(0.01
)
|
|
Weighted
average common shares outstanding - diluted
|
11,767,304
|
7,679,501
|
|
Diluted
(loss) earnings per share
|
$
(0.46
)
|
$
(0.01
)
|
|
Common
stock equivalents excluded due to anti-dilutive effect
|
2,242,447
|
105,317
|
For the
year ended December 31, 2017, the following potentially 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 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.
For the
year ended December 31, 2016, the following potentially dilutive
securities were excluded from diluted loss per share as the Company
had a net loss: 99,034 for outstanding warrants and 6,283 related
to the Series A Preferred Stock. In addition, 58,499 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 has the non-forfeitable right to
participate on an as converted basis at the conversion rate then in
effect in any common stock dividends declared and, as such, is
considered a participating security. The Series A Preferred
Stock is included in the computation of basic and diluted loss per
share pursuant to the two-class method. Holders of the Series A
Preferred Stock do not participate in undistributed net losses
because they are not contractually obligated to do so.
The
computation of diluted (loss) earnings per share attributable to
common stockholders reflects the potential dilution that could
occur if securities or other contracts to issue shares of common
stock that are dilutive were exercised or converted into shares of
common stock (or resulted in the issuance of shares of common
stock) and would then share in our earnings. During the periods in
which we record a loss attributable to common stockholders,
securities would not be dilutive to net loss per share and
conversion into shares of common stock is assumed not to
occur.
72
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,
2017 and 2016
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
Numerator:
|
|
|
|
Net
(loss) earnings from continuing operations
|
$
(5,041,134
)
|
$
(38,984
)
|
|
Less:
preferred stock dividends
|
(362,131
)
|
(5,286
)
|
|
Net
income (loss) attributable to shareholders
|
$
(5,403,265
)
|
$
(44,270
)
|
|
Denominator
(basic):
|
|
|
|
Weighted
average common shares outstanding
|
11,767,304
|
7,679,501
|
|
Participating
securities - Series A preferred stock
|
932,070
|
6,283
|
|
Participating
securities - Series B preferred stock
|
60,215
|
-
|
|
Weighted
average shares outstanding
|
12,759,589
|
7,685,784
|
|
|
|
|
|
Loss
per common share - basic under two-class method
|
$
(0.42
)
|
$
(0.01
)
|
|
|
|
|
|
Denominator
(diluted):
|
|
|
|
Weighted
average common shares outstanding
|
11,767,304
|
7,679,501
|
|
Participating
securities - Series A preferred stock
|
932,070
|
6,283
|
|
Participating
securities - Series B preferred stock
|
60,215
|
-
|
|
Weighted
average shares outstanding
|
12,759,589
|
7,685,784
|
|
|
|
|
|
Loss
per common share - basic under two-class method
|
$
(0.42
)
|
$
(0.01
)
|
Secure Education Consultants Acquisition
On
January 1, 2018, Novume completed its acquisition of certain assets
of Secure Education Consultants, LLC (“SEC LLC”). SEC
LLC’s security and safety experts provide customized
emergency protocols and critical incident response training for
schools and child care organizations and will further augment the
risk mitigation and crisis management services we provide to our
clients. 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. As the SEC LLC acquisition has recently been
completed, the Company is currently in the process of completing
the purchase price allocation treating the SEC LLC acquisition as a
business combination. The purchase price allocation for SEC LLC
will be included in the Company’s consolidated financial
statements in the first quarter of the year ending December 31,
2018. As of January 1, 2018, there are 66,666 SEC LLC warrants
outstanding.
Sale of Note
On February 13, 2018, Brekford sold a note receivable from Global
Public Safety, LLC (“Global Public Safety”), which it
had received as part of the purchase price consideration in
connection with the sale of its legacy upfitting business that
occurred prior to its acquisition by Novume as a result of the
merger with KeyStone in 2017. On December 31, 2017, the Company
reclassified the note receivable balance to a current asset and
wrote down $450,000 as other expense resulting in the balance of
$1,475,000 based on the decision to sell the note receivable to an
unrelated third party. Brekford continues to retain a 19.9%
interest in Global Public Safety.
NeoSystems
On March 7, 2018, we 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
provide that upon termination, the Company is 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 Company reserves all rights under
applicable law with respect to the NeoSystems Merger Agreement,
including such notice.
73
Promissory Note
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 loan is due and payable on
May 1, 2019 and bears interest at 15% per annum, with a minimum of
15% interest payable regardless of when the loan is repaid. The
loan is secured by a security interest in all of the assets of
Brekford. In addition, Novume agreed to issue 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. 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 against proceeds from
the sale of Brekford, if any.
74
As
reported on the KeyStone Solutions, Inc. Form 1-U filed with the
SEC on May 4, 2017 (the “Form 1-U”), the Company was
notified by CohnReznick LLP (“CR”) on April 28,
2017 that CR resigned, effective on the same date, from its
engagement as the Company’s independent registered public
accounting firm. CR had previously been engaged on
November 3, 2016 to serve as the auditors of the
Company’s consolidated financial statements as of and for the
years ended December 31, 2016 and 2015, and on
January 24, 2017 to serve as the auditors of Firestorm
Solutions, LLC’s and Firestorm Franchising, LLC’s
financial statements as of and for the years ended
December 31, 2016 and 2015. The audits for which CR was
engaged were not completed and no auditor’s reports were
issued by CR.
Immediately
preceding CR’s resignation, there was a disagreement between
the Company’s management and CR as to whether an outside
valuation of the Company’s common stock and warrants was
necessary to support various accounting amounts to be reported in
the Company’s consolidated financial statements and elsewhere
in the Amendment No. 1 to the Registration Statement on Form
S-4 of Novume Solutions, Inc. in which the Company’s
consolidated financial statements were to be included. Immediately
following CR’s resignation, the Company’s Board of
Directors spoke to a representatives of CR on April 28, 2017,
who stated that on April 25, 2017, an executive officer of the
Company, after being informed that an outside valuation of the
Company’s common stock and warrants was necessary, stated to
CR that litigation against CR would be initiated by the Company.
The Board of Directors indicated to CR that no decision to sue CR
had been made and discussed with CR whether management’s
decision on April 26, 2017 to engage a service provider for an
outside valuation had removed the issue. However, CR advised the
Company that it was resigning from its engagements with the Company
because CR’s independence was impaired under the Standards of
the Public Company Accounting Oversight Board and the Code of
Professional Conduct of the AICPA.
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in
Rule 13a-15(f) of the Exchange Act) that are designed to
ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in
evaluating the cost benefit relationship of possible controls and
procedures.
We
carried out an evaluation, required by paragraph (b) of
Rule 13a-15 or Rule 15d-15 under the Exchange Act, under
the supervision and with the participation of management, including
our Chief Executive Officer and Principal Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined
in Rule 13a-15(e) or Rule 15d-15(e) of the
Exchange Act) as of the end of the period covered by this Annual
Report on Form 10-K Based on this review, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective as of December
31, 2017.
Management’s Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined
in Exchange Act Rule 13a - 15(f). Our internal control system was
designed to provide reasonable assurance to our management and the
Board of Directors regarding the preparation and fair presentation
of published financial statements. All internal control systems, no
matter how well designed have inherent limitations. Therefore, even
those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation. Our management assessed the
effectiveness of our internal control over financial reporting as
of December 31, 2017. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
Internal Control - Integrated Framework - Guidance for Smaller
Public Companies (the COSO criteria).
An internal control system, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation and may not
prevent or detect misstatements in the financial statements or the
unauthorized use or disposition of the Company’s assets.
Also, projections of any evaluation of effectiveness of internal
controls to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with policies and procedures may
deteriorate.
75
A material weakness is a control deficiency (within the meaning of
Public Company Accounting Oversight Board Auditing Standard No. 5)
or combination of control deficiencies, that result in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected on a
timely basis.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2017,
based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
2013 Internal Control – Integrated Framework. Based on this
assessment and on the foregoing criteria, management has concluded
that, as of December 31, 2017, the Company’s internal control
over financial reporting was not effective due to the material
weakness described below.
