Exhibit 99.2
NC4 Inc. and NC4 Public Sector LLC
Condensed ConsolidatedCarve-Out Financial Statements
As of and for the Six Months Ended June 30, 2019 and 2018
NC4 INC. AND NC4 PUBLIC SECTOR LLC
TABLE OF CONTENTS
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Page No. | ||||
Condensed ConsolidatedCarve-out Financial Statements (Unaudited): | ||||
Condensed ConsolidatedCarve-out Balance Sheets | 1 | |||
Condensed ConsolidatedCarve-out Statements of Income | 2 | |||
Condensed ConsolidatedCarve-out Statements of Changes in Stockholders’ Deficit | 3 | |||
Condensed ConsolidatedCarve-out Statements of Cash Flows | 4 | |||
Notes to Condensed ConsolidatedCarve-out Financial Statements | 5-17 |
NC4 INC. AND NC4 PUBLIC SECTOR LLC
CONDENSED CONSOLIDATEDCARVE-OUT BALANCE SHEETS
(UNAUDITED)
AS OF JUNE 30, | 2019 | 2018 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 437,259 | $ | 540,295 | ||||
Accounts receivable, net | 2,916,616 | 2,929,860 | ||||||
Unbilled accounts receivable | 132,373 | 60,779 | ||||||
Due from affiliates | — | 101,478 | ||||||
Deferred sales commissions | 275,496 | 403,479 | ||||||
Prepaid expenses and other current assets | 622,669 | 584,608 | ||||||
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Total current assets | 4,384,413 | 4,620,499 | ||||||
Property and equipment, net | 288,756 | 440,047 | ||||||
Goodwill | 776,000 | 776,000 | ||||||
Intangible assets, net | 87,757 | 199,705 | ||||||
Deferred sales commissions, net of current portion | 432,397 | 148,962 | ||||||
Other assets | 29,409 | 34,597 | ||||||
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Total assets | $ | 5,998,732 | $ | 6,219,810 | ||||
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Liabilities and Stockholders’ Deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 352,777 | $ | 305,765 | ||||
Accrued expenses | 2,925,354 | 2,717,607 | ||||||
Deferred revenue | 9,415,399 | 8,077,722 | ||||||
Due to affiliates | 19,796 | — | ||||||
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Total current liabilities | 12,713,326 | 11,101,094 | ||||||
Deferred rent | 27,281 | 47,343 | ||||||
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Total liabilities | 12,740,607 | 11,148,437 | ||||||
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Commitments and contingencies (see notes) | ||||||||
Stockholders’ deficit: | ||||||||
Common stock, $0.001 par value, 3,000 shares authorized, 1,515 shares issued and outstanding | 2 | 2 | ||||||
Additionalpaid-in capital | 63,937,701 | 56,433,114 | ||||||
Stockholders’ net investments | (20,220,958 | ) | (7,719,519 | ) | ||||
Accumulated deficit | (50,458,620 | ) | (53,642,224 | ) | ||||
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Total stockholders’ deficit | (6,741,875 | ) | (4,928,627 | ) | ||||
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Total liabilities and stockholders’ deficit | $ | 5,998,732 | $ | 6,219,810 | ||||
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See accompanying notes to the condensed consolidatedcarve-out financial statements.
Page 1
NC4 INC. AND NC4 PUBLIC SECTOR LLC
CONDENSED CONSOLIDATEDCARVE-OUT STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, | 2019 | 2018 | ||||||
Revenues: | ||||||||
Subscription services | $ | 8,586,549 | $ | 8,031,422 | ||||
Post-contract customer support services | 379,826 | 367,364 | ||||||
Implementation services | 145,122 | 68,899 | ||||||
Professional and other services | 103,567 | 91,885 | ||||||
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Revenues, net | 9,215,064 | 8,559,570 | ||||||
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Operating expenses: | ||||||||
Cost of revenues | 2,765,085 | 2,118,678 | ||||||
Selling and marketing expenses | 1,441,911 | 1,747,340 | ||||||
General and administrative expenses | 2,499,719 | 2,616,760 | ||||||
Research and development | 1,257,100 | 1,430,690 | ||||||
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Total operating expenses | 7,963,815 | 7,913,468 | ||||||
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Income before provision for state income taxes | 1,251,249 | 646,102 | ||||||
Provision for state income taxes | 800 | 800 | ||||||
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Net income | $ | 1,250,449 | $ | 645,302 | ||||
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See accompanying notes to the condensed consolidatedcarve-out financial statements.
