Brekford Corp.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Brekford Corp.
Notes to Unaudited Condensed Consolidated Financial Statements
Fort the Three and Six Months Ended June 30, 2014
NOTE 1 – DESCRIPTION OF THE BUSINESS
Brekford Corp. (OTCBB; OTCQB: BFDI) headquartered in Hanover, Maryland is a leading public safety technology service provider of fully integrated traffic safety solutions, parking enforcement citation collections and integrator of mobile technology equipment for public safety vehicle services to State and Local municipalities, the U.S. Military and various Federal public safety agencies throughout the United States. Brekford’s combination of upfitting services, cutting edge technology, and automated traffic enforcement services offers a unique 360º solution for law enforcement agencies and municipalities. Our core values of integrity, accountability, respect, and teamwork drive our employees to achieve excellence and deliver industry leading technology and services, thereby enabling a superior level of safety solutions to our clients.
As used in these notes, the terms “Brekford”, “the Company”, “we”, “our”, and “us” refer to Brekford Corp. and, unless the context clearly indicates otherwise, its consolidated subsidiary.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations and cash flows. The condensed consolidated balance sheet at December 31, 2013, has been derived from audited financial statements of that date. The interim condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year or any future interim period. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules and regulations prescribed by the United States Securities and Exchange Commission. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our annual report on Form 10-K for the year ended December 31, 2013.
The consolidated financial statements of Brekford include accounts of the Company and its wholly-owned subsidiary, Municipal Recovery Agency, LLC. Intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying unaudited condensed consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for doubtful accounts, sales returns, allowance for inventory obsolescence, fair value of long-lived assets, deferred taxes and valuation allowance, and the depreciable lives of fixed assets. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company maintains cash accounts with major financial institutions. From time to time, amounts deposited may exceed the FDIC insured limits.
Accounts Receivable
Accounts receivable are carried at estimated net realizable value. The Company has a policy of reserving for uncollectable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company calculates the allowance based on a specific analysis of past due balances. Past due status for a particular customer is based on how recently payments have been received from that customer. Historically, the Company’s actual collection experience has not differed significantly from its estimates, due primarily to credit and collections practices and the financial strength of its customers.
Inventory
Inventory principally consists of hardware and third-party packaged software that is modified to conform to customer specifications and held temporarily until the completion of a contract. Inventory is valued at the lower of cost or market value. The cost is determined by the lower of first-in, first-out (“FIFO”) method, while market value is determined by replacement cost for raw materials and parts and net realizable value for work-in- process.
Property and Equipment
Property and equipment is stated at cost. Depreciation of furniture, vehicles, computer equipment and software and phone equipment is calculated using the straight-line method over the estimated useful lives (two to ten years), and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term (which is three to five years).
Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
Revenue Recognition
The Company recognizes revenue relating to its vehicle upfitting solutions when all of the following criteria have been satisfied: (i) persuasive evidence of an arrangement exists; (ii) delivery or installation has been completed; (iii) the customer accepts and verifies receipt; and (iv) collectability is reasonably assured. The Company considers delivery to its customers to have occurred at the time at which products are delivered and/or installation work is completed and the customer acknowledges its acceptance of the work.
The Company provides its customers with a warranty against defects in the installation of its vehicle upfitting solutions for one year from the date of installation. Warranty claims were insignificant for the six months ended June 30, 2014 and 2013. The Company also performs warranty repair services on behalf of the manufacturers of the equipment it sells.
The Company also offers separately-priced extended warranty and product maintenance contracts to its customers on the equipment sold by the Company. Revenues from extended warranty services are apportioned over the period of the extended warranty service contracts and the warranty costs are expensed as incurred. Revenue from extended warranties for the six months ended June 30, 2014 and 2013 amounted to $227,362 and $145,656, respectively.
For automated traffic safety enforcement revenue, the Company recognizes the revenue when the required collection efforts are completed and the respective municipality is billed depending on the terms of the respective contract. The Company records revenue related to automated traffic violations for the Company’s share of the violation amount.
Share-Based Compensation
The Company complies with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation, in measuring and disclosing stock based compensation cost. The measurement objective in ASC Paragraph 718-10-30-6 requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost is recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period). Performance-based awards are expensed ratably from the date that the likelihood of meeting the performance measures is probable through the end of the vesting period.
Treasury Stock
The Company accounts for treasury stock using the cost method. As of June 30, 2014, 10,600 shares of Brekford Corp. common stock were held in treasury at an aggregate cost of $5,890.
Income Taxes
The Company uses the liability method to account for income taxes. Income tax expense includes income taxes currently payable and deferred taxes arising from temporary differences between financial reporting and income tax bases of assets and liabilities. Deferred income taxes are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense, if any, consists of the taxes payable for the current period. Valuation allowances are established when the realization of deferred tax assets are not considered more likely than not.
The Company files income tax returns with the U.S. Internal Revenue Service and with the revenue services of various states. The Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years prior to 2010. The Company’s policy is to recognize interest related to unrecognized tax benefits as income tax expense. The Company believes that it has appropriate support for the income tax positions it takes and expects to take on its tax returns, and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.