Management has concluded that, as of December 31, 2017, a material
weakness exists because the Company does not currently employ a
sufficient number of qualified accounting personnel to ensure
proper and timely evaluation of complex accounting, tax, and
disclosure issues that may arise during the course of the
Company’s business. The Company intends to address this
material weakness by reviewing the Company’s accounting and
finance processes to identify any improvements thereto that might
enhance the Company’s internal control over financial
reporting and determine the feasibility of implementing such
improvements and by seeking qualified employees and/or outside
consultants who possess the knowledge needed to eliminate this
weakness. The Company’s ability to remediate this weakness
may, however, be delayed or limited by resource constraints, a lack
of qualified persons in the Company’s market area and/or
competition from other employers.
This
Annual Report does not include an attestation report by our
independent registered public accounting firm, regarding internal
control over financial reporting. Management’s report was not
subject to attestation by the Company’s independent
registered public accounting firm pursuant to temporary rules of
the SEC that permits the Company to only provide management’s
report in this Form 10-K.
Changes to Internal Control over Financial Reporting
There
have been no changes in our internal controls over financial
reporting during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
None.
The
following table sets forth our directors and executive officers as
of March 31, 2018.
|
Name
|
Age
|
Position
|
Since
|
|
Executive Officers:
|
|
|
|
|
James K.
McCarthy
|
66
|
Chairman of the
Board
|
2017
|
|
Robert A.
Berman
|
58
|
Chief Executive
Officer and Member of the Board
|
2017
|
|
Harry
Rhulen
|
54
|
President
|
2017
|
|
Suzanne
Loughlin
|
56
|
General Counsel and
Chief Administrative Officer
|
2017
|
|
Riaz
Latifullah
|
61
|
Executive Vice
President, Corporate Development and Principal Financial
Officer
|
2017
|
|
Directors
:
|
|
|
|
|
James K.
McCarthy
|
66
|
Chairman of the
Board
|
2016
|
|
Robert
Berman
|
58
|
Director
|
2016
|
|
Dr. Richard
Nathan
|
73
|
Director
|
2016
|
|
Glenn
Goord
|
66
|
Director -
Independent
|
2016
|
|
Paul A. de
Bary
|
71
|
Director -
Independent
|
2017
|
|
Christine J.
Harada
|
45
|
Director -
Independent
|
2017
|
|
Marta
Tienda
|
67
|
Director -
Independent
|
2017
|
Our
seven-member Board of Directors currently has four directors who
are “independent” within the meaning of NASDAQ Rule
5605(b)(1).
76
Executive Officers and Directors
James K. McCarthy, Chairman
James
K. McCarthy serves as our Chairman of the Board of Directors.
Mr. McCarthy served as our Chief
Strategy Officer through March 2017, and from April 2017 through
March 2018 he was the host of
The Bridge
, a weekly 30-minute broadcast television program
produced by us devoted exclusively to bridging the gap between
today's government and the private sector.
Mr. McCarthy’s career spans over 30 years of marketing
strategy creation, proposal development, and oral presentation
coaching to contractors seeking to expand their market shares or to
enter the government contracts market sector. As a founder and the
Technical Director of AOC Key Solutions, he built an organization
that, over the last five years, has played a part in winning an
average of $9 billion per year in federal contract awards for
its clients. Mr. McCarthy has worked at AOC Key Solutions
since 1983. Mr. McCarthy has served in an advisory role with
the George Washington University, Virginia Science and Technology
Campus, Technology Accelerator and has been a frequent speaker with
the George Mason University Procurement and Technical Assistance
Center. Mr. McCarthy has also served on the board of Coalition
for Government Procurement and on the Veterans Institute for
Procurement GovCon Council. In February 2016, Mr. McCarthy was
named to Executive Mosaic’s Washington 100 as one of the
top–100 most influential leaders in the government
contracting arena. He was the founder and host of Government
Contracting Weekly, a television show dedicated to supporting
contractors in their quest for government business. Mr. McCarthy
holds a BA in Political Science and Government and an MA in Public
Policy and Government from Ohio University.
Director Qualifications:
Mr.
McCarthy holds over 35% of the voting power of the Company,
directly aligning his interests with those of our shareholders. He
is a well-respected and acknowledged thought leader in the
government contracting environment. He has extensive executive
leadership and management experience and continues to lead the
development and execution of our businesses. We believe that his
entrepreneurial background building Novume’s first
acquisition, AOC Key Solutions, combined with his leadership
experience and his industry reputation and visibility, allow him to
be a qualified member of our Board of Directors and to serve as
Chairman.
Robert A. Berman, Chief Executive Officer and Director
Robert
Berman is our Chief Executive Officer and is a member of the Board
of Directors and has served in such capacities since March 16,
2016. Since January 2000, Mr. Berman has served as the General
Partner of Avon Road Partners, L.P., a limited partnership
investing in real estate and the broadcast media industry. From
2006 through March 2015, Mr. Berman held the office of Chairman and
Chief Executive Officer at Cinium Financial Services Corporation, a
privately-held specialty finance company, and its predecessor,
Upper Hudson Holdings, LLC. Prior to Cinium, Mr. Berman was Chief
Executive Officer of Empire Resorts, Inc., a NASDAQ-listed gaming
company, from 2002-2005.
In the
late 1990’s, Mr. Berman led a special advisory committee of
large shareholders who worked to identify a new strategic direction
for Executone Information Systems, Inc. a publicly-traded telecom
company. Following the committee’s recommendations, the
company was restructured in 1998, and Mr. Berman was appointed to
Executone’s Board of Directors. After the restructuring, the
company’s market capitalization increased by more than $500
million. From 1997 until 1999, Mr. Berman was Chairman and Chief
Executive Officer of Hospitality Worldwide Services
(“HWS”), a publicly-traded company that became the
premiere service provider to the hospitality industry. Under Mr.
Berman’s leadership HWS grew from a small company with under
$25 million in net revenues in 1996 to more than $229 million in
net revenues in 1998 with offices on several continents and 3,000
employees. While at HWS, Mr. Berman executed a successful
acquisition strategy that resulted in multiple operating divisions
that provided a one-stop shop to serve the needs of the hotel
industry. Mr. Berman was also instrumental in forging partnerships
with institutional investors including ING and Apollo RE leading to
the acquisition, re-positioning, and sale of more than $100 million
of hotel properties.
Director Qualifications:
Mr.
Berman has extensive experience in the private equity and public
company markets. We believe his strong understanding of the
financial markets and the M&A process, and his previous senior
executive roles with public companies make him a qualified member
of our Board of Directors and to serve as our Chief Executive
Officer.
77
Richard Nathan, PhD, Director
Dr.
Richard Nathan served as our Chief Operating Officer until his
retirement on February 28, 2018 and is a member of the Board of
Directors. He brings over 45 years of corporate management, program
management and business and proposal development experience and has
had responsibility for large management and operation contracts
valued at hundreds of millions of dollars and managed service and
technical contracts for DOE, DoD, DHS, NASA, EPA, and state
governments. Dr. Nathan has directed and grown the
environmental and energy business for a large corporation, and
served as a corporate officer and held management and technical
positions at Battelle Memorial Institute and Mason &
Hanger. Dr. Nathan worked at AOC Key Solutions and its
predecessor company American Operations Corporation, for over 17
years and most recently as AOC Key Solutions’ Chief Executive
Officer. Dr. Nathan holds a BS in Chemistry from the Massachusetts
Institute of Technology and a PhD in Chemistry from the Polytechnic
Institute of Brooklyn.
Director Qualifications:
Dr.
Nathan has a strong technical background and understanding of the
government contracting, aviation, and aerospace world from where
the majority of Novume’s revenue is derived. We believe this
expertise, when combined with his entrepreneurial background having
built strong operating companies, makes him a qualified member of
our Board of Directors.