Page 2
NC4 INC. AND NC4 PUBLIC SECTOR LLC
CONDENSED CONSOLIDATEDCARVE-OUT STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(UNAUDITED)
Additional | Stockholders’ | |||||||||||||||||||||||
Common Stock | Paid-in | Net | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Investments | Deficit | Total | |||||||||||||||||||
Balance, December 31, 2018 | 1,515 | $ | 2 | $ | 59,437,701 | $ | (13,307,684 | ) | $ | (51,709,069 | ) | $ | (5,579,050 | ) | ||||||||||
Contributions | — | — | 4,500,000 | — | — | 4,500,000 | ||||||||||||||||||
Net change in intercompany payable and receivable balances including NC4 Inc.’s investments in other subsidiaries | — | — | — | (6,913,274 | ) | — | (6,913,274 | ) | ||||||||||||||||
Net income | — | — | — | — | 1,250,449 | 1,250,449 | ||||||||||||||||||
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Balance, June 30, 2019 | 1,515 | $ | 2 | $ | 63,937,701 | $ | (20,220,958 | ) | $ | (50,458,620 | ) | $ | (6,741,875 | ) | ||||||||||
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Additional | ||||||||||||||||||||||||
Common Stock | Paid-in | Stockholders’ | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Net investments | Deficit | Total | |||||||||||||||||||
Balance, December 31, 2017 | 1,515 | $ | 2 | $ | 52,433,114 | $ | (2,491,329 | ) | $ | (54,047,152 | ) | $ | (4,105,365 | ) | ||||||||||
Cumulative effect of adoption of FASB ASC 606 | — | — | — | — | (240,374 | ) | (240,374 | ) | ||||||||||||||||
Contributions | — | — | 4,000,000 | — | — | 4,000,000 | ||||||||||||||||||
Net change in intercompany payable and receivable balances including NC4 Inc.’s investments in other subsidiaries | — | — | — | (5,228,190 | ) | — | (5,228,190 | ) | ||||||||||||||||
Net income | — | — | — | — | 645,302 | 645,302 | ||||||||||||||||||
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Balance, June 30, 2018 | 1,515 | $ | 2 | $ | 56,433,114 | $ | (7,719,519 | ) | $ | (53,642,224 | ) | $ | (4,928,627 | ) | ||||||||||
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See accompanying notes to the condensed consolidatedcarve-out financial statements.
Page 3
NC4 INC. AND NC4 PUBLIC SECTOR LLC
CONDENSED CONSOLIDATEDCARVE-OUT STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, | 2019 | 2018 | ||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,250,449 | $ | 645,302 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 119,451 | 99,284 | ||||||
Deferred sales commissions | 313,826 | 246,121 | ||||||
Accrued sales and use taxes | 359,643 | 282,520 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 409,577 | (85,334 | ) | |||||
Unbilled accounts receivable | 88,157 | (20,454 | ) | |||||
Due from affiliates | 7,690 | 9,306 | ||||||
Deferred sales commissions | (347,499 | ) | (370,872 | ) | ||||
Prepaid expenses and other current assets | 110,267 | 138,158 | ||||||
Other assets | 5,018 | 2,000 | ||||||
Accounts payable | 31,671 | 62,319 | ||||||
Accrued expenses | (736,857 | ) | (415,829 | ) | ||||
Deferred revenue | 683,319 | 825,199 | ||||||
Due to affiliates | 19,796 | — | ||||||
Deferred rent | (10,906 | ) | (7,186 | ) | ||||
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Net cash provided by operating activities | 2,303,602 | 1,410,534 | ||||||
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Cash flows from investing activities: | ||||||||
Purchases of property and equipment | — | (53,069 | ) | |||||
Acquisition of intangible assets | — | (16,005 | ) | |||||
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Cash used in investing activities | — | (69,074 | ) | |||||
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Cash flows from financing activities: | ||||||||
Proceeds from bank line of credit | — | 100,000 | ||||||
Repayments on bank line of credit | — | (100,000 | ) | |||||
Capital contributions | 4,500,000 | 4,000,000 | ||||||
Net change in intercompany receivable and payable balances including NC4 Inc.’s investments in other subsidiaries | (6,913,274 | ) | (5,228,190 | ) | ||||
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Net cash used in financing activities | (2,413,274 | ) | (1,228,190 | ) | ||||
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Net change in cash and cash equivalents | (109,672 | ) | 113,270 | |||||
Cash and cash equivalents, beginning of period | 546,931 | 427,025 | ||||||
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Cash and cash equivalents, end of period | $ | 437,259 | $ | 540,295 | ||||
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Supplemental disclosures of cash flow information: | ||||||||
Cash paid for the following during the period: | ||||||||
Cash paid for interest | $ | — | $ | 1,332 | ||||
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Cash paid for state and local income tax | $ | 800 | $ | 800 | ||||
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See accompanying notes to the condensed consolidatedcarve-out financial statements.
Page 4
NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
1. | ORGANIZATION AND BUSINESS |
NC4 Inc. (“NC4”), incorporated in the state of Delaware on January 9, 2004, is headquartered in El Segundo, California. NC4 formed NC4 Public Sector LLC in the state of Delaware on August 17, 2005. NC4 Public Sector LLC primarily is comprised of two distinct business units known asE-Team and Street Smart. All identifiable assets, liabilities, and business activities pertaining to the Street Smart business unit are excluded from the accompanying condensed consolidatedcarve-out interim financial statements. NC4 Public Sector LLC, excluding the Street Smart business unit, is herein referred to as “Public Sector.” NC4 and Public Sector, collectively referred to as the“Carve-out Entity,” have developed unique technologies and processes to collect, curate, enhance and disseminate information to both private and public sector clients who leverage that data for the benefit of their constituents.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Accounting MethodTheCarve-out Entity maintains its accounting records on an accrual method in conformity with accounting principles generally accepted in the United States of America.
Basis of PresentationThe condensed consolidatedcarve-out balance sheets, consolidatedcarve-out statements of income, changes in stockholders’ deficit, and cash flows of theCarve-out Entity, which exclude the financial results of The ESP Group Inc. and NC4 Soltra LLC, both of which were wholly owned subsidiaries of NC4 Inc., and the Street Smart business unit of NC4 Public Sector LLC (collectively, the “Excluded Business Units”), have been derived from historical accounting records of NC4 Inc. and its subsidiaries, and are presented on acarve-out basis. Historically, the consolidated financial statements have included the financial results of the Excluded Business Units.