Net loss per Share
Basic net loss per share is calculated by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding and does not include the effect of any potentially dilutive common stock equivalents. Diluted net loss per share is calculated by dividing net loss by the weighted-average number of shares outstanding, adjusted for the effect of any potentially dilutive common stock equivalents. There is no dilutive effect on the loss per share during loss periods. See Note 10 for the calculation of basic and diluted net loss per share.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s promissory note obligations approximate fair value, as the terms of these notes are consistent with terms available in the market for instruments with similar risk.
Segment Reporting
FASB ASC Topic 280, Segment Reporting, requires that an enterprise report selected information about operating segments in its financial reports issued to its stockholders. Based on its current analysis, management has determined that the Company has only one operating segment, which is Traffic Safety Solutions. The chief operating decision-makers use combined results to make operating and strategic decisions, and, therefore, the Company believes its entire operation is covered under a single segment.
Newly Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09 – Revenue from contracts with Customers. This guidance is effective for fiscal years beginning after December 15, 2016 and early adoption is not allowed. We have not yet determined the effects of this new guidance on our financial statements.
NOTE 3 – LINE OF CREDIT AND NOTES PAYABLE
On May 27, 2014, Brekford Corp. (the “Company”) closed (the “Closing”) on an aggregate $3.0 million credit facility (the “Credit Facility”) with Rosenthal & Rosenthal, Inc. (“Rosenthal”) as lender consisting of $2.5 million in revolving loans (the “Revolving Facility”) and a $500,000 non-revolving loan (the “Term Loan”). The terms and conditions of the Credit Facility are set forth in a Financing Agreement between the Company and Rosenthal dated May 27, 2014 (the “Financing Agreement”). The Term Loan is additionally evidenced by a Term Note issued by the Company in favor of Rosenthal. The maximum amount that the Company may borrow from time to time under the Revolving Facility will be the lesser of $2.5 million or the “Loan Availability” (as defined in the Financing Agreement), which is tied to the amount of the Company’s “Eligible Receivables” (as defined in the Financing Agreement) and the amount of its “Eligible Inventory” (as defined in the Financing Agreement). Interest on the unpaid principal balances due under the Credit Facility will be payable monthly in arrears. Amounts borrowed under the Revolving Facility that do not exceed the “Receivable Availability” (as defined in the Financing Agreement) will bear interest at an annual rate equal to the prime rate from time to time publicly announced in New York City by JPMorgan Chase Bank (the “Prime Rate”) plus 2.5%; amounts borrowed under the Revolving Facility that relate to the “Inventory Availability” (as defined in the Financing Agreement) will bear interest at an annual rate equal to the Prime Rate plus 3.0% (the “Inventory Rate”); and any amounts that, on any day, exceed the Loan Availability will bear interest at an annual rate equal to the Inventory Rate plus 4.0%; provided, however, that the Prime Rate will never be deemed to be less than 4.0%. The Company agreed to pay a minimum of $3,000 in monthly interest under the Revolving Facility, as well as a $1,000 monthly loan administration fee. In addition, the Company agreed to pay Rosenthal a facility fee at the Closing in the amount of $30,000. At each annual renewal of the Financing Agreement, the Company will pay Rosenthal a facility fee in the amount of $18,750.
The Company’s obligations under the Financing Agreement and related documents are secured by a continuing lien on and security interest in substantially all of the Company’s assets. The Company’s repayment obligations under the Revolving Facility are due on demand by Rosenthal or, at Rosenthal’s option, upon the expiration of the Financing Agreement and/or the occurrence of an event of default thereunder. The original term of the Financing Agreement will expire on May 31, 2016 but will automatically renew for successive one-year terms unless the Company elects not to renew the Financing Agreement by providing at least 60 days’ prior written notice thereof to Rosenthal. Rosenthal may terminate the Financing Agreement at any time upon 60 days’ prior written notice to the Company.
The Credit Facility replaced the Company’s $2.0 million credit facility with PNC Bank, National Association (“PNC”), under that certain Loan Agreement, dated as of June 28, 2012, as amended (the “PNC Facility”), and refinanced the amounts that were due under the PNC Facility. At the Closing, the Company paid approximately $1,030,707 to PNC in satisfaction of its obligations under the PNC Facility. In addition, the Company used proceeds from the Credit Facility, totaling approximately $310,649, to satisfy its obligations to Bank of America, N.A., under its Master Lease Agreement, dated as of December 13, 2011. As of June 30, 2014, we were out of compliance with one of the financial covenant contained in our credit facility with Rosenthal & Rosenthal as a result of the loss recorded for the second quarter of 2014. We have reported this non-compliance to Rosenthal & Rosenthal and requested the wavier on the covenants.
The Company financed certain vehicles and equipment under finance agreements. The agreements mature in September 2014, March 2017 and May 2017. The agreements require various monthly payments of principal and interest until maturity. As of June 30, 2014 and 2013, financed assets of $101,838 and $136,256, respectively, net of accumulated amortization of $67,126 and $32,707, respectively, are included in property and equipment on the balance sheets. The weighted average interest rate was 3.75% at June 30, 2014 and June 30, 2013.
