Document and Entity Information
Document and Entity Information - shares | 3 Months Ended | |
Mar. 31, 2016 | May. 11, 2016 | |
Document And Entity Information | ||
Entity Registrant Name | Brekford Corp. | |
Entity Central Index Key | 1,357,115 | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2016 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Is Entity a Well-known Seasoned Issuer? | No | |
Is Entity a Voluntary Filer? | No | |
Is Entity's Reporting Status Current? | Yes | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 46,336,064 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2,016 |
Condensed Consolidated Balance
Condensed Consolidated Balance Sheet (Unaudited) - USD ($) | Mar. 31, 2016 | Dec. 31, 2015 |
CURRENT ASSETS | ||
Cash | $ 544,514 | $ 580,400 |
Accounts receivable, net of allowance $0 at March 31, 2016 and December 31, 2015, respectively | 2,548,823 | 3,781,263 |
Unbilled receivables | 385,721 | 304,470 |
Prepaid expenses | 53,258 | 71,740 |
Inventory | 554,246 | 606,471 |
Total current assets | 4,086,562 | 5,344,344 |
Property and equipment, net | 216,066 | 223,347 |
Other non-current assets | 103,828 | 179,208 |
TOTAL ASSETS | 4,406,456 | 5,746,899 |
CURRENT LIABILITIES | ||
Accounts payable and accrued expenses | 1,698,999 | 2,979,131 |
Accrued payroll and related expenses | 78,924 | 98,000 |
Line of credit, net of fees | 1,762,160 | 1,402,380 |
Term loan – current portion, net of fees | 104,167 | 166,667 |
Deferred revenue | 127,208 | 95,233 |
Customer deposits | 10,071 | 36,070 |
Obligations under other notes payable - current portion | 29,477 | 29,277 |
Derivative liability | 99,876 | 99,036 |
Other liabilities | 46,979 | 46,979 |
Total current liabilities | 3,957,861 | 4,952,773 |
LONG - TERM LIABILITIES | ||
Notes payable - stockholders | 500,000 | 500,000 |
Other notes payable - net of current portion, net of fees | 14,187 | 21,660 |
Deferred rent, net of current portion | 44,874 | 44,923 |
Convertible promissory notes, net of debt discounts and issuance costs of $284,484 and $418,730 at March 31, 2016 and December 31, 2015, respectively | 255,517 | 221,269 |
Total long-term liabilities | 814,578 | 787,852 |
TOTAL LIABILITIES | 4,772,439 | 5,740,625 |
STOCKHOLDERS' (DEFICIT) EQUITY | ||
Preferred stock, par value $0.0001 per share; 20,000,000 shares authorized; none issued and outstanding | 0 | 0 |
Common stock, par value $0.0001 per share; 150,000,000 shares authorized; 46,138,064 and 45,151,254 issued and outstanding, at March 31, 2016 and December 31, 2015, respectively | 4,614 | 4,515 |
Additional paid-in capital | 11,133,431 | 10,951,491 |
Treasury Stock, at cost 10,600 shares at March 31, 2016 and December 31, 2015 respectively | (5,890) | (5,890) |
Accumulated deficit | (11,496,665) | (10,942,380) |
Other comprehensive loss | (1,473) | (1,462) |
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY | (365,983) | 6,274 |
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY | $ 4,406,456 | $ 5,746,899 |
Condensed Consolidated Balance3
Condensed Consolidated Balance Sheet (Unaudited) (Parenthetical) - USD ($) | Mar. 31, 2016 | Dec. 31, 2015 |
Assets | ||
Allowance for Receivables | $ 0 | $ 0 |
Convertible promissory notes, net of debt discounts | $ 284,484 | $ 418,730 |
Stockholders Equity | ||
Preferred Stock par value | $ 0.0001 | $ 0.0001 |
Preferred Stock Authorized | 20,000,000 | 20,000,000 |
Preferred Stock Issued | 0 | 0 |
Preferred Stock Outstanding | 0 | 0 |
Common Stock par value | $ 0.0001 | $ 0.0001 |
Common Stock Authorized | 150,000,000 | 150,000,000 |
Common Stock Issued | 46,138,064 | 45,151,254 |
Common Stock Outstanding | 46,138,064 | 45,151,254 |
Condensed Consolidated Statemen
Condensed Consolidated Statements of Operations (Unaudited) and Comprehensive loss - USD ($) | 3 Months Ended | |
Mar. 31, 2016 | Mar. 31, 2015 | |
Income Statement [Abstract] | ||
NET REVENUE | $ 3,081,126 | $ 5,146,179 |
COST OF REVENUE | 2,468,870 | 4,220,587 |
GROSS PROFIT | 612,256 | 925,592 |
OPERATING EXPENSES | ||
Salaries and related expenses | 479,860 | 540,221 |
Selling, general and administrative expenses | 411,341 | 461,385 |
TOTAL OPERATING EXPENSES | 891,201 | 1,001,606 |
LOSS FROM OPERATIONS | (278,945) | (76,014) |
OTHER (EXPENSE) INCOME | ||
Interest expense | (152,028) | (97,882) |
Change in fair value in derivative liability | (840) | 46,788 |
Loss on extinguishment of debt | (122,472) | 0 |
TOTAL OTHER (EXPENSE) INCOME | (275,340) | (51,094) |
NET LOSS | (554,285) | (127,108) |
OTHER COMPREHENSIVE LOSS - foreign currency translation | (1,473) | 0 |
COMPREHENSIVE LOSS | $ (555,758) | $ (127,108) |
LOSS PER SHARE – BASIC | $ (0.01) | $ 0 |
LOSS PER SHARE – DILUTED | $ (0.01) | $ 0 |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC | 45,297,869 | 44,625,236 |
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - DILUTED | 45,297,869 | 44,625,236 |
Condensed Consolidated Stateme5
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) | 3 Months Ended | |
Mar. 31, 2016 | Mar. 31, 2015 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | ||
Net loss | $ (554,285) | $ (127,108) |
Adjustments to reconcile net loss to net cash used in operating activities: | ||
Depreciation and amortization | 31,781 | 62,413 |
Share based compensation | 3,737 | 46,750 |
Deferred rent | (49) | 28,540 |
Amortization of debt discount | 77,553 | 18,300 |
Amortization of finance cost | 20,087 | 22,799 |
Change in fair value of derivative liability | 840 | (46,788) |
Loss on extinguishment of debt | 122,472 | 0 |
Changes in operating assets and liabilities: | ||
Accounts receivables | 1,232,440 | (2,188,411) |
Unbilled receivables | (81,251) | (5,488) |
Prepaid expenses and other non-current assets | 93,862 | 92,303 |
Inventory | 52,225 | (65,652) |
Customer deposits | (25,999) | 39,952 |
Accounts payable and accrued expenses | (1,274,165) | 361,621 |
Accrued payroll and related expenses | (19,076) | 78,761 |
Deferred revenue | 31,975 | (81,344) |
NET CASH USED IN OPERATING ACTIVITIES | (287,853) | (1,763,352) |
CASH FLOWS FROM INVESTING ACTIVITIES: | ||
Purchase of fixed assets | (24,500) | 0 |
NET CASH USED IN INVESTING ACTIVITIES | (24,500) | 0 |
CASH FLOWS FROM FINANCING ACTIVITIES: | ||
Net change in the line of credit | 346,251 | 818,552 |
Principal payments on capital lease obligations | 0 | (23,085) |
Payments on other notes payable | (7,273) | (4,512) |
Borrowings on term notes | 0 | 650,000 |
Payments on term notes | (62,500) | (62,500) |
Deferred financing cost | 0 | (93,741) |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | 276,478 | 1,284,714 |