All revenue and costs as well as assets and liabilities directly associated with the business activities of theCarve-out Entity are included in the accompanying condensed consolidatedcarve-out financial statements. The condensed consolidatedcarve-out financial statements also exclude allocations of certain operating, selling, and administrative expenses of the Excluded Business Units. These allocations were based on methodologies that management believes to be reasonable; however, amounts derecognized by theCarve-out Entity are not necessarily representative of the amounts that would have been reflected in the condensed consolidatedcarve-out financial statements had the Excluded Business Units operated independently of theCarve-out Entity.
Historically, NC4 Inc. and its subsidiaries have used a centralized approach to certain aspects of its operations. Any intercompany assets or liabilities related to the Excluded Business Units are classified as part of equity, with expectations that such intercompany balances will be forgiven concurrent with a contemplated transaction. All significant intercompany accounts and transactions among the businesses comprising theCarve-out Entity have been eliminated in the accompanying condensed consolidatedcarve-out financial statements.
The accompanying unaudited condensed consolidatedcarve-out financial statements have been prepared in a manner consistent with that used in the preparation of the annual audited consolidatedcarve-out financial statements as of and for the year ended December 31, 2018. The unaudited condensed consolidatedcarve-out financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require theCarve-out Entity to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the unaudited
Page 5
NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
condensed consolidatedcarve-out financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited condensed consolidatedcarve-out financial statements reflect all adjustments, consisting of only normal and recurring adjustments, necessary for a fair statement of the financial position and results of operations for the periods presented. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year.
Revenue RecognitionEffective January 1, 2019, theCarve-out Entity adopted the requirements of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606,Revenue from Contracts with Customers(“FASB ASC 606”). TheCarve-out Entity adopted the requirements of the new revenue standard, utilizing the retrospective method of transition. TheCarve-out Entity applied the new standard’s practical expedient that permits the omission of prior-period information about its remaining performance obligations, which are not material to restated information.
TheCarve-out Entity enters into various types of service arrangements that offer professional services, including software licenses, consulting implementation services, and maintenance and customer support services in various combinations. In certain arrangements, software licenses are provided together with maintenance and customer support services. In other arrangements, theCarve-out Entity offers consulting implementation services or hosting services without granting the customer a software license. In addition, theCarve-out Entity offers software as a service (“SaaS”) subscriptions including hosting services. Revenues are recognized when control of these services is transferred to the customers in an amount that reflects the consideration theCarve-out Entity expects to be entitled to in exchange for those services. Customer support services, hosting services, and SaaS subscriptions are typically renewable for subsequentone-year periods and the average customer term is estimated to be five years.
TheCarve-out Entity determines revenue recognition applying the following steps required under FASB ASC 606:
Step 1: Identification of the customer contracts
Step 2: Identification of the performance obligations in the contracts
Step 3: Determination of the transaction price
Step 4: Allocation of the transaction price to each of the performance obligations in the contracts
Step 5: Recognition of revenue when, or as, each of the identified performance obligations is satisfied
When a service contains both a software element and a service component, judgment is required to determine whether the software license is considered distinct and therefore accounted for separately and recognized at a point in time, or not distinct and therefore accounted for together with the service component and recognized over time. TheCarve-out Entity has determined that the software license and post-contract customer support services are separate performance obligations. Upon adoption of FASB ASC 606, no material performance obligations related to software licenses remained pertaining to the six months ended June 30, 2019 and 2018. A number of theCarve-out Entity’s customers who had previously purchased software licenses have renewed their contracts to continue receiving customer support services. TheCarve-out Entity typically invoices the customers for customer support services on an annual basis and recognizes related revenue ratably over the term of the related services, which is typically one year.
Page 6
NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
SaaS subscription services revenues primarily consist of fees that provide customers access to one or more of theCarve-out Entity’s hosted applications for threat intelligence solutions that empower businesses, government organization, and communities to assess and disseminate risk data and information to manage and mitigate the impact of critical events. Revenue is generally recognized over time on a ratable basis over the contract term beginning on the date that theCarve-out Entity’s service is made available to the customer. All services are recognized using an output measure of progress looking at time elapsed as the contracts generally provide the customer equal benefit throughout the contract period. TheCarve-out Entity’s subscription contracts are billed annually in advance with an average contract term of two years.
On occasion, theCarve-out Entity enters into contracts with customers that may contain multiple performance obligations. Determining whether services are considered distinct performance obligations that should be accounted for separately or together may require significant judgment. For these contracts, theCarve-out Entity accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. TheCarve-out Entity determines the standalone selling prices based on its overall pricing objectives, taking into consideration market conditions and other factors, including the value of its contracts, the applications sold, customer demographics, geographic locations, and the number and types of users within its contracts. Significant judgment may be required to determine a standalone selling price for each distinct performance obligation. Upon adoption of FASB ASC 606, no material performance obligations related to multiple performance obligation arrangements remained pertaining to the six months ended June 30, 2019 and 2018.
The primary impact of adopting the new revenue standard relates to the timing of consulting implementation service fees as well as the recognition the deferral of incremental commission costs of obtaining contracts. TheCarve-out Entity previously treated consulting implementation services as separate units of account in multiple-element arrangements and recognized the implantation service fees when the related services were performed. In the application of guidance under FASB ASC 606, theCarve-out Entity has determined that an initial implementation setup service is not considered distinct from the context of the customer contract because these initial setup services typically do not transfer goods or services to the customer; and therefore is not considered a separate performance obligation. Prior to the adoption of FASB ASC 606, theCarve-out Entity recognized sales commission expense as the associated revenue was recognized. Under FASB ASC340-40,Other Assets and Deferred Costs – Contracts with Customers(“FASB ASC340-40”), theCarve-out Entity defers incremental commission costs of obtaining a customer contract and amortizes those costs over a period of benefit, which theCarve-out Entity has determined to be five years. TheCarve-out Entity has determined the period of benefit by taking into consideration its customer contracts, its technology and other factors. Amortization of deferred commissions is included in selling and marketing expenses in the accompanying condensed consolidatedcarve-out statements of income.