NOTE 4 – CONVERTIBLE NOTES PAYABLE – STOCKHOLDERS
Brekford Corp. financed the repurchase of shares of its common stock and warrants from the proceeds of convertible promissory notes that were issued by Brekford Corp. on November 9, 2009 in favor of a lender group that included two of its directors, Messrs. C.B. Brechin and Scott Rutherford, in the principal amounts of $250,000 each (each, a “Promissory Note” and together, the “Promissory Notes”). Each Promissory Note bears interest at the rate of 12% per annum and at the time of issuance was to be convertible into shares of Brekford Corp. common stock, at the option of the holder, at an original conversion price of $.07 per share. At the time of issuance, Brekford agreed to pay the unpaid principal balance of the Promissory Notes and all accrued but unpaid interest on the date that was the earlier of (i) two years from the issuance date or (ii) 10 business days after the date on which Brekford Corp. closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000.
On April 1, 2010, Brekford Corp. and each member of the lender group executed a First Amendment to the Unsecured Promissory Note, which amended the Promissory Notes as follows:
| | ● | | Revise the conversion price in the provision that allows the holder of the Promissory Note to elect to convert any outstanding and unpaid principal portion of the Promissory Note and any accrued but unpaid interest into shares of the common stock at a price of fourteen cents ($0.14) per share, and |
| | ● | | Each Promissory Note’s maturity date was extended to the earlier of (i) four years from the issuance date or (ii) 10 business days after the date on which Brekford closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000. |
On November 8, 2013, Brekford Corp. and each member of the lender group agreed to further extend the maturity dates of the Promissory Notes to the earlier of (i) November 9, 2014 or (ii) 10 business days after the date on which Brekford Corp. closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000. The Company anticipates the maturity date of these notes will be extended, as a result they are classified as long term liability.
As of June 30, 2014 and December 31, 2013, the amounts outstanding under the Promissory Notes totaled $500,000.
Capital Leases
The Company financed certain equipment under separate non-cancelable equipment loan and security agreements. The agreements mature in April 2015. The agreements require various monthly payments and are secured by the assets under lease. As of June 30, 2014 and 2013, capital lease assets of $98,445 and $1,293,074, respectively, net of accumulated amortization of $0 and $940,927, respectively, are included in property and equipment on the balance sheets. Our weighted average interest rate was 5.84% at June 30, 2014 and June 30, 2013.
Operating Leases
The Company records rent expense under a non-cancelable operating leases expiring January 2015. Rent expense under this lease amounted to $73,947 and $82,573 for the six months ended June 30, 2014 and 2013, respectively.
The Company leases approximately 2,500 square feet of office space from a related party under a non-cancelable operating leases expiring June 2015. Rent expense under this lease amounted to $23,400 and $21,466 for the six months ended June 30, 2014 and 2013, respectively.
NOTE 6 – MAJOR CUSTOMERS AND VENDORS
Major Customers
The Company has several contracts with government agencies, of which net revenue from one major customers during the six months ended June 30, 2014 represented 17% of the total net revenue for the period. Accounts receivable due from two customers at June 30, 2014 amounted to 53% of total accounts receivable.
For the period ended June 30, 2013, the Company had several contracts with government agencies, of which net revenue from one major customer represented 41% of the total net revenue for the period. Accounts receivable due from two customers at June 30, 2013 amounted to 64% of total accounts receivable. Accounts receivable due from customers at December 31, 2013 amounted to 25% of total accounts receivable at that date.
Major Vendors
The Company purchased substantially all hardware products that it resold during the periods presented from three major distributors. Revenues from hardware products amounted to 54% and 43% of total revenues for the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014 and 2013, accounts payable due to these distributors amounted to 67% and 34% of total accounts payable, respectively. Accounts payable due to these distributors at December 31, 2013 amounted to 56% of total accounts payable at that date.
NOTE 7 - STOCKHOLDERS’ EQUITY
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On September 7, 2010, Brekford Corp. issued a press release announcing that its board of directors authorized a stock repurchase program permitting the Company to repurchase up to $500,000 in outstanding shares of its common stock from time to time over a period of 12 months in open market transactions or in privately negotiated transactions at the Company's discretion. The stock repurchase program was subsequently extended for an additional 12 months until September 7, 2012. On September 28, 2012, the Company adopted a new stock repurchase program which permits the Company to repurchase the $363,280 in shares that remained available for repurchase under the old program, with the same terms and conditions except that the term of the new stock repurchase program is 24 months. No shares were repurchased during the second quarter of 2014.
NOTE 8 – SHARE-BASED COMPENSATION
The Company has issued shares of restricted common stock and warrants to purchase shares of common stock and has granted non-qualified stock options to certain employees and non-employees. On April 25, 2008, the Company’s stockholders approved the 2008 Stock Incentive Plan (the “2008 Incentive Plan”). During the first quarter of 2014, Brekford Corp. granted stock options under the 2008 Incentive Plan to its non-employee directors. These options have exercise prices equal to the fair market value of a share of common stock as of the date of grant and have terms of ten years.
Stock Options
Option grants during the six months ended June 30, 2014 were primarily made to non-employee directors who elected to receive options during the annual equity grant period in the first quarter of each fiscal year. The options had a grant date fair value of $0.10 per share and will vest and become exercisable with respect to option shares over a three year period commencing from the date of grant at a rate of 33.33% per year. The Company recorded $2,493 in stock option compensation expense during in the period ending June 30, 2014 related to the stock option grants.
