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ACQUISITIONS | 9 Months Ended
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Sep. 30, 2018
Acquisitions |
ACQUISITION | Secure Education Consultants Acquisition On January 1, 2018, Novume completed its acquisition of certain assets of Secure Education through Firestorm. Consideration paid as part of this acquisition included: (a) $99,197 in cash, (b) 33,333 shares of Novume common stock valued at $163,332; (c) warrants to purchase 33,333 shares of Novume common stock, exercisable over a period of five years, at an exercise price of $5.44 per share, valued at $65,988 and (d) warrants to purchase 33,333 of Novume common stock, exercisable over a period of five years at an exercise price of $6.53 per share, valued at $57,484. As the Secure Education acquisition has recently been completed, the Company is currently in the process of completing the preliminary purchase price allocation treating the Secure Education acquisition as a business combination. The preliminary purchase price has been allocated to the assets acquired based on fair values as of the acquisition date. The final purchase price allocation for Secure Education will be included in the Company’s financial statements in future periods. The table below shows preliminary analysis for the Secure Education asset purchase:
Cash paid |  | $ | 99,197 |
Common stock issued |  |  | 163,332 |
Warrants issued, at $5.44 |  |  | 65,988 |
Warrants issued, at $6.53 |  |  | 57,484 |
Total consideration |  |  | 386,001 |
Less intangible and intellectual property |  |  | (386,001 | )
Net goodwill recorded |  | $ | - |
BC Management Acquisition On December 31, 2017, Novume completed its acquisition of certain assets of BC Management through Firestorm. 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) warrants to purchase 33,333 shares of Novume common stock, exercisable over a period of five years, at an exercise price of $5.44 per share, valued at $65,988 and (d) warrants to purchase 33,333 of Novume common stock, exercisable over a period of five years at an exercise price of $6.53 per share, valued at $57,484. The preliminary purchase price has been allocated to the assets acquired based on fair values as of the acquisition date. 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 |  |  | 163,332 |
Warrants issued, at $5.44 |  |  | 65,988 |
Warrants issued, at $6.53 |  |  | 57,484 |
Total consideration |  |  | 386,804 |
Less intangible and intellectual property |  |  | (386,804 | )
Net goodwill recorded |  | $ | - |
Global Acquisition On October 1, 2017, Novume completed its acquisition of Global by purchasing Global Technical Services, Inc. (“GTS”) and Global Contract Professionals, Inc. (“GCP”). Consideration paid as part of the Global acquisition included: (a) $750,000 in cash, (b) 375,000 shares of Novume common stock valued at $566,288 and (c) 240,861 shares of Novume Series B Cumulative Convertible Preferred Stock (the “Novume Series B Preferred Stock”) valued at $2,408,610. In addition to the merger consideration, Novume paid $365,037 to satisfy in full all of the outstanding debt of GTS and GCP at closing, except for certain intercompany debt and ordinary course debt, and amounts due under (a) the Secured Account Purchase Agreement dated August 22, 2012 by and between GTS and 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 October 1, 2017. Additionally, Novume assumed $2,462,276 of Global’s liabilities. As part of the Global acquisition, the Company issued 240,861 shares of $0.0001 par value Novume Series B Cumulative Convertible Preferred Stock (the “Series B Preferred Stock”). All Series B Preferred Stock was issued at a price of $10.00 per share as part of the acquisition of Global. The Series B Preferred Stock is entitled to quarterly cash dividends of 1.12% (4.48% per annum) per share. The Series B Preferred Stock has a conversion price of $5.00 per share. Each Series B Preferred Stock has an automatic conversion feature based on the share price of Novume (see Note 10). The Company measured the holdback consideration in April 2018 and determined that the contingent liability should be decreased by $94,657. In accordance with ASC 805-10-25, a contingent consideration classified as an asset or liability shall be recognized in earnings, and $94,657 was recognized as other income for the nine months ended September 30, 2018. For the nine months ended September 30, 2018, the Company paid $78,342 of the holdback consideration. As of September 30, 2018 and December 31, 2017, the Company had $27,001 and $200,000, respectively, of holdback consideration included in accrued expenses. 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 $1.7 million of goodwill. Brekford Acquisition On August 28, 2017, the mergers by and among Novume, KeyStone, Brekford, Brekford Merger Sub, Inc., and KeyStone Merger Sub, LLC, were consummated (the “Brekford Merger”). As a result, Brekford became a wholly-owned subsidiary of Novume, and Brekford Merger Sub ceased to exist. KeyStone Merger Sub, LLC also became a wholly-owned subsidiary of Novume, and KeyStone Solutions, Inc. ceased to exist. When KeyStone Merger Sub, Inc. filed its certificate of merger with the Secretary of State of the State of Delaware, it immediately effectuated a name-change to KeyStone Solutions, LLC, the name by which it is now known. Upon completion of the Brekford Merger, the merger consideration was issued in accordance with the terms of the merger agreement. Immediately upon completion of the Brekford Merger, the pre-merger stockholders of KeyStone owned approximately 80% or 13,548,837 of the issued and outstanding capital stock of Novume on a fully-diluted basis, and the pre-merger stockholders of Brekford owned approximately 20% or 3,375,084 shares of the issued and outstanding capital stock of Novume on a fully-diluted basis. The Company 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”). Membership Interest Purchase Agreement Pursuant to the terms of the Membership Interest Purchase Agreement (the “MIPA”), by and among Novume, the Firestorm Entities, 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 with interest payable over, and principal due after, 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 $3.6083 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. 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. Effective October 11, 2018, Mr. Rhulen changed position from President of Novume to Executive Vice-President of Firestorm. 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. 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 as of January 1, 2017. The pro-forma financial information for the three and nine months ended September 30, 2017 does not include BC Management and Secure Education as it was deemed immaterial. This unaudited pro-forma financial information is presented for information purposes only and is not intended to present actual operating results that would have been attained had the acquisitions been completed as of January 1, 2017 (the beginning of the earliest period presented) or to project potential operating results as of any future date or for any future periods.
|  | For the three months ended September 30, |  |  | For the nine months ended September 30, |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Revenues |  | $ | 13,148,848 |  |  | $ | 10,674,716 |  |  | $ | 36,705,781 |  |  | $ | 31,824,716 |
Net income (loss) |  | $ | (503,834 | ) |  | $ | (1,002,345 | ) |  | $ | (3,618,967 | ) |  | $ | (3,061,031 | )
Basic earnings (loss) per share |  | $ | (0.05 | ) |  | $ | (0.09 | ) |  | $ | (0.31 | ) |  | $ | (0.27 | )
Diluted earnings (loss) per share |  | $ | (0.05 | ) |  | $ | (0.09 | ) |  | $ | (0.31 | ) |  | $ | (0.27 | )
Basic Number of Shares |  |  | 14,542,362 |  |  |  | 14,323,018 |  |  |  | 14,524,030 |  |  |  | 13,592,532 |
Diluted Number of Shares |  |  | 14,542,362 |  |  |  | 14,323,018 |  |  |  | 14,524,030 |  |  |  | 13,592,532 |

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI http://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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