Adoption of the new revenue standard had no impact on total cash provided by or used in operating, financing, or investing activities in the accompanying condensed consolidatedcarve-out statements of cash flows.
Page 7
NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
The cumulative effect of the changes made to accompanying condensed consolidatedcarve-out balance sheets as of June 30, 2019 and 2018 for the adoption of FASB ASC 606 and FASB ASC340-40 was as follows:
Under previous Guidance | Effect of | Under new Guidance | ||||||||||
December 31, 2018 | Adoption | January 1, 2019 | ||||||||||
Deferred commissions | $ | 582,802 | $ | 91,418 | $ | 674,220 | ||||||
Deferred revenue | $ | 8,462,144 | $ | 269,937 | $ | 8,732,081 | ||||||
Accumulated deficit | $ | 51,530,551 | $ | 178,518 | $ | 51,709,069 | ||||||
Under previous Guidance | Effect of | Under new Guidance | ||||||||||
December 31, 2017 | Adoption | January 1, 2018 | ||||||||||
Deferred commissions | $ | 502,813 | $ | (75,123 | ) | $ | 427,690 | |||||
Deferred revenue | $ | 7,087,272 | $ | 165,251 | $ | 7,252,523 | ||||||
Accumulated deficit | $ | 54,047,152 | $ | 240,374 | $ | 54,287,526 |
The impact of the adoption of FASB ASC 606 and FASB ASC340-40 on the accompanying condensed consolidatedcarve-out balance sheets and consolidatedcarve-out statements of income was as follows:
As of June 30, 2019 | ||||||||||||
Balance Without | Effect of | |||||||||||
As reported | Adoption | Change | ||||||||||
Deferred commissions | $ | 707,893 | $ | 629,267 | $ | 78,626 | ||||||
Deferred revenue | $ | 9,415,399 | $ | 9,191,299 | $ | 224,100 | ||||||
Accumulated deficit | $ | 50,458,620 | $ | 49,966,064 | $ | 492,556 | ||||||
For the six months ended June 30, 2019 | ||||||||||||
Activity Without | Effect of | |||||||||||
As reported | Adoption | Change | ||||||||||
Total revenues | $ | 9,215,064 | $ | 9,165,667 | $ | 49,397 | ||||||
Selling and marketing expenses | $ | 1,441,911 | $ | 1,429,119 | $ | 12,792 | ||||||
Net income | $ | 1,250,449 | $ | 1,213,844 | $ | 36,605 | ||||||
As of June 30, 2018 | ||||||||||||
Balance Without | Effect of | |||||||||||
As reported | Adoption | Change | ||||||||||
Deferred commissions | $ | 552,441 | $ | 592,620 | $ | (40,179 | ) | |||||
Deferred revenue | $ | 8,077,722 | $ | 7,869,736 | $ | 207,986 | ||||||
Accumulated deficit | $ | 53,642,224 | $ | 53,394,059 | $ | 248,165 |
Page 8
NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
For the six months ended June 30, 2018 | ||||||||||||
Activity Without | Effect of | |||||||||||
As reported | Adoption | Change | ||||||||||
Total revenues | $ | 8,559,570 | $ | 8,516,835 | $ | 42,735 | ||||||
Selling and marketing expenses | $ | 1,747,340 | $ | 1,712,396 | $ | 34,944 | ||||||
Net income | $ | 645,302 | $ | 637,511 | $ | 7,791 |
The following table presents theCarve-out Entity’s revenues, which are all recognized over time, disaggregated by revenue source:
For the six months ended June 30, | 2019 | 2018 | ||||||
Subscription services | $ | 8,586,549 | $ | 8,031,422 | ||||
Post-contract customer support services | $ | 379,826 | $ | 367,364 | ||||
Implementation services | $ | 145,122 | $ | 68,899 | ||||
Professional and other services | $ | 103,567 | $ | 91,885 |
Contract Asset Balances The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the accompanying condensed consolidatedcarve-out balance sheets. TheCarve-out Entity generally invoices the customers for customer support services and SaaS subscriptions in advance on an annual basis, resulting in deferred revenue. On occasion, billing occurs subsequent to revenue recognition, resulting in unbilled receivable.
The contract asset balances as of June 30, 2019 and 2018, were as follows:
June 30, | 2019 | 2018 | ||||||
Accounts receivable | $ | 2,916,616 | $ | 2,929,860 | ||||
Unbilled receivable | $ | 132,373 | $ | 60,779 | ||||
Deferred revenue | $ | 9,415,399 | $ | 8,077,722 |
Deferred RevenueDeferred revenue consists of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. Deferred revenue that will be realized during the succeeding 12 month period is recorded as current, and the remaining deferred revenue is recorded as noncurrent. In instances where the timing of revenue recognition differs from the timing of invoicing, theCarve-out Entity has determined its contracts generally do not include a significant financing component. The primary purpose of its invoicing terms is to provide customers with simplified and predictable ways of purchasing its services, not to receive financing from its customers or to provide customers with financing.
Deferred Sales Commissions Deferred sales commissions as of June 30, 2019 and 2018, were approximately $708,000 and $552,000, respectively. For the six months ended June 30, 2019 and 2018, amortization expense related to deferred sales commissions amounted to approximately $314,000 and $246,000, respectively, and is included in selling and marketing expenses in the accompanying condensed consolidatedcarve-out statements of income. For the six months ended June 30, 2019 and 2018, there was no impairment loss in relation to the capitalized deferred sales commissions.