Glenn Goord, Director
Mr. Goord
is a 32-year veteran of the New York State Department of
Correctional Services and served as Commissioner from 1996 until
2006. As Commissioner, he oversaw the nation’s fourth largest
state prison system, administering an operating budget of
$2.3 billion in state and federal funds, plus
$245 million in capital expenditures. Mr. Goord’s
outstanding contributions to furthering excellence in corrections
earned him the Carl Robison Award, the highest honor bestowed by
the Middle Atlantic States Correctional Association. In 1998 he
earned the Charles Evans Hughes Award for public service from the
Albany based Capital Area Chapter for the American Society for
Public Administration (ASPA). In 2002, the ASPA awarded
Mr. Goord its highest honor, the Governor Alfred E. Smith
Award, for his direction of the Department’s immediate and
expansive efforts to aid New York City following the
September 11, 2001 terrorist attack. Mr. Goord holds a BA
Psychology from Fairleigh Dickinson University.
Director Qualifications:
Mr. Goord
has a strong background in government operations and procurement.
His insights into how government operates is a key skill for board
decision making on Novume strategy in certain industry segments. We
believe his operational experience makes him a qualified member of
our Board of Directors and the committees on which he
participates.
Paul A. de Bary, Lead Director
Paul A.
de Bary has been a member of the board of managers of TDI, LLC, an
agent for a manufacturer of digital X-ray systems for medical,
veterinary and industrial applications from 2001 through the
present. He has also served as chairman of the Board of Ethics of
the Town of Greenwich, Connecticut since 2008. He was a managing
director at Marquette de Bary Co., Inc., a New York based
broker-dealer, from 1996 to 2015, where he served as a financial
advisor for state and local government agencies, public and private
corporations and non-profit organizations, as well as general
counsel. He previously served as a director of Empire Resorts, Inc.
(Nasdaq: NYNY) from 1996 to 2010, where he served as chairman of
its audit committee as well as, at various times throughout his
tenure as a director, a member of the governance and compensation
committees and various special committees. Prior to that,
Mr. de Bary was a managing director in the Public Finance
Department of Prudential Securities from 1994 to 1997 and a partner
in the law firm of Hawkins, Delafield & Wood in New York
from 1975 to 1994. Mr. de Bary is a member of the American Bar
Association, the New York State Bar Association and the Association
of the Bar of the City of New York. Mr. de Bary holds a Juris
Doctor degree, an MBA and an AB from Columbia
University.
Director Qualifications:
Mr. de
Bary has a diverse background that includes vast experience as a
lawyer, investment banker and member of several boards of
directors, including those of public companies. We believe these
experiences, combined with his skills and knowledge related to
public market decision-making and audit committee roles and
responsibilities, makes him qualified member of our Board of
Directors and the committees on which he participates.
78
Christine J. Harada, Director
Christine
J. Harada has over 20 years of success in leading government and
management consulting organizations. She previously served as the
Federal Chief Sustainability Officer from November 2015 through
January 2017. Prior to that role, Ms. Harada was the Acting Chief
of Staff of the U.S. General Services Administration
(“GSA”) from March 2015 through November 2015. While at
the GSA, Ms. Harada also served as Associate Administrator,
Government-wide Policy and Chief Acquisition Officer for the GSA
from June 2014 through February 2015. Ms. Harada’s private
sector experience includes serving as Global Manager,
Transformation/Large Scale Change Practice at the Boston Consulting
Group from May 2013 through June 2014, and her tenure as a
principal at Booz Allen Hamilton from January 2004 through April
2013. Ms. Harada holds an MA, International Studies and an MBA,
Finance from the Lauder Institute and the Wharton School at the
University of Pennsylvania, respectively. She also holds an MS
Aeronautics/Astronautics and a BS Aeronautics/Astronautics from
Stanford University and the Massachusetts Institute of Technology,
respectively.
Director Qualifications:
Ms.
Harada has in-depth knowledge of the inner workings of the federal
government, as well as detailed background in corporate best
practices. We believe her skills and experiences make her a
qualified member of our Board of Directors and the committees on
which she participates.
Marta Tienda, PhD, Director
Marta
Tienda has served as the Maurice P. During ’22 professor in
demographic studies at Princeton University since 1999. She has
also been a Professor of Sociology and Public Affairs, and Research
Associate in the Office of Population Research at Princeton since
1997. Previously she held permanent positions at the universities
of Chicago, where she served as chair of the sociology department,
and Wisconsin-Madison, and visiting appointments at NYU, Stanford
and Brown. She is a member of the National Academy of Education,
the American Academy of Political and Social Science, and the
American Academy of Arts and Sciences. She is past president of the
Population Association of America, and from 2004 to 2006 chaired
the National Research Council’s Panel on Hispanics. She
serves on the board of the Population Reference Bureau, Robin Hood,
and the Jacobs Foundation of Switzerland. In addition to chairing
the Board of Trustees of the Alfred P. Sloan Foundation, she serves
as an independent trustee of the Board of Trustees of Teachers
Insurance Annuity Association (TIAA). She is emeritus trustee of
Brown University, the Federal Reserve Bank of New York, the W.T.
Grant Foundation, The Carnegie Corporation of New York, the Kaiser
Family Foundation, and the Russell Sage Foundation. Dr. Tienda
received honorary doctorates from Ohio State University, Lehman
College and Bank Street College. She has published over 200
scientific papers and several monographs and edited books. She has
a BA in Spanish (education) from Michigan State University, and MA
and PhD degrees in sociology from the University of Texas at
Austin.
Director Qualifications:
Dr.
Tienda is a well-respected board member and committee member for
several national organizations. We believe the skills developed
from these engagements, in addition to her knowledge of the
education community, which is a Novume customer base, make her a
qualified member of our Board of Directors and the committees on
which she participates.
Harry Rhulen, President
Mr. Rhulen
is our President. He also is a founder, and served as CEO, of
Firestorm, since its inception in 2005 until our acquisition of
Firestorm in January of 2017. Mr. Rhulen previously served as
an executive and CEO of a public insurance holding company with
U.S. and European operations, commencing 1989 through 2005.
Mr. Rhulen has extensive diligence experience having
participated in over thirty M&A transactions. He has led
several public offerings raising in excess of $350 million.
Mr. Rhulen worked as a consultant in many industries, using
his risk management, crisis management, and business management
skills, as well as his public company, legal, bankruptcy, and due
diligence experience to help his clients. Mr. Rhulen holds
both a Juris Doctor and Masters of Business Degree from Syracuse
University and graduated Cum Laude from the College of Insurance,
New York, New York.
79
Riaz Latifullah, Executive Vice President, Corporate
Development
Riaz
Latifullah previously served as our Chief Financial Officer and now
serves as Executive Vice President, Corporate Development. On April
2, 2018, Mr. Latifullah was appointed as our Principal Financial
Officer following the resignation of our Chief Financial Officer.
Prior to joining Novume, Mr. Latifullah served as the Chief
Financial Officer of the American Grandparents Association /
Grandparents.com. Mr. Latifullah spent 13 years with AARP, a
non-profit organization that advocates on behalf of people over age
50. With AARP he served as Vice President, Financial Management,
Senior Director Strategic Markets and Director Brand Operations. As
an in-house entrepreneur with AARP he created and launched five
start-up operations bringing significant changes to the
organization. In other positions before AARP Mr. Latifullah
served as General Manager for TV on the WEB, an internet video
production company, a Government Relations Representative for the
U.S. Merchant Marine Academy Alumni Foundation and an Investment
Banking Associate for Ryan, Lee and Company. Mr. Latifullah holds
an MBA from Stanford University, an MSE in Naval Architecture and
Marine Engineering from the University of Michigan and a BS in
Marine Engineering from the U.S. Merchant Marine
Academy.
Suzanne Loughlin, Chief Administrative Officer and General
Counsel
Ms. Loughlin
is our Chief Administrative Officer (CAO) and General Counsel. She
is also a founder of our subsidiary, Firestorm. Ms. Loughlin
has extensive consultative experience in the development of crisis
management and communications, workplace violence, emergency
response, and business continuity plans for clients ranging from
some of the world’s largest global companies to educational
institutions and governmental entities. Her previous career
experience includes serving as a Director and CAO of a public
insurance holding company with U.S. and European operations, where
she was responsible for HR, IT, Corporate Communications,
Facilities, Government Relations and Internal Audit. She was also a
litigator with a major New York City law firm and Managing Attorney
of a law firm with multiple offices throughout the country.