Effect of foreign currency translation | (11) | 0 |
NET CHANGE IN CASH | (35,886) | (478,638) |
CASH - Beginning of period | 580,400 | 1,112,881 |
CASH - End of period | 544,514 | 634,243 |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||
Cash paid for interest | 52,162 | 49,609 |
SUPPLEMENTAL DISCLOSURES OF NON-CASH INFORMATION | ||
Conversion of notes payable in exchange for common stock | 100,000 | 0 |
Discount on convertible debt | $ 23,572 | $ 63,336 |
1. DESCRIPTION OF THE BUSINESS
1. DESCRIPTION OF THE BUSINESS | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
DESCRIPTION OF THE BUSINESS | Brekford Corp. (BFDI), headquartered in Hanover, Maryland, is a leading public safety technology service provider of fully integrated traffic safety solutions, parking enforcement citation management, and 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 and Mexico. Brekfords combination of upfitting services, cutting edge technology, and automated traffic safety enforcement (ATSE) 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, formed in 2012 for the purpose of providing collection systems and services for unpaid citations and parking fines. 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. |
2. LIQUIDITY
2. LIQUIDITY | 3 Months Ended |
Mar. 31, 2016 | |
Liquidity | |
LIQUIDITY | For the three months ended March 31, 2016, the Company incurred a net loss of $554,285 and used $287,853 of cash for operations. Additionally, at March 31, 2016 the company had cash available of $544,514, a working capital surplus of 153,896 and availability under the established credit facility (see Note 4) of $731,948. Management believes that the Companys current level of cash combined with cash that it expects to generate in its operations during the next 12 months including anticipated new customer contracts and funds available from the credit facility and the note will be sufficient to sustain the Companys business initiatives through at least March 31, 2017, but there can be no assurance that these measures will be successful or adequate. In the event that the Companys cash reserves, cash flow from operations and funds available under the Credit Facility (see Note 4) are not sufficient to fund the Companys future operations, it may need to obtain additional capital. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. We currently have no firm commitments for any additional capital. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock. |
3. SUMMARY OF SIGNIFICANT ACCOU
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Principles of Consolidation and Basis of Presentation The Companys consolidated financial statements include the accounts of Brekford Corp. 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. generally accepted accounting principles (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 Companys 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 three months ended March 31, 2016 and 2015. 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 three months ended March 31, 2016 and 2015 amounted to $31,466 and $97,472, 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 Companys 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 Treasury Stock The Company accounts for treasury stock using the cost method. As of March 31, 2016, 10,600 shares of our 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 The Company files income tax returns with the U.S. Internal Revenue Service and with the revenue services of various states. The Companys 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. Loss per Share Basic 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 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 13 for the calculation of basic and diluted loss earnings 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 Companys 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. We account for our derivative financial instruments, consisting solely of certain stock purchase warrants that contain non-standard anti-dilutions provisions and/or cash settlement features, and certain conversion options embedded in our convertible instruments, at fair value using Level 3 inputs, which are discussed in Note 14 to these condensed consolidated financial statements. We determine the fair value of these derivative liabilities using the Black-Scholes option-pricing model when appropriate, and in certain circumstances using binomial lattice models or other accepted valuation practices. When determining the fair value of our financial assets and liabilities using the Black-Scholes option-pricing model, we are required to use various estimates and unobservable inputs, including, among other things, contractual terms of the instruments, expected volatility of our stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value. Foreign Currency Transactions The Company has certain revenue and expense transactions with a functional currency in Mexican pesos and the Company's reporting currency is the U.S. dollar. Assets and liabilities are translated from the functional currency to the reporting currency at the exchange rate in effect at the balance sheet date and equity at the historical exchange rates. Revenue and expenses are translated at rates in effect at the time of the transactions. Resulting translation gains and losses are accumulated in a separate component of stockholders' equity - other comprehensive income (loss). Realized foreign currency transaction gains and losses are credited or charged directly to operations. Segment Reporting FASB ASC Topic 280, Segment Reporting Recent Accounting Pronouncements In May 2014 the FASB issued ASU 2014-09, Revenue from contracts with Customers (Topic 606) (May 2014). The topic of Revenue Recognition had become broad with several other regulatory agencies issuing standards, which lacked cohesion. The new guidance established a comprehensive framework and reduces the number of requirements to which an entity must consider in recognizing revenue and yet provides improved disclosures to assist stakeholders reviewing financial statements. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Companys consolidated financial statements. The FASB has issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. ASU 2014-15 is intended to define managements responsibility to evaluate whether there is substantial doubt about an organizations ability to continue as a going concern and to provide related footnote disclosures. Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it established the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about managements responsibility to evaluate whether there is substantial doubt the organizations ability to continue as a going concern or to provide footnote disclosures. The ASU provides guidance to an organizations management, with principles and definition that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments in this update are effective for the annual period ending after December 31, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Companys consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of the Debt Issuance Cost. To simplify the presentation of the debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those years. Early adoption of the amendments in this ASU is permitted for financial statements that have not been previously issued. By adopting this standard, we will reclassify certain of our assets and liabilities but have not calculated the amounts of those recalculations at this time. In February 2016, FASB issued ASU-2016-02, "Leases (Topic 842)." The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. For finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments in Topic 842 are effective for the Company beginning January 1, 2019, including interim periods within that fiscal year. We are currently evaluating the impact of adopting the new guidance of the consolidated financial statements. In January 2016, the Financial Accounting Standards Board ("FASB"), issued Accounting Standards Update ("ASU") 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. generally accepted accounting principles on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and is to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this standard. In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The adoption of this standard will not have any impact on the Company's financial position, results of operations and disclosures. |
4. LINE OF CREDIT AND NOTES PAY
4. LINE OF CREDIT AND NOTES PAYABLE | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
LINE OF CREDIT AND NOTES PAYABLE | On May 27, 2014, Brekford Corp. closed (the Closing) on an aggregate $3,000,000 credit facility (the Credit Facility) with Rosenthal & Rosenthal, Inc. (Rosenthal) as lender consisting of $2,500,000 in revolving loans (the Revolving Facility) and a $500,000 non-revolving term 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 $2,500,000 or the Loan Availability (as defined in the Financing Agreement), which is tied to the amount of the Companys 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 Companys obligations under the Financing Agreement and related documents are secured by a continuing lien on and security interest in substantially all of the Companys assets. The Companys repayment obligations under the Revolving Facility are due on demand by Rosenthal or, at Rosenthals 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. At March 31, 2016, the Company had $1,768,052 in outstanding indebtedness under the Revolving Facility and $104,167 in outstanding indebtedness under the Term Loan, and the Company could have borrowed up to an additional $731,948 under the Revolving Facility. As of March 31, 2016, we were out of compliance with the financial covenants contained in the Credit Facility as a result of the loss recorded for the three months ended March 31, 2016. We reported this non-compliance to Rosenthal, and requested a waiver for the three months ended March 31, 2016. The Company financed certain vehicles and equipment under finance agreements. The agreements mature at various dates through December 2017. The agreements require various monthly payments of principal and interest until maturity. At March 31, 2016 and December 31, 2015, financed assets of $40,667 and $47,732, respectively, net of accumulated amortization of $101,248 and $98,184, respectively, were included in property and equipment on the balance sheets. The weighted average interest rate was 3.75% at March 31, 2016 and December 31, 2015. |
5. CONVERTIBLE NOTES PAYABLE -
5. CONVERTIBLE NOTES PAYABLE - STOCKHOLDERS | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
CONVERTIBLE NOTES PAYABLE - STOCKHOLDERS | Brekford financed the repurchase of shares of its common stock and warrants from the proceeds of convertible promissory notes that were issued by Brekford on November 9, 2009 in favor 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 Notes 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 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. On November 4, 2014, 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, 2015 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 November 9, 2015, the maturity dates of the Stockholder Notes were extended to the earlier of (i) November 9, 2016 or (ii) 10 business days from 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. Mr. Brechin and Mr. Rutherford have indicated that they will not exercise their right of repayment prior to March 31, 2017. The Company anticipates the maturity date of the Stockholder Notes will continue to be extended for the foreseeable future; thus, they are classified as long-term liabilities. As of March 31, 2016 and December 31, 2015, the amounts outstanding under the Stockholder Notes totaled $500,000. |
6. CONVERTIBLE PROMISSORY NOTES
6. CONVERTIBLE PROMISSORY NOTES PAYABLE - INVESTOR | 3 Months Ended |
Mar. 31, 2016 | |
Convertible Promissory Notes Payable - Investor | |
CONVERTIBLE PROMISSORY NOTES PAYABLE - INVESTOR | On March 17, 2015, the Company entered into a note and warrant purchase agreement (the Agreement) with an accredited investor (the Investor) pursuant to which the Investor purchased an aggregate principal amount of $715,000 of a 6% convertible promissory note issued by the Company for an aggregate purchase price of $650,000 (the Investor Note). The Investor Note bears interest at a rate of 6% per annum and the principal amount is due on March 17, 2017. Any interest that accrues under the Investor Note is payable either upon maturity or upon any principal being converted on any voluntary conversion date (as to that principal amount then being converted). The Investor Note is convertible at the option of the Investor at any time into shares of Common Stock at a conversion price equal to the lesser of (i) $0.25 per share and (ii) 70% of the average of the lowest three volume weighted average prices for the twelve (12) trading days prior to such conversion (the Conversion Price). In no event