Summary of the option activity for six months ended June 30, 2014 is as follows:
| | | | | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (Years) | | | |
| Outstanding at January 1, 2014 | | | — | | | $ | 0.00 | | — | | $ | 0.00 |
| Granted | | | 225,000 | | | | 0.20 | | — | | | 0.00 |
| Forfeited or expired | | | — | | | | — | | — | | | 0.00 |
| Exercised | | | — | | | | — | | — | | | |
| Outstanding at June 30, 2014 | | | | | | | 0.20 | | 4.6 | | | 0.00 |
| Exercisable at June 30, 2014 | | | | | | | 0.00 | | — | | | 0.00 |
| Vested and expected to vest | | | | | | | 0.20 | | 4.6 | | | 0.00 |
The unrecognized compensation cost for unvested stock option awards outstanding at June 30, 2014 was approximately $19,945 to be recognized over approximately 2.65 years.
Restricted Stock Grants
During the six months ended June 30, 2014, the Company granted an aggregate of 50,000 shares of restricted stock to the directors as part of the agreement and in consideration of services rendered. The weighted average value of the shares amounted to $0.27 per share based upon the closing price of shares of common stock on the date of the grant. These shares were fully vested on the date of the grant. The Company recorded $13,500 in share-based compensation expense for the six-month period ended June 30, 2014 related to restricted stock grants. For the six months ended June 30, 2013, the Company recorded $17,750 in share-based compensation expense related to restricted stock grants.
| | | | | | |
| | | | | | | |
| Nonvested restricted stock at January 1, 2014 | | — | | $ | — | |
| Granted | | 50,000 | | | 0.27 | |
| Vested | | (50,000) | | | 0.27 | |
| Forfeited or expired | | — | | | — | |
| Nonvested restricted stock at June 30, 2014 | | | | | | |
NOTE 9 – INVENTORY
As of June 30, 2014 and December 31, 2013, inventory consisted of the following:
NOTE 10 – NET LOSS PER SHARE
The following table sets forth the calculation of basic and diluted net loss per common share for the three and six months ended June 30, 2014 and 2013.
| | | Three Months Ended June 30, | | | Six Months Ended June 30, |
| | | 2014 | | | 2013 | | | 2014 | | | | 2013 | |
| | | | | | | | | | | | | | |
| Basic net loss per share : | | | | | | | | | | | | | |
| | $ | (826,682 | ) | | $ | (476,068 | ) | | $ | (1,398,295 | ) | | $ | (400,469 | ) |
Weighted average common shares outstanding | | | 44,500,569 | | | | 44,273,569 | | | | 44,498,635 | | | | 44,265,420 | |
| | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | |
| Diluted net loss per share : | | | | | | | | | | | | | | | | |
| | $ | (826,682 | ) | | $ | (476,068 | ) | | $ | (1,398,295 | ) | | $ | (400,469 | ) |
Weighted average common shares outstanding | | | 44,500,569 | | | | 44,273,569 | | | | 44,498,635 | | | | 44,265,420 | |
Potential dilutive securities | | | — | | | | — | | | | — | | | | — | |
Weighted average common shares outstanding – diluted | | | 44,500,569 | | | | 44,273,569 | | | | 44,498,635 | | | | 44,265,420 | |
Diluted earnings per share | | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | (0.03 | ) | | $ | (0.01 | ) |
Common stock equivalents excluded due to anti-dilutive effect | | | 3,796,429 | | | | 3,946,429 | | | | 3,796,429 | | | | 3,946,429 | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis presents a review of the condensed operating results of Brekford Corp. for the three and six months ended June 30, 2014 and 2013 and the financial condition of Brekford Corp. at June 30, 2014. The discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes included herein, as well as Brekford Corp.’s audited financial statements that were included in its Annual Report on Form 10-K for the year ended December 31, 2013.
Forward-Looking Statements
This Quarterly Report on Form 10-Q (“Quarterly Report”) may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “anticipate”, “estimate”, “should”, “will”, “expect”, “believe”, “intend”, and similar expressions, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this Annual Report; general economic, market, or business conditions and their effects; industry competition, conditions, performance and consolidation; changes in applicable laws or regulations; changes in the budgets and/or public safety priorities of our customers; economic or operational repercussions from terrorist activities, war or other armed conflicts; the availability of debt and equity financing; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations.
Forward-looking statements speak only as of the date the statements are made. Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise. If we update one or more forward-looking statements, then no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
As used in this Annual Report, the terms “Brekford”, “the Company”, “we”, “our”, and “us” refer to Brekford Corp. and, unless the context clearly indicates otherwise, its consolidated subsidiary.
Overview
Brekford Corp. (OTCBB; OTCQB: BFDI) headquartered in Hanover, Maryland is a leading public safety technology service provider of fully integrated traffic safety solutions, parking enforcement citation collections and integrator of mobile technology equipment for public safety vehicle services to State and Local municipalities, the U.S. Military and various Federal public safety agencies throughout the United States. Brekfords combination of upfitting services, cutting edge technology, and automated traffic enforcement services offers a unique 360O solution for law enforcement agencies and municipalities. Our core values of integrity, accountability, respect, and teamwork drive our employees to achieve excellence and deliver industry leading technology and services, thereby enabling a superior level of safety solutions to our clients. Brekford has one wholly-owned subsidiary, Municipal Recovery Agency, LLC, a Maryland limited liability company, that was formed in 2012 for the purpose of providing collection systems and services for unpaid citations and parking fines.