Ms. Loughlin is a licensed attorney in New York. She also
holds an Emergency Management Professional Development Series
Certification from FEMA, and is a member of the Association of
Threat Assessment Professionals. Ms. Loughlin holds a Juris
Doctor degree from New York Law School and a BS in Psychology from
St. Lawrence University.
Family Relationship
Our President Harry Rhulen is the brother of our Chief
Administrative Officer and General Counsel, Suzanne Loughlin. There
are no other family relationships among our executive officers and
directors.
Committees of the Board
Board Committees and Independence
Our
Board has established three standing committees—audit,
compensation, and governance—each of which operates under a
charter that has been approved by our board.
Our
Board has determined that all of the members of each of the
board’s three standing committees are independent as defined
under the rules of The NASDAQ Capital Market. In addition, all
members of the Audit Committee meet the independence requirements
contemplated by Rule 10A-3 under the Securities Exchange Act of
1934, or the Exchange Act.
Audit Committee
We have
an Audit Committee comprised of directors who are
“independent” within the meaning of NASDAQ Rule
5605(b)(1). The Audit Committee assists our Board in overseeing the
financial reporting process and maintaining the integrity of our
financial statements, and of our financial reporting processes and
systems of internal audit controls, and our compliance with legal
and regulatory requirements. The Audit Committee is responsible for
reviewing the qualifications, independence and performance of our
independent registered public accounting firm and review our
internal controls, financial management practices and investment
functions and compliance with financial legal and regulatory
requirements. The Audit Committee is also responsible to perform
risk and risk management assessments as well as to prepare any
report of the Audit Committee that may be required by the proxy
rules of the SEC to be included in the Corporation’s annual
proxy statement. Our Board has identified and appointed Paul de
Bary as its “audit committee financial expert,” as
defined by the SEC in Item 407 of Regulation S-K. Mr. de Bary
serves as the Chair of the Audit Committee, and is joined on the
committee by Ms. Harada and Mr. Goord.
80
Compensation Committee
We have
a Compensation Committee comprised of members who are
“Non-Employee Directors” within the meaning of Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) and “outside directors”
within the meaning of Section 162(m) of the Code. They are
also “independent” directors within the meaning of
NASDAQ Rule 5605(b)(1). The Compensation Committee is responsible
for overseeing the establishment and maintenance of our overall
compensation and incentive programs to discharge the Board’s
responsibilities relating to compensation of our executive officers
and directors, including establishing criteria for evaluating
performance and setting appropriate levels of compensation, and to
produce an annual report on executive compensation for inclusion in
the Corporation’s proxy statement in accordance with the
rules and regulations of the SEC. The Compensation Committee
advises and makes recommendations to our Board on all matters
concerning director compensation. Mr. Goord serves as Chair of the
Compensation Committee and is joined by Ms. Harada and Dr.
Tienda.
Compensation Committee Interlocks and Insider
Participation
None of
the members of the Compensation Committee has been, during 2016 or
2017, an officer or employee of Novume or any of its subsidiaries
or predecessor companies, or was formerly an officer of Novume or
any of its subsidiaries or predecessor companies or had any
relationship requiring disclosure by us under Item 404 of
Regulation S-K. No interlocking relationship as described in
Item 407(e)(4) of Regulation S-K exists between any of our
executive officers or Compensation Committee members, on the one
hand, and the executive officers or Compensation Committee members
of any other entity, on the other hand, nor has any such
interlocking relationship existed in the past.
Corporate Governance Committee
Our
Board has a Corporate Governance Committee that that (1) reviews
and recommends improvements to our governance guidelines and
corporate policies; (2) monitors compliance with our Code of
Conduct; (3) trains new members of the Board of Directors; (4)
reviews the performance of the Board of Directors and its various
committees and makes recommendations intended to improve that
performance, (5) evaluates and makes recommendations concerning
changes in the charters of the various Committees of the Board of
Directors, (6) evaluates the performance of the Chief Executive
Officer of the Corporation, (7) oversees the development and
implementation of succession planning for Corporation senior
management positions; (8) identifies and recommends candidates for
nomination as members of the Board of Directors and its committees
and (9) such other matters as may be required to ensure compliance
with applicable federal and state laws or the requirements of any
exchange on which the Company maintains a listing for its
securities. The committee is required to be comprised of entirely
“independent” directors within the meaning of NASDAQ
Rule 5605(b)(1). Ms. Harada currently serves as the Chair of
the Corporate Governance Committee and is joined on the committee
by Dr. Tienda and Mr. de Bary.
The
Chair and members of each committee are summarized in the table
below:
|
Name
|
|
Audit Committee
|
|
Compensation Committee
|
|
Corporate Governance Committee
|
|
Christine
Harada -- (Independent)
|
|
Member
|
|
Member
|
|
Chair
|
|
Paul de
Bary -- (Independent)
|
|
Chair
|
|
-
|
|
Member
|
|
Glenn
Goord -- (Independent)
|
|
Member
|
|
Chair
|
|
-
|
|
Marta
Tienda -- (Independent)
|
|
-
|
|
Member
|
|
Member
|
Board Leadership Structure
Our
Board of Directors is currently led by its Chairman, James
McCarthy. Our Board of Directors recognizes that it is important to
determine an optimal Board leadership structure to ensure the
independent oversight of management as the Company continues to
grow. We separate the roles of Chief Executive Officer and Chairman
of the Board in recognition of the differences between the two
roles. The Chief Executive Officer is responsible for setting the
strategic direction for the Company and the day-to-day leadership
and performance of the Company, while the Chairman of the Board of
Directors provides guidance to the Chief Executive Officer and
presides over meetings of the full Board of Directors. We believe
that this separation of responsibilities provides a balanced
approach to managing the Board of Directors and overseeing the
Company.
81
Our
Organizational Guidelines provide for a Lead Director to be elected
whenever the Chair of the Board of Directors is not an independent
director. The responsibilities of the Lead Director are to: 1)
preside at meetings of our stockholders and Board of Directors if
the Chair is absent; 2) call meetings and executive sessions of the
independent directors of the Board; 3) establish the agenda and
preside at all executive sessions and other meetings of the
independent directors of the Board and communicate the results of
meetings of the independent directors to the Chair and other
members of management, as appropriate; 4) communicate with the
independent directors of the Board between meetings as necessary or
appropriate, serve as a liaison between the Chair and the
independent directors and communicate independent director
consensus on important issues to the Chair; 5) approve Board
meeting agendas and schedules for regular meetings of the Board of
Directors to assure there is sufficient time for discussion of all
agenda items and approve meeting materials and other information to
be sent to the Board in advance of regular meetings; 6) evaluate
the quality and timeliness of information sent to the Board by the
Chief Executive Officer and other members of management; 7) oversee
the evaluation of the Chief Executive Officer and assist the Board
Chair on matters of Board succession planning and crisis
management; 8) assist the Chair of the Governance Committee with
individual director evaluations; and 9) be available for
consultation and direct communication at the request of major
stockholders. Mr. de Bary currently serves as Lead
Director.
The Board’s Role in Risk Oversight
Our
Board of Directors has responsibility for the oversight of our risk
management processes and, either as a whole or through its
committees, regularly discusses with management our major risk
exposures, their potential impact on our business and the steps we
take to manage them. The risk oversight process includes receiving
regular reports from Board committees and members of senior
management to enable our Board to understand the Company’s
risk identification, risk management and risk mitigation strategies
with respect to areas of potential material risk, including
operations, finance, legal, regulatory, strategic and reputational
risk.
The
Audit Committee reviews information regarding liquidity and
operations, and oversees our management of financial risks.
Periodically, the Audit Committee reviews our policies with respect
to risk assessment, risk management, loss prevention and regulatory
compliance. Oversight by the Audit Committee includes direct
communication with our external auditors, and discussions with
management regarding significant risk exposures and the actions
management has taken to limit, monitor or control such exposures.