can the Conversion Price be less than $0.10; provided, however, that if on or after the date of the Agreement the Company sells any Common Stock or Common Stock Equivalents (as defined in the Agreement) at an effective price per share that is less than $0.10 per share, then the Conversion Price shall be equal to the par value of the Common Stock then in effect. In connection with the Agreement, the Investor received a warrant to purchase 780,000 shares of Common Stock (the Warrant). The Warrant is exercisable for a period of five years from the date of issuance at an exercise price of $0.50 per share, subject to adjustment (the Exercise Price). On October 23, 2015, the Investor converted $25,000 of principal and $904 of accrued interest due under the Investor Note into 169,530 shares of Common Stock and the Company recognized a loss on extinguishment of debt of $19,869. On December 2, 2015, the Investor converted $50,000 of principal and $2,129 of accrued interest due under the Investor Note into 349,155 shares of Common Stock and the Company recognized a loss on extinguishment of debt of $35,160. On February 26, 2016 the Investor converted $50,000 of principal and $2,844 of accrued interest due under the Investor Note into 476,500 shares of Common Stock and the Company recognized a loss on extinguishment of debt of $49,525. On March 31, 2016 the Investor converted $50,000 of principal and $3,123 of accrued interest due under the Investor Note into 510,310 shares of Common Stock and the Company recognized a loss on extinguishment of debt of $72,947. The following table provides information relating to the Investor Note at March 31, 2016: March 31, 2016 December 31, 2015 Convertible promissory note payable $ 540,000 $ 640,000 Original issuance discount, net of amortization of the $41,428 and $29,820 as of March 31, 2016 and December 31, 2015 (23,572 ) (35,180 ) Beneficial conversion feature, net of amortization of $355,596 and $255,960 as of March 31, 2016 and December 31, 2015 (202,325 ) (301,960 ) Warrant feature, net of amortization of the $58,687and $42,243 as of March 31, 2016 and December 31, 2015 (33,391 ) (49,835 ) Original issuance cost, net of amortization of $27,305 and $20,744 as of March 31, 2016 and December 31, 2015 (25,195 ) (31,756 ) Convertible promissory note payable, net $ 255,517 $ 221,269 We evaluated the financing transactions in accordance with ASC Topic 470, Debt with Conversion and Other Options, and determined that the conversion feature of the Investor Note was afforded the exemption for conventional convertible instruments due to its fixed conversion rate. The Investor Note has an explicit limit on the number of shares issuable so it did meet the conditions set forth in current accounting standards for equity classification. The debt was issued with non-detachable conversion options that are beneficial to the investors at inception, because the conversion option has an effective strike price that is less than the market price of the underlying stock at the commitment date. The accounting for the beneficial conversion feature requires that the beneficial conversion feature be recognized by allocating the intrinsic value of the conversion option to additional paid-in-capital, resulting in a discount on the convertible notes, which will be amortized and recognized as interest expense. Accordingly, a portion of the proceeds was allocated to the Warrant based on its relative fair value, which totaled $92,079 using the Black Scholes option-pricing model. Further, the Company attributed a beneficial conversion feature of $557,921 to the shares of Common Stock issuable under the Investor Note based upon the difference between the effective Conversion Price and the closing price of the Common Stock on the date on which the Investor Note was issued. The assumptions used in the Black-Scholes model are as follows: (i) dividend yield of 0%; (ii) expected volatility of 80.5%, (iii) weighted average risk-free interest rate of 1.56%, (iv) expected life of five years, and (v) estimated fair value of the Common Stock of $0.26 per share. The expected term of the Warrant represents the estimated period of time until exercise and is based on historical experience of similar awards giving consideration to the contractual terms. The Company recorded amortization of the beneficial conversion feature and warrant feature of the Investor Note in other expense in the amount of $99,636 and $16,444 during the three months ended March 31, 2016 and $255,960 and $42,243, during the year ended December 31, 2015 which also includes the unamortized beneficial conversion feature and warrant feature attributable to the $175,000 principal converted to equity. The Company recorded an original issue discount of $65,000 to be amortized over the term of the Agreement as interest expense. The Company recognized $11,608 and $29,820 of interest expense as a result of the amortization during the three months ended March 31, 2016 and the year ended December 31, 2015 respectively, which also includes the unamortized original issue discount attributable to the $175,000 principal converted to equity. |
7. WARRANT DERIVATIVE LIABILITY
7. WARRANT DERIVATIVE LIABILITY | 3 Months Ended |
Mar. 31, 2016 | |
Warrant Derivative Liability | |
WARRANT DERIVATIVE LIABILITY | On March 17, 2015, in conjunction with the issuance of the Investor Note (see Note 7), the Company issued the Warrant, which permits the Investor to purchase 840,000 shares of Common Stock, including 60,000 related to the financing costs, with an exercise price of $0.50 per share and a life of five years. The Exercise Price is subject to anti-dilution adjustments that allow for its reduction in the event the Company subsequently issues equity securities, including shares of Common Stock or any security convertible or exchangeable for shares of Common Stock, for no consideration or for consideration less than $0.50 a share. The Company accounted for the conversion option of the Warrant in accordance with ASC Topic 815. Accordingly, the conversion option is not considered to be solely indexed to the Companys own stock and, as such, is recorded as a liability. The derivative liability associated with the Warrant has been measured at fair value at March 17, 2015 and March 31, 2016 using the Black Scholes option-pricing model. The assumptions used in the Black-Scholes model are as follows: (i) dividend yield of 0%; (ii) expected volatility of 80.5% -109.84%; (iii) weighted average risk-free interest rate of 1.21% - 1.56% (iv) expected life of five years; and (v) estimated fair value of the Common Stock of $0.20-$0.26 per share. At March 31, 2016, the outstanding fair value of the derivative liability was $99,876. |