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NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Cash and Cash EquivalentsCash and cash equivalents include cash and liquid investments with original maturities of 90 days or less upon acquisition.
Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable are customer obligations due under normal trade terms. TheCarve-out Entity performs continuing credit evaluations on each customer’s financial condition and senior management reviews accounts receivable on a monthly basis to determine if any receivable will potentially be uncollectible. TheCarve-out Entity includes any accounts receivable balances that are determined to be uncollectible in the allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Management believes that no allowance for doubtful accounts as of June 30, 2019 and 2018, is necessary.
Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation and amortization. Expenditures for maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed on a straight-line basis over the estimated useful lives of the related assets, ranging from three to five years. Leasehold improvements are amortized on a straight-line basis over the term of the lease or estimated useful life, whichever is shorter. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation and amortization are eliminated from the accounts and any resulting gain or loss is reflected in operations.
Recoverability of Long-Lived AssetsIn accordance with FASB ASC Subtopic360-10,Property, Plant and Equipment – Impairment or Disposal of Long Lived Assets, property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment losses were recognized for the six months ended June 30, 2019 and 2018.
Goodwill and Intangible AssetsTheCarve-out Entity accounts for goodwill and other intangible assets in accordance with FASB ASC Topic 350,Intangibles – Goodwill and Other (“FASB ASC 350”), under which goodwill and indefinite lived intangible assets are tested for impairment at least on an annual basis. Under FASB ASC 350, the carrying value of goodwill is evaluated for potential impairment on an annual basis or more frequently if events or circumstances indicate that impairment may have occurred. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, theCarve-out Entity compares the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. TheCarve-out Entity typically performs an annual impairment analysis towards the end of year in connection with preparation of annual consolidatedcarve-out financial statements. As of June 30, 2019 and the date the condensed consolidated carve-
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NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
out financial statements were available to be issued, theCarve-out Entity has not performed an annual impairment analysis; however, does not believe that the carrying amount of goodwill as of June 30, 2019 exceeds its implied fair value.
Software Development CostsTheCarve-out Entity accounts for software development costs intended for software arrangements that are within the scope of FASB ASC 985,Software, in accordance with FASB ASC985-20,Costs of Software to Be Sold, Leased, or Marketed (“FASB ASC985-20”). FASB ASC985-20 requires product development costs to be charged to expense as incurred until technological feasibility is attained and all other research and development activities for the product have been completed. Technological feasibility is attained when theCarve-out Entity has completed the planning, design, and testing phase of development and has been determined viable for its intended use, which typically occurs when beta testing commences. The time between the attainment of technological feasibility and the completion of software development has historically been relatively short with immaterial amounts of development costs incurred during this period. Accordingly, theCarve-out Entity has not capitalized any development costs associated with software to be sold, leased, or marketed. All research and development costs are expensed as incurred.
SaaS arrangements that are not within the scope of FASB ASC 985 or software that is not considered more-than-incidental to the products or services that it is included in or sold with, are accounted for in accordance with FASB ASC350-40,Intangibles – Goodwill and Other –Internal-Use Software(“FASB ASC350-40”).FASB ASC350-40 requires the capitalization of qualifying computer software costs, which are incurred during the application development stage. Upgrades and enhancements are capitalized if they result in added functionality which enables the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion and business process reengineering costs are expensed as incurred. TheCarve-out Entity applies an agile software development approach for its SaaS model applications, where it develops various beta versions without designing a specific path including software configuration and interfaces until such beta versions are accepted. FASB ASC350-40 suggests that a beta version is developed in the preliminary project stage, during which any development costs shall be expensed as incurred until management with the authority makes a final selection of alternatives. TheCarve-out Entity’s agile approach allows developing andre-developing various versions repeatedly until it achieves the satisfactory rating without specifically requiring management to make a final selection during the process. Furthermore, the time spent in the application development stage for its SaaS model applications has been historically short with immaterial amounts of development costs incurred during this period. Accordingly, theCarve-out Entity has not capitalized any development costs associated with SaaS arrangements that require the agile software development approach.
Lease AccountingTheCarve-out Entity’s leases are accounted for under the provisions of FASB ASC Topic 840,Leases, which require that leases be evaluated and classified as operating or capital leases for financial reporting purposes. For leases classified as capital leases, assets and related lease obligations measured at their estimated present value of minimum lease payments are recorded on the condensed consolidatedcarve-out balance sheet at the beginning of the lease term. Leases that are not treated as capital leases are classified as operating leases. Minimum base rent for operating leases, which generally have escalating rentals over the terms of the leases, are recorded on a straight-line basis over the initial lease term and those renewal periods that are reasonably assured. Liabilities for deferred rent in the amounts of approximately $27,000 and $47,000 as of June 30, 2019 and 2018, are included in deferred rent on the accompanying condensed consolidatedcarve-out balance sheets, respectively.
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NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Advertising CostsTheCarve-out Entity expenses advertising costs as incurred. Advertising expense for the six months ended June 30, 2019 and 2018 amounted to approximately $11,000 and $22,000, respectively.