The Compensation Committee is responsible for assessing whether any
of our compensation policies or programs has the potential to
encourage excessive risk-taking. The Nominating and Corporate
Governance Committee manages risks associated with the independence
of the board, corporate disclosure practices, and potential
conflicts of interest. While each committee is responsible for
evaluating certain risks and overseeing the management of such
risks, the entire Board is regularly informed through committee
reports about such risks. Matters of significant strategic risk are
considered by our Board as a whole.
82
COMPENSATION OF NOVUME DIRECTORS
The following table provides the total compensation for each person
who served as a non-employee member of our Board of Directors
during fiscal year 2017, including all compensation awarded to,
earned by or paid to each person who served as a non-employee
director for some portion or all of fiscal year
2017
:
|
Name
|
Fees earned or paid in cash
($)
|
Stock awards
($)
|
Option awards
($) (1)
|
Non-equity incentive plan compensation
($)
|
Nonqualified deferred compensation earnings
($)
|
All other compensation
($)
|
Total
($)
|
|
Paul
de Bary (2)
|
54,000
|
-
|
24,874
|
-
|
-
|
-
|
78,874
|
|
Glenn
Goord (3)
|
40,000
|
-
|
26,484
|
-
|
-
|
-
|
66,484
|
|
Christine
Harada (4)
|
16,000
|
-
|
47,523
|
-
|
-
|
-
|
63,523
|
|
Marta
Tienda (5)
|
-
|
-
|
108,900
|
-
|
-
|
-
|
108,900
|
(1)
The
amount shown reflects the aggregate grant date fair value of option
awards computed in accordance with Financial Accounting Standards
Board Accounting Standards Codification 718.
(2)
As
of December 31, 2017, Mr. de Bary held fully-vested options to
purchase 48,499 shares of our common stock
at a strike price of $1.5464 per
share
.
(3)
As
of December 31, 2017, Mr. Goord held fully-vested options to
purchase 48,499 shares of our common stock
at a strike price of $1.2887 per
share
.
(4)
As
of December 31, 2017, Ms. Harada held fully-vested options to
purchase 48,499 shares of our common stock
at a strike price of $1.6753 per
share
.
(5)
As
of December 31, 2017, Dr. Tienda held fully-vested options to
purchase 48,499 shares of our common stock
at a strike price of $3.81 per share
.
Effective August 23, 2017, our non-employee directors are
compensated for their services as follows:
|
|
|
Board
Meeting Fee
|
Committee
Meeting Fee
|
||
|
Position
|
Annual
Fee
($)
(1)
|
In
Person
($)
|
Telephonic
($)
|
In
Person
($)
|
Telephonic
($)
|
|
Board
Member
|
25,000
|
1,000
|
500
|
500
|
250
|
|
Audit
Committee Chair
|
20,000
|
1,500
|
500
|
500
|
250
|
|
Compensation
Committee Chair
|
10,000
|
1,500
|
500
|
500
|
250
|
|
Governance
Committee Chair
|
10,000
|
1,500
|
500
|
500
|
250
|
(1)
Payments are made on a quarterly basis.
Directors
who are officers or employees of Novume or its subsidiaries do not
receive any compensation for service on our Board, but employee
directors will be reimbursed for expenses incurred in attending
meetings of our Board or any committees thereof
.
Code of Ethics
We have
adopted a Code of Conduct, which serves as our Code of Ethics, that
applies to all of our employees, including our Chief Executive
Officer, our Chief Financial Officer and our Principal Financial
Officer. Our Code of Conduct is available on our website at
www.novume.com. If we amend or grant a waiver of one or more of the
provisions of our Code of Conduct, we intend to satisfy the
requirements under Item 5.05 of Item 8-K regarding the disclosure
of amendments to or waivers from provisions of our Code of Conduct
that apply to our Principal Executive and Principal Financial
Officer by posting the required information on our website at the
above address. Our website is not part of this Annual Report on
Form 10-K.
Section 16(a) Beneficial Ownership Reporting
Compliance
Based
on a review of reports filed by our directors, executive officers,
and beneficial owners of more than 10% of our shares of common
stock pursuant to Section 16 of the Securities Exchange Act of
1934, as amended, and other information available to us, we believe
that all such ownership reports required to be filed by those
reporting persons during and with respect to Fiscal 2017 were
timely made.
83
The
following table sets forth information about the annual paid
compensation of our: Principal Executive Officer, Mr. Berman; two
most highly compensated executive officers other than the Principal
Executive Officer, Messrs. James McCarthy and Latifullah, who
were serving as executive officers as of December 31, 2017; and two
additional individuals, Messrs. Greg McCarthy and Berrigan, for
whom disclosure would have been required but for the fact that the
individual was not serving as an executive officer as of December
31, 2017. While all named executive officers were eligible for
bonuses in 2016 and 2017, due to our startup nature and because the
first closing of the Regulation A Offering did not occur until
December 23, 2016, management elected to only issue bonuses to
Messrs. Gregory McCarthy and Berrigan for AOC Key Solutions and
individual sales performance. The information in this table for the
Company’s most recently completed fiscal year is based on the
information available to the Company as of the date of this Annual
Report on Form 10-K.
|
Name/Capacities in which compensation was received
|
|
Year
|
Salary
($)
|
Bonus
($)
|
|
Options
($)
|
|
All other compensation
($)
|
|
Total
($)
|
|
Robert Berman
|
|
2017
|
395,000
|
-
|
|
-
|
|
-
|
|
395,000
|
|
Chief Executive Officer (1)
|
|
2016
|
300,000
|
-
|
|
-
|
|
-
|
|
300,000
|
|
James K. McCarthy
|
|
2017
|
293,231
|
-
|
|
-
|
|
8,931
|
(2)
|
302,162
|
|
Chief Strategy Officer (3)
|
|
2016
|
298,989
|
-
|
|
-
|
|
10,600
|
(2)
|
406,840
|
|
Riaz Latifullah (4)
|
|
2017
|
258,333
|
-
|
|
97,251
|
(5)
|
-
|
|
355,584
|
|
EVP, Corporate Development, Chief Financial Officer
(6)
|
|
2016
|
200,000
|
-
|
|
-
|
|
-
|
|
200,000
|
|
Greg McCarthy
|
|
2017
|
272,380
|
5,381
|
(7)
|
-
|
|
10,800
|
(2)
|
288,561
|
|
Chief Executive Officer of AOC Key Solutions
|
|
2016
|
229,800
|
42,762
|
(8)
|
-
|
|
9,497
|
(2)
|
282,059
|
|
Kevin
Berrigan
|
|
2017
|
232,792
|
18,500
|
(7)
|
-
|
|
-
|
|
251,292
|
|
SVP
and Chief Financial Officer of AOC Key Solutions
|
|
2016
|
209,724
|
11,641
|
(7)
|
-
|
|
4,461
|
(2)
|
225,826
|
(1)
Mr. Berman was an independent consultant in 2016 and became an
employee on January 1, 2017.
(2)
Amount represents 401(k) matching contribution.
(3)
Mr. James McCarthy served as: Chief
Executive Officer through March 15, 2016; Chief Strategy Officer
from March 16, 2016 through March 31, 2017; and Host of
The
Bridge
from April 2017
through March 2018.
(4)
Mr. Latifullah served as Chief Financial Officer until August 28,
2017 at which time he transitioned to EVP of Corporate Development.
He currently serves as our Principal Financial
Officer.
(5)
Amount represents the fair value of the issuance of 174,595 stock
options to Mr. Latifullah on December 23,
2016.
(6)
Mr. Latifullah was an independent consultant in 2016 and became and
employee on January 1, 2017.
(7)
Amount represents subjective bonus.
(8)
Amount represents commissions on sales and subjective
bonus.