8. LEASES
8. LEASES | 3 Months Ended |
Mar. 31, 2016 | |
Leases [Abstract] | |
LEASES | Capital Leases At March 31, 2016 and December 31, 2015, no capital lease was included in property and equipment on the consolidated balance sheets. Operating Leases The Company rents office space under separate non-cancelable operating leases. Rent expense under our main headquarters lease, expiring on April 30, 2020 amounted to $42,810 and $40,865 for the three months ended March 31, 2016 and 2015, respectively. The Company also leases approximately 2,500 square feet of office space from a related party under a non-cancelable operating lease expiring on June 30, 2016. Rent expense under this lease amounted $12,300 for the three months ended March 31, 2016 and 2015, respectively. |
9. MAJOR CUSTOMERS AND VENDORS
9. MAJOR CUSTOMERS AND VENDORS | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
MAJOR CUSTOMERS AND VENDORS | Major Customers The Company has several contracts with government agencies, of which net revenue from one major customer during the three months ended March 31, 2016 represented 11% of the total net revenue for the period. Accounts receivable due from two customers at March 31, 2016 amounted to 24% of total accounts receivable. For the quarter ended March 31, 2015, the Company had several contracts with government agencies, of which net revenue from two major customers represented 57% of the total net revenue for the period. Accounts receivable due from two customers at March 31, 2015 amounted to 46% of total accounts receivable. Accounts receivable due from customers at December 31, 2015 amounted to 53% of total accounts receivable at that date. Major Vendors The Company purchased substantially all hardware products that it resold during the periods presented from two major distributors. Revenues from hardware products amounted to 31% and 47% of total revenues for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016 and 2015, accounts payable due to these distributors amounted to 39% and 58% of total accounts payable, respectively. Accounts payable due to these distributors at December 31, 2015, amounted to 72% of total accounts payable at that date. |
10. STOCKHOLDERS' EQUITY
10. STOCKHOLDERS' EQUITY | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
STOCKHOLDERS' EQUITY | Warrants The assumptions used to value warrant grants during the three months ended March 31, 2016, which consisted solely of the Warrant, were as follows: Three months ended March 31, 2016 Expected life (in years) 5.00 Volatility 80.5% Risk free interest rate 1.56% Expected Dividend Rate 0 Summary of the warrant activity for or three months ended March 31, 2016 is as follows: Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Outstanding at January 1, 2016 840,000 $ 0.50 3.96 $ 0.00 Granted 0.00 Forfeited or expired 0.00 Exercised Outstanding at March 31, 2016 840,000 0.50 3.96 0.00 Exercisable at March 31, 2016 840,000 0.50 3.96 0.00 The weighted average remaining contractual life of warrants outstanding as of March 31, 2016 was as follows: Weighted Average Stock Stock Remaining Exercisable Warrants Warrants Contractual Prices Outstanding Exercisable Life (years) $ 0.50 840,000 840,000 3.96 Total 840,000 840,000 3.96 |
11. SHARE-BASED COMPENSATION
11. SHARE-BASED COMPENSATION | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
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 Companys stockholders approved the 2008 Stock Incentive Plan (the 2008 Incentive Plan). Stock Options The Company recorded $3,737 and $1,870 in stock option compensation expense during in the period ending March 31, 2016 and 2015, respectively, related to the stock option grants. There were no options granted during the three months ended March 31, 2016. Summary of the option activity for three months ended March 31, 2016 is as follows: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Outstanding at January 1, 2016 400,000 $ 0.20 3.25 $ 0.00 Granted Forfeited or expired 0.00 Exercised Outstanding at March 31, 2016 400,000 0.20 3.0 0.00 Exercisable at March 31, 2016 125,000 0.00 Vested and expected to vest 275,000 0.20 3.0 0.00 The unrecognized compensation cost for unvested stock option awards outstanding at March 31, 2016 was approximately $31,134 to be recognized over approximately 3.0 years. Restricted Stock Grants There were no stock grants during the three months ended March 31, 2016. The Company recorded $0 in share-based compensation expense during the period ending March 31, 2016 related to restricted stock grants. For the three months ended March 31, 2015, the Company recorded $44,880 in share-based compensation expense related to restricted stock grants. |
12. INVENTORY
12. INVENTORY | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
INVENTORY | As of March 31, 2016 and December 31, 2015, inventory consisted of the following: March 31, 2016 December 31, 2015 Raw Materials $ 529,014 $ 573,769 Work in Process 25,232 32,702 Total Inventory $ 554,246 $ 606,471 |
13. NET LOSS PER SHARE
13. NET LOSS PER SHARE | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
NET LOSS PER SHARE | The following table provides information relating to the calculation of loss per common share. Three Months Ended March 31, 2016 2015 Basic loss per share : Net loss $ (554,285) $ (127,108) Weighted average common shares outstanding 45,297,869 44,625,236 Basic loss per share $ (0.01 ) $ (0.00) Diluted loss per share : Net loss $ (554,285) $ (127,108) Weighted average common shares outstanding 45,297,869 44,625,236 Potential dilutive securities Weighted average common shares outstanding diluted 45,297,869 44,625,236 Diluted loss per share $ (0.01) $ (0.00) Common stock equivalents excluded due to anti-dilutive effect 7,987,899 8,842,311 |
14. FAIR VALUE OF FINANCIAL INS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS | 3 Months Ended |
Mar. 31, 2016 | |
Fair Value Disclosures [Abstract] | |