Products and Services
Public safety is a major concern for most communities – especially as populations grow, public safety budgets are reduced. One way to help make streets safer while reducing workload is a well-run photo red light or speed enforcement program. The objective of photo enforcement is to help curtail aggressive driving through voluntary compliance. Revenue generated from fines routinely goes directly back into supporting other public safety initiatives.
Although opponents of red light cameras cite the increase in rear end collisions as cause for disapproval of cameras, a study conducted in February 2011 by the Insurance Institute for Highway Safety (the “IIHS”) reported that red-light cameras reduced fatal red light running crashes by 24% in 14 large U.S. cities with populations over 200,000. IIHS concluded that if red light cameras had been operating in all 99 U.S. cities with populations over 200,000 during this study period (five years), a total of 815 deaths could have been avoided. Because the types of crashes prevented by red light cameras tend to be far more severe than rear-end crashes, research has shown there is a positive aggregate benefit. Photo Enforcement solutions can reduce collisions, injuries and deaths by providing a useful tool for municipalities and law enforcement agencies, without unduly taxing drivers who do not break the law. Today, more than 600 communities across the U.S. operate red light or speed camera enforcement programs.
Regardless of the increased safety effects and prevention of fatalities, there is still a common misconception that automated traffic safety enforcement systems are not supported by the general public. An IIHS survey conducted in November, 2012 found that a large majority of people living in Washington, D.C., one of the largest combined red light and speed enforcement programs in the U.S., favor camera enforcement. Of those surveyed, 87% support red light cameras and 76% support speed cameras. Even the majority of violators (59%) agreed that they deserved their most recent citation.
Brekford’s automated traffic safety enforcement (“ATSE”) products offer intersection safety (red light), photo speed, work zone and school bus enforcement options by way of a complete suite of solution-based products. By assembling a team of industry professionals with the most experience in this field, we have developed equipment and a full turn-key solution that we believe will ensure the success of any program. Having the advantage of a team with experience, we have created and implemented some of the most cutting-edge features into our design – while constructing end-to-end systems specifically with our clients’ needs in mind.
Automated Traffic Safety Enforcement - Photo Speed & Red Light Enforcement
ATSE systems are one of a wide range of measures that are effective at reducing vehicle speeds and crashes. The automated speed enforcement (“ASE”) system is an enforcement technique with one or more motor vehicle sensors producing recorded images of motor vehicles traveling at speeds above a defined threshold. Images captured by the ASE system are processed and reviewed in an office environment and violation notices are mailed to the registered owner of the identified vehicle. ASE is a technology available to law enforcement as a supplement and not a replacement for traditional enforcement operations. Evaluations of ASE, both internationally and in the United States have identified some advantages over traditional speed enforcement methods. These include:
| ● | High rate of violation detection. ASE units can detect and record multiple violations per minute. This can provide a strong deterrent effect by increasing drivers’ perceived likelihood of being cited for speeding. |
| ● | Physical safety of ASE operators and motorists. ASE can operate at locations where roadside traffic stops are dangerous or infeasible, and where traffic conditions are unsafe for police vehicles to enter the traffic stream and stop suspected violators. With ASE there is normally no vehicle pursuit or confrontation with motorists. ASE might also reduce the occurrence of traffic congestion due to driver distraction caused by traffic stops on the roadside. |
| ● | Fairness of operation. Violations are recorded for all vehicles traveling in excess of the enforcement speed threshold. Efficient use of resources. ASE can act as a “force multiplier,” enhancing the influence of limited traffic enforcement staff and resources. |
Beyond traditional tax collection on income or property, state agencies and local municipalities rely heavily on fine and fee revenue generated from a multitude of violator funded sources. For example, jurisdictions generate sizable revenues from court fees, traffic and parking violations, ordinance infractions, and library and utility arrearages. Each of these revenue sources funds public safety and community development initiatives and without the income the services are curtailed. Brekford offers client-specific solutions to these agencies and municipalities to assist them with collecting unpaid fines, including:
| ● | Notification Continuance |
| ● | Mail House and Printing Service |
| ● | Data Purification and Verification Service |
| ● | Back Office Support Service |
- Call Center Response (Inbound & Out Bound)
- Lock-Box & Treasury Services
- Payment Processing
Electronic Ticketing System - Slick-Ticket ™
Many of today’s law enforcement agencies are struggling to balance the increasing demand from their citizens for more services with limited and/or declining budgets. One of the easiest and most cost-effective ways agencies can address this issue is by deploying an electronic ticketing, or E-Ticketing solution. Automating the ticket issuing and processing system can significantly decrease cost, increase productivity and improve officer safety.
Brekford offers a unique functionality that streamlines the data entry process even further. Many law enforcement agencies that have deployed a mobile data system run background queries from national (NCIC), state, and local databases and Brekford’s solution captures the data from these mobile query files and auto-populates all of the requisite data into the electronic citation (E-Tix) form on the screen. Brekford’s Slick-Ticket ™ product is a fully portable, over-the-seat organizer for public safety vehicles, specially designed to house a printer and scanner to allow law enforcement officers to quickly access driver's license and registration information as well as issue tickets, warnings and citations.
Rugged Information Technology Solutions – Mobile Data & Digital Video
Law enforcement agency, fire department and EMS personnel have unique requirements for fleet vehicle upfitting and IT equipment to include characteristics such as ruggedness and reliability. The equipment must be able to work in extreme environments that include high levels of vibration and shock, wide temperature ranges, varying humidity, electromagnetic interference as well as voltage and current transients. Our rugged and non-rugged IT products and mobile data communication systems provide public safety workers with the unique functionalities necessary to enable effective response to emergency situations.