84
Outstanding Equity Awards at Fiscal Year-End
The
following table sets forth information with respect to unexercised
stock options, stock that has not vested, and equity incentive plan
awards held by our named executive officers at December 31,
2017.
|
|
Option Awards
|
Stock Awards
|
||||
|
Name and Principal Position
|
Number of Securities Underlying Unexercised Options -
Exercisable
|
Number of Securities Underlying Unexercised Options -
Unexercisable
|
Option Exercise Price
($)
|
Option Expiration Date
|
Number of Shares of Stock that Have not Vested
|
Market Value of Shares of Stock that Have not Vested
($)
|
|
Robert
Berman (1)
|
-
|
-
|
-
|
-
|
-
|
-
|
|
James
McCarthy
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Riaz
Latifullah (2)
|
72,748
|
101,847
|
1.42
|
12/23/26
|
-
|
-
|
|
Greg
McCarthy
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Kevin
Berrigan
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
Mr.
Berman has options to purchase 4,318,857 outstanding shares of our
common stock in the aggregate from Mr. James McCarthy (2,725,836
shares) and Dr. Richard Nathan (1,593,021 shares) granted by
Mr. McCarthy and Dr. Nathan to Avon Road. Mr. Berman is
the general partner of Avon Road, and therefore may be deemed to
share beneficial ownership with Avon Road of the shares reported
herein.
(2)
These options
were granted on December 23, 2016 and vest in equal monthly
installments over 24 months starting March 1, 2017, based on
continued employment.
Compensation Committee Interlocks and Insider
Participation
No
member of our Compensation Committee is a current or former officer
or employee of Novume or its subsidiaries. No executive officer of
Novume served as a director or member of the Compensation Committee
of any entity that has one or more executive officers serving as a
member of our Board of Directors or Compensation
Committee.
Employment Agreements
We have
entered into employment agreement our executives in connection with
his or her commencement of employment with us.
Berman Employment Agreement
The
Employment Agreement with Robert Berman (the “Berman
Employment Agreement”) provides that Mr. Berman will
serve as our Chief Executive Officer. The agreement has an initial
term, which was effective as of December 23, 2016, of five years
with automatically renewing one-year terms thereafter.
Mr. Berman’s base salary is $395,000 per annum, and he
is eligible for a bonus as determined by our Compensation
Committee. Mr. Berman is also eligible to receive all such
other benefits as are provided to other management
employees.
In the
event of a “Change of Control”, as defined in the
Berman Employment Agreement, whether during the initial term or
thereafter, we shall have the right to terminate the Berman
Employment Agreement. In the event we exercise the option to
terminate Mr. Berman’s agreement, we will be required to
pay Mr. Berman an amount equal to Mr. Berman’s base
salary per annum multiplied by the number of years and portions
thereof remaining under the Berman Employment Agreement.
Mr. Berman may be terminated by the Company for
“Cause”, as defined in the Berman Employment
Agreement.
Mr. Berman
also agreed as consideration for entering into the Berman
Employment Agreement, that for the period during his employment and
for twelve months thereafter, (i) he will not compete with the
Company in the “Geographic Area”, as defined in the
Berman Employment Agreement, and (ii) he will not solicit any
of our existing employees, suppliers or customers.
85
Rhulen Employment Agreement
The
employment agreement with Harry Rhulen (the “Rhulen
Employment Agreement”) provides that Mr. Rhulen will
serve as our President for an initial five-year term that began on
January 25, 2017. His base salary is $275,000 per annum, and
he will be eligible for a bonus as determined by our Compensation
Committee. Mr. Rhulen is also eligible to receive all such
other benefits as are provided to other management
employees.
Mr. Rhulen
was previously granted options to purchase 80,000 shares of the
common stock, par value $0.001 per share, of KeyStone at a strike
price of $3.00 per share. These options were converted into options
to purchase 155,195 shares of our common stock at a strike price of
$1.5464 per share. The conversion did not affect their vesting
schedule; the options were to begin vesting on the first
anniversary of Mr. Rhulen’s initial employment as President
and continue vesting monthly over the following two
years.
We may
terminate Mr. Rhulen’s employment agreement for
“Cause,” as defined in the Rhulen Employment Agreement.
If we terminate Mr. Rhulen’s employment other than for
“Cause,” or Mr. Rhulen terminates his employment
for “Good Reason”, as defined in the Rhulen Employment
Agreement, we will be required to pay Mr. Rhulen an amount
equal to the remaining amount of base salary payable under the
Rhulen Employment Agreement until the end of the initial five-year
term and our contribution to Mr. Rhulen’s health
insurance premiums.
Mr. Rhulen
also agreed that, for the period during his employment and for one
year thereafter, (i) he will not compete with the Company in
the “Restricted Territory”, as defined in Exhibit A to
the Rhulen Employment Agreement, and (ii) he will not solicit
any of our existing employees, suppliers or customers.
James K. McCarthy Offer Letter
The
amended and restated James K. McCarthy Offer Letter (the
“McCarthy Offer Letter”) provides that
Mr. McCarthy will serve as our Host and Moderator -- The
Bridge on TV. His employment is at will, subject to providing
120-days’ notice of resignation or termination. We may pay
Mr. McCarthy’s salary in lieu of notice for some or all
of the 120-day notice period. His base salary is $298,989 per
annum, and he is eligible for a bonus as determined by our
Compensation Committee. Mr. McCarthy will also be eligible to
receive all such other benefits as are provided to other management
employees.
Mr. McCarthy
also agreed that, for the period during his employment and for two
years thereafter, (i) he will not compete with the Company in
the “Restricted Territory”, as defined in Exhibit A to
the McCarthy Offer Letter, and (ii) he will not solicit any of
our existing employees, suppliers or customers.
Nathan Employment Agreement
The
employment agreement with Richard Nathan (the “Nathan
Employment Agreement”) provided for Dr. Nathan to serve
as our Chief Operating Officer for a term until December 31,
2017, with an option to extend the term. Dr. Nathan retired as
Chief Operating Officer effective February 28, 2018. His base
salary was $225,200 per annum, and he was eligible for a bonus as
determined by our Compensation Committee. Dr. Nathan also
agreed that, for two years after his employment: (i) he will
not compete with the Company in the “Restricted
Territory”, as defined in Exhibit A to the Nathan Employment
Agreement; and (ii) he will not solicit any of our existing
employees, suppliers or customers.
Loughlin Employment Agreement
The
employment agreement with Suzanne Loughlin (the “Loughlin
Employment Agreement”) provides that Ms. Loughlin is
General Counsel and Chief Administrative Officer for an initial
five-year term that began on January 25, 2017. Her base salary
is $225,000 per annum, and she is eligible for a bonus as
determined by our Compensation Committee. Ms. Loughlin is also
eligible to receive all such other benefits as are provided to
other management employees.
Ms. Loughlin
was previously granted options to purchase 80,000 shares of the
common stock, par value $0.001 per share, of KeyStone at a strike
price of $3.00 per share. These options were converted into options
to purchase 155,195 shares of our common stock at a strike price of
$1.5464 per share. The conversion did not affect their vesting
schedule; the options were to begin vesting on the first
anniversary of Ms. Loughlin’s initial employment as General
Counsel and Chief Administrative Officer and continue vesting
monthly over the following two years.
86
We may
terminate Ms. Loughlin’s employment agreement for
“Cause,” as defined in the Loughlin Employment
Agreement. If we terminate Ms. Loughlin’s employment
other than for “Cause,” or Ms. Loughlin terminates
her employment for “Good Reason”, as defined in the
Loughlin Employment Agreement, we will be required to pay
Ms. Loughlin an amount equal to the remaining amount of base
salary payable under the Loughlin Employment Agreement until the
end of the initial five-year term and our contribution to
Ms. Loughlin’s health insurance premiums.
Ms. Loughlin
also agreed that, for the period during her employment and for one
year thereafter, (i) she will not compete with the Company in the
“Restricted Territory”, as defined in Exhibit A to the
Loughlin Employment Agreement, and (ii) she will not solicit
any of our existing employees, suppliers or customers.
Amended Latifullah Agreement
In
connection with Mr. Latifullah’s transition to Executive Vice
President, Corporate Development, on August 28, 2017, Mr.
Latifullah and Novume entered into a Restated, Amended and
Supplemental Employment Agreement (the “Amended Latifullah
Agreement”), which amended and restated his original
employment agreement with KeyStone effective as of December 23,
2016, which was assumed by Novume. The Amended Latifullah Agreement
provides that he is Executive Vice President, Corporate Development
for a term that ends on December 23, 2019. His base salary is
$205,000 per annum, and he will be eligible for a bonus as
determined by our Compensation Committee. On March 29, 2018, Mr.