FAIR VALUE OF FINANCIAL INSTRUMENTS | Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of March 31, 2016, the amounts reported for cash, accrued interest and other expenses, notes payables, and derivative liability approximate their fair values because of their short maturities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include: ● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; ● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and ● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at March 31, 2016: Total (Level 1) (Level 2) (Level 3) Liabilities Derivative liability 99,876 99,876 Total liabilities measured at fair value $ 99,876 $ $ $ 99,876 The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value: Beginning balance as of December 31, 2015 $ 99,036 Fair value of derivative liabilities issued Gain on change in derivative liability 840 Ending balance as of March 31, 2016 $ 99,876 |
3. SUMMARY OF SIGNIFICANT ACC20
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
Principles of Consolidation and Basis of Presentation | The Companys consolidated financial statements include the accounts of Brekford Corp. 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. generally accepted accounting principles (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 Receivables | 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 Companys 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 three months ended March 31, 2016 and 2015. 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 three months ended March 31, 2016 and 2015 amounted to $31,466 and $97,472, 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 Companys 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 |
Treasury Stock | The Company accounts for treasury stock using the cost method. As of March 31, 2016, 10,600 shares of our 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 The Company files income tax returns with the U.S. Internal Revenue Service and with the revenue services of various states. The Companys 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. |
Loss per Share | Basic 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 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 13 for the calculation of basic and diluted loss earnings 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 Companys 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. We account for our derivative financial instruments, consisting solely of certain stock purchase warrants that contain non-standard anti-dilutions provisions and/or cash settlement features, and certain conversion options embedded in our convertible instruments, at fair value using Level 3 inputs, which are discussed in Note 14 to these condensed consolidated financial statements. We determine the fair value of these derivative liabilities using the Black-Scholes option-pricing model when appropriate, and in certain circumstances using binomial lattice models or other accepted valuation practices. When determining the fair value of our financial assets and liabilities using the Black-Scholes option-pricing model, we are required to use various estimates and unobservable inputs, including, among other things, contractual terms of the instruments, expected volatility of our stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value. |
Foreign Currency Transactions | The Company has certain revenue and expense transactions with a functional currency in Mexican pesos and the Company's reporting currency is the U.S. dollar. Assets and liabilities are translated from the functional currency to the reporting currency at the exchange rate in effect at the balance sheet date and equity at the historical exchange rates. Revenue and expenses are translated at rates in effect at the time of the transactions. Resulting translation gains and losses are accumulated in a separate component of stockholders' equity - other comprehensive income (loss). Realized foreign currency transaction gains and losses are credited or charged directly to operations. |
Segment Reporting | FASB ASC Topic 280, Segment Reporting |
Recent Accounting Pronouncements | In May 2014 the FASB issued ASU 2014-09, Revenue from contracts with Customers (Topic 606) (May 2014). The topic of Revenue Recognition had become broad with several other regulatory agencies issuing standards, which lacked cohesion. The new guidance established a comprehensive framework and reduces the number of requirements to which an entity must consider in recognizing revenue and yet provides improved disclosures to assist stakeholders reviewing financial statements. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Companys consolidated financial statements. The FASB has issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. ASU 2014-15 is intended to define managements responsibility to evaluate whether there is substantial doubt about an organizations ability to continue as a going concern and to provide related footnote disclosures. Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it established the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about managements responsibility to evaluate whether there is substantial doubt the organizations ability to continue as a going concern or to provide footnote disclosures. The ASU provides guidance to an organizations management, with principles and definition that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments in this update are effective for the annual period ending after December 31, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Companys consolidated financial statements. In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of the Debt Issuance Cost. To simplify the presentation of the debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015 and interim periods within those years. Early adoption of the amendments in this ASU is permitted for financial statements that have not been previously issued. By adopting this standard, we will reclassify certain of our assets and liabilities but have not calculated the amounts of those recalculations at this time. In February 2016, FASB issued ASU-2016-02, "Leases (Topic 842)." The guidance requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its right to use the underlying asset for the lease term. For finance leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statement of comprehensive income; and repayments of the principal portion of the lease liability will be classified within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows. For operating leases: the right-of-use asset and a lease liability will be initially measured at the present value of the lease payments, in the statement of financial position; a single lease cost will be recognized, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis; and all cash payments will be classified within operating activities in the statement of cash flows. Under Topic 842 the accounting applied by a lessor is largely unchanged from that applied under previous GAAP. The amendments in Topic 842 are effective for the Company beginning January 1, 2019, including interim periods within that fiscal year. We are currently evaluating the impact of adopting the new guidance of the consolidated financial statements. In January 2016, the Financial Accounting Standards Board ("FASB"), issued Accounting Standards Update ("ASU") 2016-01, "Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which amends the guidance in U.S. generally accepted accounting principles on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and is to be adopted by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this standard. In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The adoption of this standard will not have any impact on the Company's financial position, results of operations and disclosures. |