For more than a decade, Brekford has been a distributor for most major brands in the mobile technology arena. We handle everything from Panasonic Toughbooks® and Arbitrator® digital video systems to emergency lighting systems and wireless technology. We believe that we have all of the high-end products our customers need to handle their day-to-day operations and protect the public they serve. Every product we sell is tested by highly trained technicians and guaranteed to work in even the most extreme conditions. We specialize in seamlessly incorporating custom built solutions within existing networks. We deliver our end-to-end solutions with service programs that work for agencies large and small, from turn-key drop shipping to municipal leases. Our commitment is to design and deliver solutions that meet or exceed industry standards for safety, ergonomics, reliability, serviceability and uniformity.
We develop integrated, interoperable, feature-rich mobile systems that enable first responders, such as police, fire and EMS, to obtain and exchange information in real time. The rapid dissemination of real time information is critical to determine and assure timely and precise resource allocation by public sector decision makers. As a premiere Panasonic Toughbook partner, we augment these rugged laptops by designing and manufacturing vehicle mounting systems and docking stations for in-vehicle communications equipment. From rugged laptop computers, tablets and hand-helds, GPS terminals, two-way radios, and full console systems, we provide ergonomically sound mounting products with full port replication.
Toughbook Arbitrator is a rugged revolution in law enforcement video capture. The fully integrated system offers unparalleled video capture (up to 360 degrees), storage and transfer, and is designed to work with back-end software for seamless video management, including archiving and retrieving. Brekford augments this solution with an Automatic License Plate Reader (ALPR / LPR), an image-processing technology used to identify vehicles by their license plates. License Plate Readers (LPRs) can record plates at about one per second at speeds of up to 70 MPH and they often utilize infrared cameras for clarity and to facilitate reading at any time of day or night. The data collected can either be processed in real-time, at the site of the read, or it can be transmitted to remote centers and processed at a later time.
360° Vehicle Solution - Upfitting
The Brekford 360-degree vehicle solution provides complete vehicle upfitting, mobile data and video solutions including municipal financing and leasing services for agencies. The 360-degree vehicle solutions approach provides customers with a one-stop upfitting, cutting edge technology and installation service. The 360-degree approach is the only stop our customers need to purchase law enforcement vehicles (GM, Ford, Dodge), have them upfitted with lights, sirens, radio communication and rugged IT technology, and then have them “ready to roll”. Our mission is to provide and install equipment that ensures safe and efficient mission critical vehicles while incorporating the latest technological advances. We adhere to strict quality control procedures and provide comprehensive services. The Brekford certified installation team provides our customers the highest level of expertise and service from inception to completion, including maintenance and upgrades.
We distinguish ourselves by truly being a “one-stop shop” for vehicle upfitting, cutting edge technology, and installation services. Unlike our competitors, we provide customers with one place to purchase law enforcement vehicles that are not only upfitted with the traditional lights and sirens but also with rugged IT hardware and communications equipment. Our 360-degree engineered bumper-to-bumper vehicle solution, our commitment to top quality, fast, reliable service, along with our streamlined purchasing process is why we believe Brekford is the best all-around vehicle and automated traffic enforcement technology solutions provider.
Results of Operations
Results of Operations for the Six Months Ended June 30, 2014 and 2013
The following tables summarize and compare selected items from the statements of operations for the six months ended June 30, 2014 and the six months ended June 30, 2013.
| | | Six Months Ended June 30, | | | (Decrease) / Increase | |
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Gross Profit Percentage of Revenue | | | | | | | | | | | | | | | | |
Revenues
Revenues for the six months ended June 30, 2014 amounted to $8,554,594 as compared to revenues of $8,062,437 for the six months ended June 30, 2013, representing an increase of $492,157 or 6.10%. The increase in revenues for the first six months of 2014 when compared to the same period of last year was primarily due to increase in sales for rugged IT products and electronic ticketing.
Cost of Revenues
Cost of revenues for the six months ended June 30, 2014 amounted to $7,306,372 as compared to $6,133,937 for the six months ended June 30, 2013, an increase of $1,172,435 or 19.11%, primarily due to increases in the costs related to rugged IT products and vehicle upfitting services.
Gross Profit
Gross profit for the six months ended June 30, 2014 amounted to $1,248,222 as compared to $1,928,500 for the six months ended June 30, 2013, a decrease of $680,278 or 35.27%, primarily due to lower profit margins from rugged IT products and vehicle upfitting services.
Expenses
| | | Six Months Ended June 30, | | | | |
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Salaries and related expenses | | | | | | | | | | | | | | | | |
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Salaries and Related Expenses
Salaries and related expenses for the six months ended June 30, 2014 amounted to $933,596 as compared to $905,285 for the six months ended June 30, 2013, an increase of $28,311 or 3.13%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended June 30, 2014 amounted to $1,641,214 as compared to $1,338,315 for the six months ended June 30, 2013, an increase of $302,899 or 22.63%. The increase was due to corporate expenses and a loss related to the disposal of obsolete ATSE equipment in order to eliminate a balance due with the equipment vendor. As of June 30, 2014, all ATSE clients have been upgraded to Brekford’s latest integrated technology.
