Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

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Summary of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2014
Summary of Significant Accounting Policies [Abstract]  
Description of Business:

Description of Business:

 

Drone Aviation Holding Corp. f/k/a MacroSolve, Inc. (the “Company”), through its wholly owned subsidiary Lighter Than Air Systems Corp. (LTAS), provides critical aerial and land-based surveillance and communications solutions to government and commercial customers. LTAS systems are designed and developed in-house utilizing proprietary technologies and processes that result in compact, rapidly deployable aerostat solutions and mast-based ISR systems. The LTAS systems are able to fulfill critical requirements of the military and law enforcement in the U.S. and internationally.

Basis of Presentation:

Basis of Presentation:

 

The accompanying financial statements of the Company were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Principal of Consolidation:

Principal of Consolidation: 

 

Our consolidated financial statements as of December 31, 2014 include the accounts of Drone Aviation Holding Corp. and its subsidiaries: Drone Aviation Corp. and Lighter Than Air Systems Corp. As of December 31, 2013, the financial statements include only Lighter Than Air Systems Corp. as a stand-alone entity.

Reclassifications:

 Reclassifications:

 

On March 28, 2013, World Surveillance Group, Inc. (WSGI) consummated a Stock Purchase Agreement as amended between WSGI, LTAS, Felicia Hess and Kevin Hess pursuant to which WSGI acquired 100% of the outstanding shares of capital stock of LTAS, which was 100 shares with a par value of $1.00, thereby making LTAS a wholly-owned subsidiary of WSGI.

  

The following table summarizes the WSGI purchase price of LTAS which had been accounted at the fair values of the assets acquired and liabilities assumed under the acquisition method of accounting adjusted pursuant to the First Amendment to the Agreement:

 

    Amended Allocation
Current assets   $ 710,415  
Property and equipment     3,913  
Goodwill     807,824  
Due to selling shareholder     (350,000 )
Current liabilities assumed     (249,652 )
Total purchase price   $ 922,500  

 

The net fair value adjustments in the carrying amount of the assets and liabilities of LTAS that were pushed down to LTAS as a result of the acquisition on March 28, 2013, did not have an impact on the results of LTAS’s operations for the year ended December 31, 2013. The net fair value adjustment for LTAS push down accounting was $143,126.

As further described in Footnote 3, on May 5, 2014, the Company’s subsidiary, Drone Aviation Corp. (DAC), entered into a securities exchange agreement with WSGI to acquire 100% of WSGI’s interest in LTAS. Certain prior year amounts have been combined and reclassified to conform to the current year presentation.

Use of Estimates:

Use of Estimates:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Concentration of Credit Risk:

Concentration of Credit Risk:

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and trade receivables. The Company places its cash with high credit quality financial institutions. At times such cash may be in excess of the FDIC limit. With respect to trade receivables, the Company routinely assesses the financial strength of its customers and, as a consequence, believes that the receivable credit risk exposure is limited.

Cash Equivalents:

Cash Equivalents:

 

Cash equivalents are represented by operating accounts or money market accounts maintained with insured financial institutions, including all highly-liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had no cash equivalents as of December 31, 2014 and 2013.

Accounts Receivable and Credit Policies:

Accounts Receivable and Credit Policies:

 

Trade accounts receivable consist of amounts due from the sale of tethered aerostats, accessories, spare parts and delivery and installation of aerostats.  Accounts receivable are uncollateralized customer obligations due under normal trade terms requiring payment within 30 days of receipt of the invoice.  The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts based on historical collection experience and a review of the current status of trade accounts receivable. At December 31, 2014 and 2013, the Company characterized $0 and $0 as uncollectible, respectively.

Marketable Securities:

Marketable Securities:

 

All marketable securities are classified as available-for-sale securities. Available-for-sale securities are carried at fair value with resulting unrealized gains and losses, reported as a component of accumulated other comprehensive loss. The Company did not have any available-for-sale securities at December 31, 2014.

Inventories

Inventories

 

Inventories are stated at the lower of cost or market, using the first-in first-out method. Cost includes materials, labor and manufacturing overhead related to the purchase and production of inventories. We regularly review inventory quantities on hand, future purchase commitments with our supplies, and the estimated utility of our inventory. If the review indicates a reduction in utility below carrying value, we reduce our inventory to a new cost basis through a charge to cost of goods sold.

Property and Equipment:

Property and Equipment:

 

Property and equipment is recorded at cost when acquired.  Depreciation is provided principally on the straight-line method over the estimated useful lives of the related assets, which is 3-7 years for equipment, furniture and fixtures, hardware and software. Property and equipment consists of the following at December 31, 2014 and 2013:

 

      2014     2013  
  Machinery and equipment   $ 19,954     $ 1,100  
  Office furniture and fixtures     14,110       5,461  
  Less - accumulated depreciation     (7,040 )     (4,563 )
      $ 27,024     $ 1,998  

 

Expenditures for maintenance and repairs are charged to expense as incurred, whereas expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized.