6. CONVERTIBLE PROMISSORY NOT21
6. CONVERTIBLE PROMISSORY NOTES PAYABLE - INVESTOR (Tables) | 3 Months Ended |
Mar. 31, 2016 | |
Convertible Promissory Notes Payable - Investor Tables | |
Convertible promissory note | March 31, 2016 December 31, 2015 Convertible promissory note payable $ 540,000 $ 640,000 Original issuance discount, net of amortization of the $41,428 and $29,820 as of March 31, 2016 and December 31, 2015 (23,572 ) (35,180 ) Beneficial conversion feature, net of amortization of $355,596 and $255,960 as of March 31, 2016 and December 31, 2015 (202,325 ) (301,960 ) Warrant feature, net of amortization of the $58,687and $42,243 as of March 31, 2016 and December 31, 2015 (33,391 ) (49,835 ) Original issuance cost, net of amortization of $27,305 and $20,744 as of March 31, 2016 and December 31, 2015 (25,195 ) (31,756 ) Convertible promissory note payable, net $ 255,517 $ 221,269 |
10. STOCKHOLDERS' EQUITY (Table
10. STOCKHOLDERS' EQUITY (Tables) | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
Assumptions for warrent valuation | Three months ended March 31, 2016 Expected life (in years) 5.00 Volatility 80.5% Risk free interest rate 1.56% Expected Dividend Rate 0 |
Summary of warrant activity | Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Outstanding at January 1, 2016 840,000 $ 0.50 3.96 $ 0.00 Granted 0.00 Forfeited or expired 0.00 Exercised Outstanding at March 31, 2016 840,000 0.50 3.96 0.00 Exercisable at March 31, 2016 840,000 0.50 3.96 0.00 |
Weighted Average Remaining Contractual Life of Warrants | Weighted Average Stock Stock Remaining Exercisable Warrants Warrants Contractual Prices Outstanding Exercisable Life (years) $ 0.50 840,000 840,000 3.96 Total 840,000 840,000 3.96 |
11. SHARE-BASED COMPENSATION (T
11. SHARE-BASED COMPENSATION (Tables) | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
Summary of the option activity | Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value Outstanding at January 1, 2016 400,000 $ 0.20 3.25 $ 0.00 Granted Forfeited or expired 0.00 Exercised Outstanding at March 31, 2016 400,000 0.20 3.0 0.00 Exercisable at March 31, 2016 125,000 0.00 Vested and expected to vest 275,000 0.20 3.0 0.00 |
12. INVENTORY (Tables)
12. INVENTORY (Tables) | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
Schedule of Inventory | March 31, 2016 December 31, 2015 Raw Materials $ 529,014 $ 573,769 Work in Process 25,232 32,702 Total Inventory $ 554,246 $ 606,471 |
13. NET LOSS PER SHARE (Tables)
13. NET LOSS PER SHARE (Tables) | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
Calculation of loss per common share | Three Months Ended March 31, 2016 2015 Basic loss per share : Net loss $ (554,285) $ (127,108) Weighted average common shares outstanding 45,297,869 44,625,236 Basic loss per share $ (0.01 ) $ (0.00) Diluted loss per share : Net loss $ (554,285) $ (127,108) Weighted average common shares outstanding 45,297,869 44,625,236 Potential dilutive securities Weighted average common shares outstanding diluted 45,297,869 44,625,236 Diluted loss per share $ (0.01) $ (0.00) Common stock equivalents excluded due to anti-dilutive effect 7,987,899 8,842,311 |
14. FAIR VALUE OF FINANCIAL I26
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables) | 3 Months Ended |
Mar. 31, 2016 | |
Fair Value Disclosures [Abstract] | |
Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis | Total (Level 1) (Level 2) (Level 3) Liabilities Derivative liability 99,876 99,876 Total liabilities measured at fair value $ 99,876 $ $ $ 99,876 |
Reconciliation of the derivative liability | Beginning balance as of December 31, 2015 $ 99,036 Fair value of derivative liabilities issued Gain on change in derivative liability 840 Ending balance as of March 31, 2016 $ 99,876 |
2. LIQUIDITY (Details Narrative
2. LIQUIDITY (Details Narrative) - USD ($) | 3 Months Ended | ||
Mar. 31, 2016 | Mar. 31, 2015 | Dec. 31, 2015 | |
Liquidity | |||
Net loss | $ (554,285) | $ (127,108) | |
Working capital | 287,853 | ||
Cash available | 544,514 | $ 580,400 | |
Working capital surplus | 153,896 | ||
Line of credit facility | $ 731,948 |
3. SUMMARY OF SIGNIFICANT ACC28
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) | 3 Months Ended | ||
Mar. 31, 2016 | Mar. 31, 2015 | Dec. 31, 2015 | |
Revenue from extended warranties | $ 31,466 | $ 97,472 | |
Common stock were held in treasury amount | $ 5,890 | $ 5,890 | |
Treasury Stock [Member] | |||
Common stock were held in treasury, shares | 10,600 | ||
Common stock were held in treasury amount | $ 5,890 |
4. LINE OF CREDIT AND NOTES P29
4. LINE OF CREDIT AND NOTES PAYABLE (Details Narrative) - USD ($) | Mar. 31, 2016 | Dec. 31, 2015 |
Notes to Financial Statements | ||
Financed assets | $ 40,667 | $ 47,732 |
Accumulated amortization | $ 101,248 | $ 98,184 |
Weighted average interest rate | 3.75% | 3.75% |
5. CONVERTIBLE NOTES PAYABLE 30
5. CONVERTIBLE NOTES PAYABLE - STOCKHOLDERS (Details Narrative) - USD ($) | Mar. 31, 2016 | Dec. 31, 2015 |
Convertible Notes Payable - Stockholders Details Narrative | ||
Amounts outstanding under Promissory Notes, total | $ 500,000 | $ 500,000 |
6. CONVERTIBLE PROMISSORY NOT31
6. CONVERTIBLE PROMISSORY NOTES PAYABLE - INVESTOR (Details) - USD ($) | Mar. 31, 2016 | Dec. 31, 2015 |
Convertible Promissory Notes Payable - Investor Details | ||
Convertible promissory note payable | $ 540,000 | $ 640,000 |
Original issuance discount, net of amortization of the $41,428 and $29,820 as of March 31, 2016 and December 31, 2015 | (23,572) | (35,180) |
Beneficial conversion feature, net of amortization of $355,596 and $255,960 as of March 31, 2016 and December 31, 2015 | (202,325) | (301,960) |