Latifullah and Novume entered into a Second Restated, Amended and
Supplemental Employment Agreement (the “Second Amended
Latifullah Agreement”) which provides for a base salary of
$285,000. No other terms were changed.
Under
the terms of the Second Amended Latifullah Agreement, Mr.
Latifullah is also eligible to receive all such other benefits as
are provided to other management employees. Mr. Latifullah was
previously granted options to purchase 90,000 shares of the common
stock, par value $0.001 per share, of KeyStone at a strike price of
$2.75 per share. These options were converted into options to
purchase 174,595 shares of our common stock at a strike price of
$1.4176 per share. The conversion did not affect their vesting
schedule; the options began vesting in equal monthly installments
on March 1, 2017 and will continue vesting monthly until March 1,
2019.
The
Second Amended Latifullah Agreement may be terminated with or
without cause, as defined in the agreement. Subject to certain
conditions, the Second Amended Latifullah Agreement provides that,
if Mr. Latifullah is terminated without cause, or if he leaves for
good reason, he will be provided a severance package equal to six
(6) months of base salary and such percentage of health premiums as
would have been paid for by Novume during the corresponding time
period. Additionally, half of all unvested options issued to Mr.
Latifullah under the Second Amended Latifullah Agreement would vest
immediately.
Mr. Latifullah
also agreed that, for the period during his employment and for one
year thereafter, (i) he will not compete with Novume in the
“Restricted Territory”, as defined in Exhibit A to the
Latifullah Employment Agreement, and (ii) he will not solicit
any of Novume’s existing employees, suppliers or
customers.
Bonus Eligibility
Bonuses
for our executive officers may be conditioned on the achievement of
objective goals, which may not be waived after being set, based on
one or more of the following performance measures: earnings;
operating profits (including measures of earnings before interest,
taxes, depreciation and amortization); free cash flow or adjusted
free cash flow; cash from operating activities; revenues; net
income (before or after tax); financial return ratios; market
performance; stockholder return and/or value; net profits; earnings
per share; profit returns and margins; stock price; working
capital; capital investments; returns on assets; returns on equity;
returns on capital investments; selling, general and administrative
expenses; discounted cash flows; productivity; expense targets;
market share; cost control measures; strategic initiatives; changes
between years or periods that are determined with respect to any of
the above-listed performance criteria; net present value; sales
volume; cash conversion costs; leverage ratios; maintenance of
liquidity; integration of acquired businesses; operational
efficiencies, including Lean Six Sigma initiatives; regulatory
compliance, including the Sarbanes-Oxley Act of 2002; and economic
profit.
87
The
following table sets forth, as March 31, 2018, information
concerning the beneficial ownership of Novume common stock by
(i) each person or group of persons known to beneficially own
more than 5% of the outstanding shares of our common stock,
(ii) each person who is our executive officer or director and
(iii) all such executive officers and directors as a group.
Beneficial ownership and percentage ownership are determined in
accordance with the rules of the SEC. Under these rules, beneficial
ownership generally includes any shares as to which the individual
or entity has sole or shared voting power or investment power and
includes any shares that an individual or entity has the right to
acquire beneficial ownership of within 60 days of March 31, 2018
through the exercise of any option, warrant, conversion privilege
or similar right. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person,
shares of our common stock that could be issued upon the exercise
of outstanding options and warrants that are exercisable within 60
days of March 31, 2018 are considered to be outstanding. These
shares, however, are not considered outstanding as of March 31,
2018 when computing the percentage ownership of each other person,
except as specifically set forth below.
To our
knowledge, except as indicated in the footnotes to the following
table, all beneficial owners named in this table have sole voting
and investment power with respect to all shares shown as
beneficially owned by them. Percentage of ownership is based on
14,496,697 shares of common stock outstanding as of March 31,
2018.
|
|
Shares Beneficially Owned
|
|
|
|
Name and address of beneficial owner (1)
|
Number of Shares (2)
|
|
Percent of
class
|
|
Directors and Named Executive Officers
|
|
|
|
|
Robert
A. Berman
|
4,440,104
|
(3)
|
30.6
%
|
|
James
McCarthy
|
5,451,671
|
|
37.6
%
|
|
Richard
Nathan
|
3,207,045
|
(4)
|
22.1
%
|
|
Harry
Rhulen
|
558,376
|
(5)
|
3.8
%
|
|
Suzanne
Loughlin
|
558,376
|
(5)
|
3.8
%
|
|
Paul
de Bary
|
48,499
|
(6)
|
*
|
|
Glenn
Goord
|
48,499
|
(6)
|
*
|
|
Christine
Harada
|
48,499
|
(6)
|
*
|
|
Marta
Tienda
|
48,499
|
(6)
|
*
|
|
Riaz
Latifullah (7)
|
109,122
|
(8)
|
*
|
|
5% or Greater Shareholders
|
|
|
|
|
C.B.
Brechin
|
743,333
|
|
5.1
%
|
|
Scott
Rutherford
|
748,226
|
|
5.2
%
|
|
Paul
Milligan
|
781,722
|
(9)
|
5.2
%
|
|
All
current Directors and named executive officers as a group (10
persons)
|
14,518,690
|
|
66.6
%
|
* Less
than 1%
(1)
The address of
those listed is c/o Novume Solutions, Inc., 14420 Albemarle Point
Place, Suite 200, Chantilly, VA, 20151. Unless otherwise indicated,
all shares are owned directly by the beneficial owner.
(2)
Based on 14,496,697
shares of our common stock issued and outstanding as of the March
31, 2018.
(3)
Consists of:
(i) options to purchase 4,318,857 outstanding shares of our
common stock in the aggregate from Mr. James McCarthy
(2,725,836 shares) and Dr. Richard Nathan (1,593,021
shares) granted by Mr. McCarthy and Dr. Nathan to
Avon Road, and (ii) 121,247 shares of our common stock issued to
Avon Road. Mr. Berman is the general partner of Avon Road, and
therefore may be deemed to share beneficial ownership with Avon
Road of the shares reported herein. The 4,318,857 shares underlying
the Avon Road Options are already outstanding as they are held by
Mr. James McCarthy and Dr. Richard Nathan and are
therefore included in the beneficial ownership calculation for all
persons including Mr. Berman.
(4)
Consists of: (i)
3,186,041 shares of our common stock, (ii) a Unit Warrant to
purchase 4,849 shares of our common stock at a $1.031 exercise
price and (iii) 16,155 shares of our common stock acquirable
through the conversion of 10,000 shares of Novume Series A
Preferred Stock at a $6.19 conversion price.
(5)
Consists of:
(i) 315,625 shares of our common stock, (ii) a warrant to
purchase 105,209 shares of our common stock at a $2.5774 exercise
price, (iii) a warrant to purchase 105,209 shares of our
common stock at a $3.6083 exercise price and (iv) options to
purchase 32,333 shares of our common stock that are exercisable
within 60 days.
(6)
Consists of options
to purchase 48,499 shares of our common stock.
(7)
Mr. Latifullah
served as our Chief Financial Officer until August 28, 2017 when he
began serving as our Executive Vice President of Corporate
Development.
(8)
Consists of options
to purchase 109,122 shares of our common stock that are exercisable
within 60 days.
(9)
Consists of: (i)
300,000 shares of our common stock and (ii) 481,722 shares of our
common stock acquirable through the conversion of 240,861 shares of
our Series B Preferred Stock at a $2.00 conversion
price.
88
In
addition to the executive officer and director compensation
arrangements discussed above under “Compensation of Novume
Directors” and “Executive Compensation,” the
following is a description of each transaction since January 1,
2014
and
any currently proposed transaction in which (i) we have been
or are to be a participant, (ii) the amount involved exceeded
or will exceed the lesser of $120,000 or one percent of the average
of our total assets at year end for the last two completed fiscal
years, and (iii) any of our directors, executive officers,
holders of more than five percent of our capital stock, or
any immediate family member of, or person sharing the household
with, any of these individuals, had or will have a direct or
indirect material interest.