Net (Loss) Income
Net loss for the six months ended June 30, 2014 amounted to $1,398,295 compared to net loss of $400,469 for the six months ended June 30, 2013, an increase of $997,826 or 249.16%. The increase was primarily due to lower profit margins from rugged IT products and vehicle upfitting services and the loss related to disposal of ATSE equipment referenced above.
Results of Operations for the Three Months Ended June 30, 2014 and 2013
The following tables summarize and compare selected items from the statement of operations for the three months ended June 30, 2014 and the three months ended June 30, 2013.
| | | Three Months Ended June 30, | | | | |
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Gross Profit Percentage of Revenue | | | | | | | | | | | | | | | | |
Revenues
Revenues for the three months ended June 30, 2014 amounted to $3,892,307 as compared to revenues of $3,667,598 for the three months ended June 30, 2013, representing an increase of $224,709 or 6.13%. The increase in revenues for the three months ended June 30, 2014 when compared to the same period of last year was primarily due to an increase of $593,545 in sales for rugged IT products, partially offset by lower sales in vehicle upfitting services, electronic ticketing, and ATSE. Lower sales in ATSE was primarily due to the termination of a contract that was in effect during the three months ended June 30, 2013.
Cost of Revenues
Cost of revenues for the three months ended June 30, 2014 amounted to $3,232,244 as compared to $3,002,452 for the three months ended June 30, 2013, an increase of $229,792 or 7.65%, primarily due to an increase in the cost of rugged IT products, partially offset by a decrease in the cost of ATSE services
Gross profit for the three months ended June 30, 2014 amounted to $660,063 as compared to $665,146 for the three months ended June 30, 2013, a decrease of $5,083 or 0.76%, primarily due to lower profit margins from rugged IT products and vehicle upfitting services.
Expenses
| | | Three Months Ended June 30, | | | | |
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Salaries and related expenses | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | | | | | | | | | | | | | | |
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Salaries and Related Expenses
Salaries and related expenses for the three months ended June 30, 2014 amounted to $445,967 as compared to $457,197 for the three months ended June 30, 2013, a decrease of $11,230 or 2.46%, as the personnel count related to corporate infrastructure and business development remained relatively flat.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30, 2014 amounted to $1,004,930 as compared to $635,851 for the three months ended June 30, 2013, an increase of $369,079 or 58.04%. The increase was primarily due to a loss related to the disposal of obsolete ATSE equipment in order to eliminate a balance due with the equipment vendor. As of June 30, 2014, all ATSE clients have been upgraded to Brekford’s latest integrated technology.
Net (Loss) Income
Net loss for the three months ended June 30, 2014 amounted to $826,682 compared to net loss of $476,068 for the three months ended June 30, 2013, an increase of $350,614 or 277.09%. The increase was primarily due to lower profit margins from rugged IT products and vehicle upfitting services and the loss related to the disposal of ATSE equipment as referenced above.
Financial Condition, Liquidity and Capital Resources
At June 30, 2014, we had total current assets of $3.4 million and total current liabilities of $3.3 million resulting in a working capital of $0.1 million. Inventory totaled $0.6 million at June 30, 2014 and primarily consisted of raw materials related to future product sales. The Company’s accumulated deficit increased to $10,466,857 at June 30, 2014 compared to $9,068,562 at December 31, 2013, as result of the net loss recorded for the first and second quarters of 2014. Cash flows provided by operations for the six months ended June 30, 2014 were $317,737.
At June 30, 2014, we had approximately $1 million of cash on hand. Our operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant customers, lack of operating history and uncertainty of future profitability and possible fluctuations in financial results.
The Company intends to continue its efforts to expand sales of ATSE products, and such expansion may significantly increase the Company’s working capital needs. Management believes that the Company’s current level of cash combined with cash that it expects to generate in its operations during the next 12 months and funds available from its $3,000,000 credit facilities with Rosenthal & Rosenthal will be sufficient to sustain the Company’s business initiatives through at least June 30, 2015. Management has taken certain measures to conserve the Company’s capital resources and maintain liquidity that it believes will permit the Company to meet its future capital requirements, but there can be no assurance that these measures will be successful or adequate. As of June 30, 2014, the Company had $0.7 million in outstanding indebtedness under its line of credit and the term loan with Rosenthal & Rosenthal. As of June 30, 2014, we were out of compliance with one of the financial covenant contained in our credit facility with Rosenthal & Rosenthal as a result of the loss recorded for the second quarter of 2014. We have reported this non-compliance to Rosenthal & Rosenthal and requested the wavier on the covenants.
As discussed in Note 4 to the condensed consolidated financial statements presented elsewhere in this Quarterly Report, the Company is indebted to C.B. Brechin and Scott Rutherford under unsecured promissory notes in the aggregate balance of $500,000 as of June 30, 2014. Unless their maturity dates are extended, these notes will mature on the earlier of (i) November 9, 2014 or (ii) ten business days from the date on which Brekford closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000.