Income TaxesNC4 has elected S corporation status under the Internal Revenue Code, and NC4 Public Sector LLC is a single-member limited liability company treated as a disregarded entity for federal and state income tax purposes; therefore, theCarve-out Entity does not incur federal income taxes at an entity level. Instead, its earnings and losses are passed through to the stockholders and included in the stockholders’ federal income tax returns. Accordingly, no liability or provision for federal income taxes is included in the accompanying condensed consolidatedcarve-out financial statements, nor are any deferred taxes provided for temporary differences between tax and financial reporting. TheCarve-out Entity is subject to the state of California income tax on S corporation operations at a rate of 1.50% of taxable income. In addition, NC4 Public Sector LLC is subject to a California fee based on their annual gross revenue. Further, theCarve-out Entity is required to pay annual Franchise Tax Board fees to the state of California for the right to conduct business in the state.
TheCarve-out Entity applies the provisions of FASB ASC Topic 740,Income Taxes (“FASB ASC 740“). FASB ASC 740 prescribes a recognition threshold measurement attributed for financial recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters, such asde-recognition, interest and penalties, and disclosure. TheCarve-out Entity evaluates uncertain tax positions by considering the tax years’ subject to potential audit under federal and state income tax law and identifying favorable tax positions that do not meet the threshold of more likely than not to prevail if challenged by tax authorities that would have a direct impact on theCarve-out Entity as opposed to an impact to the stockholders. Management believes that theCarve-out Entity has not taken any uncertain tax positions that have a more likely than not chance of not being sustained upon examination by the tax authorities. Accordingly, no liabilities for uncertain tax positions have been recorded in the accompanying condensed consolidatedcarve-out financial statements as of June 30, 2019 and 2018. With few exceptions, theCarve-out Entity is no longer subject to federal and state income tax examinations by tax authorities for the years before 2015.
Recently Adopted Accounting PronouncementIn May 2014, the FASB issued Accounting Standards Update (“ASU”)2014-09,Revenue from Contracts with Customers (Topic 606) (“FASB ASU2014-09”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. FASB ASU2014-09 supersedes most existing revenue recognition guidance, including industry-specific revenue recognition guidance and provides a unified model to determine when and how revenue is recognized. Since the issuance of FASB ASU2014-09, the FASB has issued several amendments to the standard, including, among other matters, the application of identifying performance obligations and the accounting for contract costs and contract modifications. While continuing to assess all potential impacts of the standard, theCarve-out Entity currently believes there will be an impact related to timing and measurement of fees related to certain revenue arrangements based on identification of performance obligations and whether certain services would be considered a material right. Further, theCarve-out Entity believes customer incentives could potentially be recognized as an expense, which are generally recorded as a reduction of revenue under previous guidance. The standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. TheCarve-out Entity has adopted the new guidance on January 1, 2019, using the retrospective transition approach.
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NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Recently Issued Accounting Pronouncements Not Yet Adopted In February 2016, the FASB issued ASU2016-02,Leases (Topic 842) (“FASB ASU2016-02”). The new standard establishes aright-of-use (“ROU”) model that requires a lessee to record an ROU asset and a lease liability, measured on a discounted basis, on the condensed consolidatedcarve-out balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidatedcarve-out statement of income. Since the issuance of FASB ASU2016-02, the FASB has issued several amendments to the standard including, among other matters, clarifications regarding lease reassessments and application of an optional transition method. The standard is required to be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. TheCarve-out Entity has not selected its transition method and is currently in the process of evaluating the potential impact of this new guidance, which is effective for privately held companies for fiscal years beginning after December 15, 2019. Management does not believe that there will be any material impact on theCarve-out Entity’s consolidatedcarve-out financial statements upon adoption of the new guidance as its existing leases are set to expire through June 2020, and the remaining minimum lease payments are expected to be immaterial upon adoption of FASB ASU2016-02.
In August 2016, the FASB issued ASU2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“FASB ASU2016-15”), to provide classification guidance for certain transactions, such as debt prepayments or debt extinguishment costs, and contingent consideration payments made after a business combination. FASB ASU2016-15 is effective for privately held companies for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted. TheCarve-out Entity has not yet determined the impact of the adoption of FASB ASU2016-15 on its consolidatedcarve-out financial statements.
3. | CONCENTRATIONS OF BUSINESS AND CREDIT RISK |
Financial instruments that potentially expose theCarve-out Entity to concentrations of credit risk consist primarily of cash. TheCarve-out Entity places its short-term invested cash on deposit with financial institutions which may exceed the Federal Deposit Insurance Corporation (“FDIC”) limits. The FDIC deposit insurance limit is $250,000 per depositor. As of June 30, 2019, theCarve-out Entity’s uninsured portion of this balance was approximately $200,000. TheCarve-out Entity limits its exposure to this credit risk by holding excess balances at high-quality financial institutions and does not believe significant credit risk exists with respect to this cash at June 30, 2019 and 2018.
TheCarve-out Entity did not have revenue from an individual customer representing more than 10% of total revenues for the six months ended June 30, 2019 and 2018. TheCarve-out Entity continually evaluates the financial strength of its customers but generally does not require collateral to support the customer receivables. None of the customers’ accounts receivable balances outstanding as of June 30, 2019 and 2018 represented more than 10% of total accounts receivable.
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NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
4. | PROPERTY AND EQUIPMENT |
Property and equipment consisted of the following:
June 30, | 2019 | 2018 | ||||||
Computers and equipment | $ | 1,098,258 | $ | 3,018,081 | ||||
Furniture and fixtures | 148,807 | 200,511 | ||||||
Leasehold improvements | 406,766 | 430,093 | ||||||
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1,653,831 | 3,648,685 | |||||||
Less: accumulated depreciation and amortization | (1,365,075 | ) | (3,208,638 | ) | ||||
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Property and equipment, net | $ | 288,756 | $ | 440,047 | ||||
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Depreciation and amortization expense amounted to approximately $71,000 and $50,000 for the six months ended June 30, 2019 and 2018, respectively, and is included in general and administrative expenses on the accompanying condensed consolidatedcarve-out statements of income.