Firestorm Acquisition
As part
of the consideration for the acquisition of
Firestorm Solutions, LLC and Firestorm
Franchising, LLC in January 2017, we issued subordinated promissory
notes to Harry Rhulen, our President, and Suzanne Loughlin, our
General Counsel and Chief Administrative Officer. The principal
amount of the promissory note to Mr. Rhulen is $166,666.66 and
the principal amount of the promissory note to Ms. Loughlin is
$166,666.67. Each of the promissory notes bears interest at a rate
of 2%. In connection with the acquisition, we also paid cash of
$125,000 to each of Mr. Rhulen and Ms. Loughlin, issued
warrants to purchase 105,209 shares of our common stock,
exercisable over a period of five years, at an exercise price of
$2.58 per share, and issued warrants to purchase 105,209 shares of
our common stock, exercisable over a period of five years, at an
exercise price of $3.60 per share.
Prior to the consummation of the Firestorm Acquisition, Mr. Rhulen
and Ms. Loughlin were not officers of the Company.
Avon Road Note Purchase Agreement
On March 16, 2016, we entered into a Subordinated Note and
Warrant Purchase Agreement pursuant to which we agreed to issue up
to $1,000,000 in subordinated debt and warrants to purchase up to
242,493 shares of our common stock at an exercise price of $1.031
per share to Avon Road Partners, L.P., an affiliate of Robert
Berman, our CEO and a member of our Board of Directors.
Simultaneously with the entry into the Subordinated Note and
Warrant Purchase Agreement we issued subordinated notes with a face
amount of $500,000 and warrants to purchase 121,247 shares of our
common stock to the Avon Road. These warrants were to expire on
March 16, 2019 and
were exercised on
December 11, 2017 for proceeds of $125,006. There are no Avon Road
Subordinated Note Warrants outstanding as of December 31,
2017.
Simple interest accrues on the unpaid principal of the
note at a rate equal to the lower of (a) 9% per annum, or
(b) the highest rate permitted by applicable
law.
The
foregoing transaction was reviewed and approved by officers and
directors other than Mr. Berman.
Review, Approval, or Ratification of Transactions with Related
Parties
Our
written related party transactions policy and the Charter of our
Governance Committee require that any transaction with a related
person that must be reported under applicable rules of the SEC must
be reviewed and either approved, disapproved or ratified by our
Governance Committee.
Prior
to August 2017, we had no formal, written policy or procedure for
the review and approval of related-party transactions.
Director Independence
Paul de
Bary, Glen Goord, Christina Harada and Marta Tienda are each
“independent” within the meaning of NASDAQ Rule
5605(b)(1).
The
Audit Committee reviews and pre-approves both audit and all
permissible non-audit services provided by our independent
registered public accounting firm. Since our Audit Committee was
formed on August 28, 2017, accounting fees and services incurred
prior to August 28, 2017 were reviewed and pre-approved by the
Board of Directors.
BD
& Company, Inc. (“BD & Company”) has served as
our principal auditor since May 2017. They did not provide any
services, and no fees were paid to them, in 2016. CohnReznick LLP
(“CohnReznick”) provided principal auditor services
from November 3, 2016 through April 28, 2017, but did not issue an
audit report. Ericksen, Krentel & Laporte, LLP (“Ericksen
Krentel”) served as our principal auditor in 2016 and
provided accounting services in 2017.
89
The
Audit Committee has considered whether the provision of services,
other than services rendered in connection with the audit of our
annual financial statements, is compatible with maintaining BD
& Company’s independence. The Audit Committee has
determined that the rendering of non-audit services by BD &
Company during 2017 was compatible with maintaining the
firm’s independence.
Aggregate
fees billed or incurred related to the following years for
professional services rendered by BD & Company for 2017 and
2016 are set forth below.
|
|
2017
|
2016
|
|
Audit
fees
|
$
241,661
|
$
-
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
24,875
|
-
|
|
All
other fees
|
-
|
-
|
|
Total
|
$
266,536
|
$
-
|
Aggregate
fees billed or incurred related to the following years for
professional services rendered by CohnReznick for 2017 and 2016 are
set forth below.
|
|
2017
|
2016
|
|
Audit
fees
|
$
35,850
|
$
14,150
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
-
|
-
|
|
All
other fees
|
-
|
-
|
|
Total
|
$
35,850
|
$
14,150
|
Aggregate
fees billed or incurred related to the following years for
professional services rendered by Ericksen Krentel for 2017 and
2016 are set forth below.
|
|
2017
|
2016
|
|
Audit
fees
|
$
-
|
$
28,500
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
-
|
2,705
|
|
All
other fees
|
25,128
|
-
|
|
Total
|
$
25,128
|
$
31,205
|
Audit
Fees for 2017 and 2016 include fees associated with the audits of
the annual financial statements, the quarterly reviews of the
unaudited interim financial statements included in the
Company’s Quarterly Reports on Form 10-Q, and services
related to other reports filed with the SEC. Tax Fees for 2017 and
2016 include fees associated with the preparation and reviews of
tax returns, advising on the impact of local tax laws, and tax
planning.
1. Financial Statements
The
Novume Solutions, Inc financial statements are included in Item 8.
Financial Statements and Supplementary Data.
2. Financial Schedules
None.
90
3. Exhibits.
|
Exhibit
No.
|
|
Description
|
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91
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|
101-INS
|
|
XBRL Instance
Document
|
|
101-SCH
|
|
XBRL Taxonomy
Extension Schema Document
|
|
101-CAL
|
|
XBRL Taxonomy
Extension Calculation Linkbase
Document
|
|
101-LAB
|
|
XBRL Taxonomy
Extension Label Linkbase Document
|
|
101-PRE
|
|
XBRL Taxonomy
Extension Presentation Linkbase
Document
|
|
101-DEF
|
|
XBRL Taxonomy
Extension Definition Linkbase Document
|
*
Filed
herewith.
None.
92
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
|
Novume
Inc.
|
|
|
|
|
|
|
|
/s/
Robert A. Berman
|
|
|
|
Name:
Robert A. Berman
|
|
|
|
Title:
Chief Executive Officer
Principal
Executive Officer
Director
and Authorized Signatory
|
Pursuant
to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
/s/
Robert A. Berman
Robert A. Berman
|
Chief
Executive Officer (Principal Executive Officer) and
Director
|
April
12
,
2018
|
|
|
|
|
|
/s/
Riaz Latifullah
Riaz Latifullah
|
EVP,
Corporate Development (Principal Financial and Accounting
Officer)
|
April
12
,
2018
|
|
|
|
|
|
/s/
James K. McCarthy
James K. McCarthy
|
Chairman
of the Board and Director
|
April
12
,
2018
|
|
|
|
|
|
/s/
Richard Nathan
Dr. Richard Nathan
|
Director
|
April
12
,
2018
|
|
|
|
|
|
/s/
Glenn Goord
Glenn Goord
|
Director
|
April
12
,
2018
|
|
|
|
|
|
/s/
Paul de Bary
Paul de Bary
|
Director
|
April
12
,
2018
|
|
|
|
|
|
/s/
Christine J. Harada
Christine J. Harada
|
Director
|
April
12
,
2018
|
|
/s/
Marta Tienda
Marta Tienda
|
Directo
r
|
April
12
,
2018
|
93
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Nature Of Operations and RecapitalizationNote 2 AcquisitionsNote 3 Summary Of Significant Accounting PoliciesNote 4 Investment At Cost and Notes ReceivableNote 5 Identifiable Intangible AssetsNote 6 Supplemental Disclosures Of Cash Flow InformationNote 7 DebtNote 8 Income TaxesNote 9 Stockholders EquityNote 10 Warrant Derivative LiabilityNote 11 Common Stock Option AgreementNote 12 CommitmentsNote 13 Equity Incentive PlanNote 14 Employee Benefit PlanNote 15 InventoryNote 16 Earnings (loss) Per ShareNote 17 Subsequent EventsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits, Financial Statements SchedulesItem 16. Form 10-k Summary