 

During the year ended December 31, 2014, the Company purchased $27,863 of furniture and equipment.

 

The Company recognized $2,477 and $2,394 of depreciation expense for the year ended December 31, 2014 and 2013, respectively,

Long-Lived Assets & Goodwill:

Long-Lived Assets & Goodwill:

 

The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, “Impairment or Disposal of Long-lived Assets”.  This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.  If the carrying amount of an 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 charges were incurred during the periods ended December 31, 2014 and 2013.

 

The Company accounts for goodwill and intangible assets in accordance with ASC 350 "Intangibles Goodwill and Other". ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

Derivative Financial Instruments:

Derivative Financial Instruments:

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a Black-Scholes option pricing model, in accordance with ASC 815-15 “Derivative and Hedging” to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Beneficial Conversion Features:

Beneficial Conversion Features:

 

The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.

Fair Value of Financial Instruments:

Fair Value of Financial Instruments:

 

The Company measures its financial assets and liabilities in accordance with the requirements of FASB ASC 820, “Fair Value Measurements and Disclosures”. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

 

Level 2 - Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

 

Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value as of December 31, 2014 and 2013:

 

  Recurring Fair Value Measures   Level 1     Level 2     Level 3     Total  
  December 31, 2014                                
  Derivative liability   $ 0     $ 0     $ 0     $ 0  
  Available-for-sale securities   $ 0     $ 0     $ 0     $ 0  
  December 31, 2013                                
  Derivative liability   $ 0     $ 0     $ 0     $ 0  
  Available-for-sale securities   $ 0     $ 0     $ 0     $ 0  

Revenue Recognition and Unearned Revenue:

Revenue Recognition and Unearned Revenue:

 

The Company recognizes revenue when all four of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred and title has transferred or services have been rendered; 3) our price to the buyer is fixed or determinable; and 4) collectability is reasonably assured. We record unearned revenue as a liability and their associated costs of sales as work in process inventory. In 2014, the Company recognized $1,650 in revenue from a 2013 sale that was delivered in 2014. There is a balance of $30,170 in accounts receivable at December 31, 2014 for sales on account.

Income Taxes:

Income Taxes:

 

The Company accounts for income taxes utilizing ASC 740, “Income Taxes” (SFAS No. 109).  ASC 740 requires the measurement of deferred tax assets for deductible temporary differences and operating loss carry forwards, and of deferred tax liabilities for taxable temporary differences.  Measurement of current and deferred tax liabilities and assets is based on provisions of enacted tax law.  The effects of future changes in tax laws or rates are not included in the measurement.  The Company recognizes the amount of taxes payable or refundable for the current year and recognizes deferred tax liabilities and assets for the expected future tax consequences of events and transactions that have been recognized in the Company’s financial statements or tax returns.  The Company has recorded a 100% valuation allowance against net deferred tax assets due to uncertainty of their ultimate realization.  Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Employee Stock-Based Compensation:

Employee Stock-Based Compensation:

 

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period.

Non-Employee Stock-Based Compensation:

Non-Employee Stock-Based Compensation:

 

The Company accounts for stock-based compensation in accordance with the provision of ASC 505, “Equity Based Payments to Non-Employees” (“ASC 505”), which requires that such equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. 

Related Parties:

Related Parties:

 

A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

 

The accounts payable due to related party at December 31, 2014 and 2013, includes allocated rent and utility charges, aerostat envelopes, truck expenses and labor charges due Aerial Products Corp (“APC”) of $2,181 and $50,691, respectively. APC is a related party, controlled by a current employee of the Company. APC shares the manufacturing facilities with LTAS and provided aerostat envelopes and manufacturing labor to LTAS until June 30, 2014 when the APC labor pool transitioned to the Company. Total charges from APC to LTAS during the years ended December 31, 2014 and 2013 were $19,242 and $28,589, respectively.

Due to Parent:

Due to Parent:

 

The due to parent liability at December 31, 2013 of $206,874 consists of $96,874 in accrued salary to Felicia Hess which was converted to options in World Surveillance Group, Inc. (WSGI) and $110,000 related to a re-allocation of a portion of the original purchase price paid to Felicia Hess. The entire balance of $206,784 was written off effective May 5, 2014 when WSGI sold LTAS to the Company.

Earnings or Loss per Share:

Earnings or Loss per Share:

 

The Company accounts for earnings per share pursuant to ASC 260, Earnings per Share, which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year. As there was a net loss for the year ended December 31, 2014, basic and diluted losses per share are the same for the year ended December 31, 2014. For the year ended December 31, 2013, after the outstanding stock was retrospectively adjusted for reverse merger, there was no outstanding common stock as of December 31, 2013, and thus basic and diluted earnings per share are not calculated.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

 

Management does not believe that any recently issued, but not effective, accounting standards, if currently adopted, would have a material effect on the Company's financial statements.