In the event that the Company’s cash reserves, cash flow from operations and funds available under its credit facilities are not sufficient to fund the Company’s future operations, it may need to obtain additional capital. No assurance can be given that the Company will be able to obtain additional capital in the future or that such capital will be available to the Company on acceptable terms. The Company’s ability to obtain additional capital will be subject to a number of factors, including market conditions, the Company’s operating performance and investor sentiment, which may make it difficult for the Company to consummate a transaction at the time, in the amount and/or upon the terms and conditions that the Company desires. If the Company is unable to raise additional capital at the times, in the amounts, or upon the terms and conditions that it desires, then it might have to delay, scale back or abandon its expansion efforts. Even with such changes, the Company’s operations could consume available capital resources and liquidity.
Cash Flows used in Operating Activities
Changes in cash flows used in operating activities resulted primarily from a decrease in profit margins for the six months ended June 30, 2014 as compared to the comparable period in 2013.
Cash Flows Used in Investing Activities
There were no capital expenditures in the second quarter of 2014 as compared to the same period in 2013. 2013 capital expenditure were primarily related to infrastructure to support our growth and to improve efficiencies.
Cash Flows Used in Financing Activities Changes in cash flows used in financing activities resulted primarily from principal payments under our capital equipment leases and line of credit for the period ended June 30, 2014 as compared to the comparable period in 2013.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 discusses those critical accounting policies and estimates that management uses to prepare our consolidated financial statements, which include those relating to accounts receivables allowances, revenue recognition and income taxes. We have reviewed those polices and believe that they remain our most critical accounting policies for the six months ended June 30, 2014, and that no material changes therein have occurred.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer who also serves as the principal accounting officer (“CEO”), to allow for timely decisions regarding required disclosure. In designing and evaluating these disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated can provide only reasonable, but not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain judgments and assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
An evaluation of the effectiveness of these disclosure controls and procedures as of June 30, 2014 was carried out under the supervision and with the participation of the Company’s management, including the CEO. Based on that evaluation, the Company’s management, including the CEO, has concluded that the Company’s disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting discussed below. A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 5) or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
As discussed in Brekford Corp.’s Annual Report on Form 10-K for the year ended December 31, 2013, management identified, through its annual evaluation as of December 31, 2013, a material weakness in the Company’s internal control over financial reporting, in that the Company does not employ a sufficient number of qualified accounting personnel to ensure proper and timely evaluation of complex accounting, tax, and disclosure issues that may arise during the course of the Company’s business. Management has concluded that this material weakness likewise existed as of June 30, 2014. The Company is addressing this material weakness by reviewing the Company’s accounting and finance processes to identify any improvements thereto that might enhance the Company’s internal control over financial reporting and determine the feasibility of implementing such improvements and by seeking qualified employees and/or outside consultants who possess the knowledge needed to eliminate this weakness. The Company’s ability to remediate this weakness may, however, be delayed or limited by resource constraints, a lack of qualified persons in the Company’s market area and/or competition from other employers. As of June 30, 2014, the Company engaged an outside consultant to provide assistance with the remediation of this weakness.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2014, other than the engagement of the consultant described above, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
The Company was not a party to pending legal proceedings during the period ended June 30, 2014 that are material to the Company or its assets.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Recent Sales of Unregistered Securities
During the quarter ended June 30, 2014, Brekford Corp. granted an aggregate of 50,000 shares of restricted common stock to its directors under the 2008 Incentive Plan in consideration of Board services rendered to the Company. Based on a per share price of $0.27 on the date of grant, these shares represent $13,500 in services rendered by the directors. The shares were issued in reliance upon the exemption from registration provided by Rule 701 under the Securities Act of 1933, as amended (the “Securities Act”), for securities issued in compensatory circumstances. Accordingly, the shares may not be offered or sold in the United States absent registration under the Securities Act and applicable state securities laws or an applicable exemption from those registration requirements.
Issuer Repurchases of Equity Securities
Neither Brekford Corp. nor any of its affiliated purchasers (as defined by Rule 10b-18 under the Exchange Act) purchased any shares of its common stock during the quarter ended June 30, 2014.
None.
The exhibits that are filed or furnished with this report are listed in the Exhibit Index which immediately follows the signatures hereto, and that Exhibit Index is incorporated herein by reference.
SIGNATURES
Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | Brekford Corp. |
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| Date: August 15, 2014 | By: | /s/ C.B. Brechin |
| | | Chandra (C.B.) Brechin |
| | | Chief Executive Officer, Chief Financial Officer, Treasurer and Director |
| | | (Principal Executive Officer and Principal Financial Officer) |
EXHIBIT INDEX
Exhibit Number | | Description |
| | 10.1 | | Financing Agreement, dated as of May 27, 2014, between Brekford Corp. and Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on May 28, 2014). |
| | 10.2 | | $500,000 Promissory Note, dated May 27, 2014, issued by Brekford Corp. in favor of Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed on May 28, 2014). |
| | 10.3 | | Form of Agreement to Subordinate and Assignment, dated as of May 27, 2014, between Brekford Corp. and each of C.B. Brechin and Scott Rutherford for the benefit of Rosenthal & Rosenthal, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed on May 28, 2014). |
| | 31.1 | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | 32.1 | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
| | XBRL Instance Document (filed herewith). |
| | XBRL Taxonomy Extension Schema (filed herewith). |
| | XBRL Taxonomy Extension Calculation Linkbase (filed herewith). |
| | XBRL Taxonomy Extension Definition Linkbase (filed herewith). |
| | XBRL Taxonomy Extension Label Linkbase (filed herewith). |
| | XBRL Taxonomy Extension Presentation Linkbase (filed herewith). |
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