Warrant feature, net of amortization of the $58,687and $42,243 as of March 31, 2016 and December 31, 2015 | (33,391) | (49,835) |
Original issuance cost, net of amortization of $27,305 and $20,744 as of March 31, 2016 and December 31, 2015 | (25,195) | (31,756) |
Convertible promissory note payable, net | $ 255,517 | $ 221,269 |
6. CONVERTIBLE PROMISSORY NOT32
6. CONVERTIBLE PROMISSORY NOTES PAYABLE - INVESTOR (Details Narrative) - USD ($) | 3 Months Ended | 12 Months Ended |
Mar. 31, 2016 | Dec. 31, 2015 | |
Convertible Promissory Notes Payable - Investor Details | ||
Interest expense | $ 11,608 | $ 29,820 |
Original issue discount | 65,000 | |
Amortization of the beneficial conversion feature | 99,636 | 255,960 |
Amortization of the beneficial warrant feature | $ 16,444 | $ 42,243 |
7. WARRANT DERIVATIVE LIABILI33
7. WARRANT DERIVATIVE LIABILITY (Details Narrative) - USD ($) | Mar. 31, 2016 | Dec. 31, 2015 |
Warrant Derivative Liability | ||
Derivative liability | $ 99,876 | $ 99,036 |
8. LEASES (Details Narrative)
8. LEASES (Details Narrative) - USD ($) | 3 Months Ended | |
Mar. 31, 2016 | Mar. 31, 2015 | |
Rent expense | $ 42,810 | $ 40,865 |
Leases [Member] | ||
Rent expense | $ 12,300 | $ 12,300 |
9. MAJOR CUSTOMERS AND VENDORS
9. MAJOR CUSTOMERS AND VENDORS (Details Narrative) | 3 Months Ended | 12 Months Ended | |
Mar. 31, 2016 | Mar. 31, 2015 | Dec. 31, 2015 | |
Major Customers [Member] | |||
Net sales | 11.00% | 57.00% | |
Accounts receivable | 24.00% | 46.00% | 53.00% |
Major Vendors [Member] | |||
Revenues from hardware products | 31.00% | 47.00% | |
Accounts payable due to distributor | 39.00% | 58.00% | 72.00% |
10. STOCKHOLDERS' EQUITY (Detai
10. STOCKHOLDERS' EQUITY (Details) | 3 Months Ended |
Mar. 31, 2016 | |
Notes to Financial Statements | |
Expected life (in years) | 5 years |
Volatility | 80.50% |
Risk free interest rate | 1.56% |
Expected Dividend Rate | 0.00% |
Disclosure - 10. STOCKHOLDERS'
Disclosure - 10. STOCKHOLDERS' EQUITY (Details 1) | 3 Months Ended |
Mar. 31, 2016$ / sharesshares | |
Number of Warrants | |
Outstanding beginning | shares | 840,000 |
Granted | shares | 0 |
Forfeited or expired | shares | 0 |
Exercised | shares | 0 |
Outstanding end | shares | 840,000 |
Exercisable end | shares | 840,000 |
Weighted Average Exercise Price | |
Outstanding beginning | $ .50 |
Granted | 0 |
Forfeited or expired | 0 |
Exercised | 0 |
Outstanding end | .50 |
Exercisable end | $ .50 |
Outstanding beginning | 3 years 11 months 16 days |
Outstanding end | 3 years 11 months 16 days |
Exercisable end | 3 years 11 months 16 days |
Aggregate Intrinsic Value | |
Outstanding beginning | $ 0 |
Granted | 0 |
Forfeited or expired | 0 |
Exercised | 0 |
Outstanding end | 0 |
Exercisable end | $ 0 |
Disclosure - 10. STOCKHOLDERS38
Disclosure - 10. STOCKHOLDERS' EQUITY (Details 2) | 3 Months Ended |
Mar. 31, 2016$ / sharesshares | |
Notes to Financial Statements | |
Exercisable Price | $ / shares | $ .50 |
Stock Options Outstanding | 840,000 |
Stock Options Exercisable | 840,000 |
Weighted Average Remaining Contractual Life | 3 years 11 months 16 days |
11. SHARE-BASED COMPENSATION (D
11. SHARE-BASED COMPENSATION (Details) | 3 Months Ended |
Mar. 31, 2016USD ($)$ / sharesshares | |
Number of Options | |
Outstanding beginning | shares | 400,000 |
Granted | shares | 0 |
Forfeited or expired | shares | 0 |
Exercised | shares | 0 |
Outstanding end | shares | 400,000 |
Exercisable end | shares | 125,000 |
Vested and expected to vest | shares | 275,000 |
Weighted Average Exercise Price | |
Outstanding beginning | $ / shares | $ .20 |
Granted | $ / shares | 0 |
Forfeited or expired | $ / shares | 0 |
Exercised | $ / shares | 0 |
Outstanding end | $ / shares | .20 |
Exercisable end | $ / shares | 0 |
Vested and expected to vest | $ / shares | $ .20 |
Outstanding beginning | 3 years 3 months |
Outstanding end | 3 years |
Vested and expected to vest | 3 years |
Aggregate Intrinsic Value | |
Outstanding beginning | $ | $ 0 |
Granted | $ | 0 |
Forfeited or expired | $ | 0 |
Exercised | $ | 0 |
Outstanding end | $ | 0 |
Exercisable end | $ | 0 |
Vested and expected to vest | $ | $ 0 |
11. SHARE-BASED COMPENSATION 40
11. SHARE-BASED COMPENSATION (Details 1) | 3 Months Ended |
Mar. 31, 2016$ / shares | |
Weighted Average Value | |
Forfeited or expired | $ 0 |
11. SHARE-BASED COMPENSATION 41
11. SHARE-BASED COMPENSATION (Details Narrative) - USD ($) | 3 Months Ended | |
Mar. 31, 2016 | Mar. 31, 2015 | |
Notes to Financial Statements | ||
Stock option compensation expense | $ 3,737 | $ 1,870 |
Unrecognized compensation cost for unvested stock option | $ 31,134 | |
Unrecognized compensation cost for unvested stock option period | 3 years |
12. INVENTORY (Details)
12. INVENTORY (Details) - USD ($) | Mar. 31, 2016 | Dec. 31, 2015 |
Notes to Financial Statements | ||
Raw Materials | $ 529,014 | $ 573,769 |
Work in Process | 25,232 | 32,702 |
Total Inventory | $ 554,246 | $ 606,471 |
13. LOSS PER SHARE (Details)
13. LOSS PER SHARE (Details) - USD ($) | 3 Months Ended | |
Mar. 31, 2016 | Mar. 31, 2015 | |
Basic net loss per share : | ||
Net loss | $ (554,285) | $ (127,108) |
Weighted average common shares outstanding | 45,297,869 | 44,625,236 |
Basic loss per share | $ (0.01) | $ 0 |
Diluted net loss per share : | ||
Net loss | $ (554,285) | $ (127,108) |
Weighted average common shares outstanding | 45,297,869 | 44,625,236 |
Potential dilutive securities | 0 | 0 |
Weighted average common shares outstanding - diluted | 45,297,869 | 44,625,236 |
Diluted earnings per share | $ (0.01) | $ 0 |
Common stock equivalents excluded due to anti-dilutive effect | 7,987,899 | 8,842,311 |
14. FAIR VALUE OF FINANCIAL I44
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) | Mar. 31, 2016USD ($) |
Liabilities | |
Derivative liability | $ 99,876 |
Total liabilities measured at fair value | 99,876 |
Level 1 | |
Liabilities | |
Derivative liability | 0 |
Total liabilities measured at fair value | 0 |
Level 2 | |
Liabilities | |
Derivative liability | 0 |
Total liabilities measured at fair value | 0 |
Level 3 | |
Liabilities | |
Derivative liability | 99,876 |
Total liabilities measured at fair value | $ 99,876 |
14. FAIR VALUE OF FINANCIAL I45
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Details 1) | 3 Months Ended |
Mar. 31, 2016USD ($) | |
Fair Value Disclosures [Abstract] | |
Beginning balance as of December 31, 2015 | $ 99,036 |
Fair value of derivative liabilities issued | 0 |
Gain on change in derivative liability | 840 |
Ending balance as of March 31, 2016 | $ 99,876 |