5. | GOODWILL AND INTANGIBLE ASSETS |
In connection with NC4’s acquisition of TranSecur, Inc. in May 2010, a portion of the purchase price was allocated to the trademark, customer relationships, and software at their respective fair values, and the excess of the purchase price over the net assets acquired was allocated to goodwill in the amount of $776,000. No impairment losses related to goodwill were recognized for the six months ended June 30, 2019 and 2018.
Intangible assets consisted of the following:
June 30, | 2019 | 2018 | ||||||
Trademark | $ | 10,000 | $ | 10,000 | ||||
Customer relationships | 330,000 | 330,000 | ||||||
Software and website | 843,414 | 1,303,218 | ||||||
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1,183,414 | 1,643,218 | |||||||
Less: accumulated amortization | (1,095,657 | ) | (1,443,513 | ) | ||||
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Intangible assets, net | $ | 87,757 | $ | 199,705 | ||||
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Amortization expense on intangible assets amounted to approximately $48,000 and $49,000 for the six months ended June 30, 2019 and 2018, respectively, and is included in general and administrative expenses on the accompanying condensed consolidatedcarve-out statements of income.
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NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
6. | BANK REVOLVING LINE OF CREDIT |
In December 2011, NC4 Public Sector LLC entered into a loan agreement (the “LOC”) with Bank of America, N.A. (the “Bank”), under which the Bank agreed to provide a revolving line of credit to NC4 Public Sector LLC in the maximum borrowing amount not to exceed $400,000. The LOC was guaranteed by NC4. Pursuant to the LOC, amended from time to time, any outstanding principal and accrued and unpaid interest would be due and payable on December 22, 2019. Any advances bore interest at a variable annual rate equal to the Bank’s Prime Rate (as defined) plus 1.00%. As of June 30, 2019 and 2018, there were no outstanding borrowings against the LOC. In July 2019, theCarve-out Entity and the Bank mutually agreed to terminate the LOC without any penalty.
7. | RELATED PARTY TRANSACTIONS |
Sublease AgreementEffective August 2007, NC4 entered into anon-cancelable sublease agreement with OSM Media, LLC (an affiliate of Celerium, Inc. – see Note 10) for the corporate office space in El Segundo, California. The initial term of the sublease expired in October 2010, and it became amonth-to-month lease until March 2017. Effective April 2017, NC4 entered into anon-cancelable sublease agreement with PJ Media, LLC (formerly, OSM Media, LLC) and NextGen Crowdfunding, LLC, subsequently changing its name as Security Token Academy LLC (an affiliate of Celerium, Inc.) for the corporate office space in El Segundo, California. The initial term of the sublease expires in June 2020. The sublease provides for a monthly base rent in the amount of approximately $11,000, subject to an annual increase at the rate of approximately 3.00% over the term of the sublease arrangement. For each of the six months ended June 30, 2019 and 2018, NC4 recognized rental income amounting to approximately $65,000, which is accounted for as a reduction in rent expense and included in general and administrative expenses on the accompanying condensed consolidatedcarve-out statements of income. In connection with the transaction described in Note 10, NC4, as the sublandlord, and Celerium, Inc., as subtenant, entered into a certain sublease agreement for the corporate office space in El Segundo, California. The term of the sublease shall expire on June 30, 2020. Throughout the term, Celerium, Inc. shall pay NC4 monthly rent in the amount of approximately $2,000 through June 2020.
Due from AffiliatesTheCarve-out Entity agreed to provide, from time to time, PJ Media, LLC and NextGen Crowdfunding, LLC (Security Token Academy LLC) support forday-to-day operations, such as payroll processing, accounting, and human resource functions. In addition, theCarve-out Entity pays certain operating expenses on behalf of NC4’s other subsidiaries that are recorded as due from affiliates in the condensed consolidatedcarve-out financial statements. Due from affiliates and other subsidiaries in the amounts of approximately $102,000 are outstanding as of June 30, 2018. No amounts were due from affiliates as of June 30, 2019. Amounts due from affiliates arenon-interest bearing and due on demand.
8. | INTERCOMPANY TRANSACTIONS WITH AFFILIATES AND OTHER BUSINESS UNITS |
Management assesses how transactions with NC4’s other subsidiaries and business units that are not part of the accompanyingcarve-out financial statements have been historically settled or are expected to be settled to determine the appropriate presentation in the accompanying condensed consolidatedcarve-out financial statements.
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NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
The following intercompany transactions are classified as a component of stockholders’ deficit:
December 31, 2018 | Net change | June 30, 2019 | ||||||||||
NC4’s investments in Excluded Business Units | $ | 13,540,925 | $ | (6,502,255 | ) | $ | 7,038,670 | |||||
Due from (to) NC4 Soltra LLC | 100,293 | (188,634 | ) | (88,341 | ) | |||||||
Due to ESP Group Inc. | (2,328,932 | ) | 99,370 | (2,229,562 | ) | |||||||
Netcarve-out allocation | 1,995,398 | 13,504,793 | 15,500,191 | |||||||||
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Balances, net | $ | 13,307,684 | $ | 6,913,274 | $ | 20,220,958 | ||||||
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December 31, 2017 | Net change | June 30, 2018 | ||||||||||
NC4’s investments in Excluded Business Units | $ | 4,362,523 | $ | 5,084,524 | $ | 9,447,047 | ||||||
Due from NC4 Soltra LLC | 10,892 | 71,854 | 82,746 | |||||||||
Due to ESP Group Inc. | (1,848,970 | ) | (167,640 | ) | (2,016,610 | ) | ||||||
Netcarve-out allocation | (33,116 | ) | 239,452 | 206,336 | ||||||||
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Balances, net | $ | 2,491,329 | $ | 5,228,190 | $ | 7,719,519 | ||||||
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9. | COMMITMENTS AND CONTINGENCIES |
Legal MattersTheCarve-out Entity is a party to various claims, complaints, and other legal actions that have arisen from time to time in the ordinary course of business. Management believes that any ultimate settlement of such legal actions would be substantially covered by theCarve-out Entity’s insurance coverage, and that the outcome of such pending legal proceedings will not have a material adverse effect on theCarve-out Entity’s financial condition, results of operations, or cash flows.
Operating LeasesTheCarve-out Entity leases certain office facilities and equipment undernon-cancelable operating leases expiring through June 2020. The leases provide for monthly rental payments ranging from approximately $1,000 to $33,000, and require payments of certain additional expenses, including utilities, parking, and other operating expenses. Rent expense relating to the operating leases amounted to approximately $83,000 and $120,000 for the six months ended June 30, 2019 and 2018, respectively, and is included in general and administrative expenses on the accompanying condensed consolidatedcarve-out statements of income.
Multi-Year Customer Services ArrangementsTheCarve-out Entity often enters into multi-year services contracts with customers, under which theCarve-out Entity grants the customers access to certain proprietary software applications resided in its own servers and provides maintenance and customer support services for fees during the contractual term. On some occasions, software arrangements also call for multi-year maintenance and customer support services in addition to perpetual licenses. Services fees for which theCarve-out Entity has not performed any underlying services or is not entitled to invoice the customer as of June 30, 2019, are not reflected on the accompanying condensed consolidatedcarve-out interim financial statements.
401(k) Savings PlanTheCarve-out Entity has a defined-contribution 401(k) savings plan covering all eligible employees that provides for employee salary deferral contributions and employer contributions. Employees may contribute up to 100% of their pay on apre-tax basis subject to limitations imposed by the Internal Revenue Service. In addition, theCarve-out Entity matches up to four percent of employees’ eligible earnings, subject to statutory prescribed annual limits. The
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NC4 INC. AND NC4 PUBLIC SECTOR LLC
NOTES TO CONDENSED CONSOLIDATED CARVE-OUT FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
Carve-out Entity incurred expenses associated with the 401(k) plan amounting to approximately $228,000 and $213,000 for the six months ended June 30, 2019 and 2018, respectively, which are included in general and administrative expenses on the accompanying condensed consolidatedcarve-out statements of income.
State and Local Taxes In July 2019, as a result of its own nexus study and investigation, theCarve-out Entity has initiated applications to enter into voluntary disclosure agreements (individually, “VDA”) with various state and local taxing authorities for potentially having underreported sales and use taxes related to its revenues generated from these jurisdictions. TheCarve-out Entity expects the states to grant VDAs as it meets all of the statutory requirements for acceptance into a voluntary disclosure program. With certain exceptions, most VDA programs are contractual agreements whereby the state and local taxing authorities will allow entities to come forward to settle unfiled obligations with a limited look-back period of three or four years from the date of filings in exchange for the entities becoming current on its tax obligations. While its investigations continue, management believes that it is probable that theCarve-out Entity will potentially be liable for up to approximately $1,441,000 in sales and use taxes including interest as of July 2019. As of June 30, 2019 and 2018, theCarve-out Entity recorded the potential liability in the amount of approximately $1,441,000 and $900,000, of which approximately $618,000 relates to years prior to December 31, 2017, and $360,000 and $283,000 relate to thesix-month periods ended June 30, 2019 and 2018, respectively.
10. | SUBSEQUENT EVENTS |
TheCarve-out Entity evaluated subsequent events that have occurred through the date of the Independent Auditor’s Review Report, which is the date the condensed consolidatedcarve-out financial statements were available to be issued, and determined that there were no subsequent events or transactions that required recognition or disclosure in the condensed consolidatedcarve-out financial statements, except as disclosed in Notes 6, 7, and 9 and below.
In May 2019, the stockholders of NC4 Inc. received anon-binding preliminary offer from Everbridge, Inc. (“Everbridge”) expressing the interest to acquire 100% of the assets of NC4 Inc.’s Risk Center and Public Safety businesses (subsequently excluding the Street Smart business unit). Effective July 29, 2019, both parties executed a certain membership interest purchase agreement (the “MIPA”). Pursuant to the terms and conditions set forth in the MIPA, and to effectuate the transaction, the stockholders of NC4 Inc. formed Celerium Group Inc. (“Celerium”), a Delaware S corporation, on July 19, 2019, to contribute all of the issued and outstanding shares of NC4 Inc. to Celerium in exchange for capital stock of Celerium. Immediately after the contribution and close of the MIPA on July 29, 2019, NC4 Inc. was converted into a Delaware limited liability company having the name, NC4, LLC, and all of the outstanding shares of NC4 Inc. were converted into membership interests, which were then wholly owned by Celerium. Under the MIPA, Celerium desired to sell, transfer, and assign to Everbridge, and Everbridge desired to purchase and acquire from Celerium, at the closing of the MIPA, 100% of the membership interests of NC4, LLC and NC4 Public Sector LLC on the Company Subsidiary Transfer Date (as defined). Following the closing and prior to the Company Subsidiary Transfer Date, Celerium caused to be transferred and assigned from NC4 Public Sector LLC to an affiliate of Celerium all assets and liabilities solely and exclusively used or held for use by the Street Smart business unit.
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