Brekford Traffic Safety, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Brekford Traffic Safety, Inc.	Financial_Report.xls
EX-32.1 - CERTIFICATION - Brekford Traffic Safety, Inc.	bfdi_ex321.htm
EX-31.1 - CERTIFICATION - Brekford Traffic Safety, Inc.	bfdi_ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to _____________

Commission File Number: 000-52719

———————

Brekford Corp.

(Exact name of registrant as specified in its charter)

———————

Delaware		20-4086662
(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)

7020 Dorsey Road, Hanover, Maryland 21076

(Address of Principal Executive Office) (Zip Code)

(443) 557-0200

(Registrant’s telephone number, including area code)

N/A

(Former name, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. The issuer had 44,500,569 shares of Common Stock, par value $0.0001 per share (“Common Stock”) issued and outstanding as of October 24, 2014.

Brekford Corp.

Form 10-Q

Index

PART I – FINANCIAL INFORMATION		Page

Item 1	Financial Statements (unaudited)	1

	Condensed Consolidated Balance Sheets at September 30, 2014 and December 31, 2013	1

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013	2

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	3

	Notes to Unaudited Condensed Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 4.	Controls and Procedures	17

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 6.	Exhibits	19

SIGNATURES		20

EXHIBIT INDEX		21

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Brekford Corp.

Condensed Consolidated Balance Sheets (Unaudited)

	September 30, 2014			December 31, 2013

ASSETS
CURRENT ASSETS
Cash, unrestricted	$	525,776		$	2,052,306
Restricted cash		1,034,042			—
Accounts receivable, net of allowance $0 at September 30, 2014 and December 31, 2013, respectively		2,538,527			1,390,300
Unbilled receivables		226,598			125,831
Prepaid expenses		139,480			47,148
Inventory		768,135			1,264,099
Total current assets		5,232,558			4,879,684
Property and equipment, net		364,792			1,593,202
Other non-current assets		116,507			187,132
TOTAL ASSETS	$	5,713,857		$	6,660,018
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	2,336,037		$	1,731,706
Accrued payroll and related expenses		64,398			104,100
Line of credit		1,747,387			1,470,533
Term loan – current portion		250,000			—
Other liabilities		48,960			49,922
Deferred revenue		359,430			677,622
Customer deposits		47,737			27,640
Obligations under capital lease – current portion		140,209			616,115
Obligations under other notes payable – current portion		39,432			32,763
Deferred rent – current portion		9,895			48,632
Total current liabilities		5,043,485			4,759,033

LONG - TERM LIABILITIES
Convertible notes payable – stockholders		500,000			500,000
Obligations under capital lease, net of current portion		—			197,832
Other notes payable, net of current portion		45,855			78,514
Deferred rent, net of current portion		—			9,895
Term notes payable, net of current portion		229,167			—
Total long-term liabilities		775,022			786,241
TOTAL LIABILITIES		5,818,507			5,545,274

STOCKHOLDERS’ (DEFICIT) EQUITY
Preferred stock, par value $0.0001 per share; 20,000,000 shares authorized; none issued and outstanding		—			—
Common stock, par value $0.0001 per share; 150,000,000 shares authorized; 44,500,569 issued and outstanding, at September 30, 2014 and 44,450,569 issued and outstanding December 31, 2013		4,451			4,445
Additional paid-in capital		10,202,609			10,184,751
Treasury Stock, at cost 10,600 shares at September 30, 2014 and December 31, 2013		(5,890	)		(5,890	)
Accumulated deficit		(10,305,820	)		(9,068,562	)
TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY		(104,650	)		1,114,744
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY	$	5,713,857		$	6,660,018

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Brekford Corp.

Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013

NET REVENUE	$	5,314,554		$	3,697,372		$	13,869,147		$	11,759,809

COST OF REVENUE		4,148,130			3,018,873			11,454,502			9,152,810

GROSS PROFIT		1,166,424			678,499			2,414,645			2,606,999

OPERATING EXPENSES
Salaries and related expenses		485,530			513,474			1,419,126			1,418,759
Selling, general and administrative expenses		473,392			683,899			2,114,605			2,022,214

TOTAL OPERATING EXPENSES		958,922			1,197,373			3,533,731			3,440,973

(LOSS) INCOME FROM OPERATIONS		207,502			(518,874	)		(1,119,086	)		(833,974	)

OTHER (EXPENSE) INCOME
Interest expense		(46,465	)		(49,618			(118,172	)		(135,160	)
Interest income		—			—			—			174
TOTAL OTHER INCOME (EXPENSE)		(46,465	)		(49,618	)		(118,172	)		(134,986	)

NET (LOSS) INCOME	$	161,037		$	(568,492	)	$	(1,237,258	)	$	(968,960	)


(LOSS) EARNINGS PER SHARE – BASIC AND DILUTED	$	0.00		$	(0.01	)	$	(0.03	)	$	(0.02	)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC		44,500,569			44,273,569			44,999,287			44,268,166
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED		48,071,998			44,273,569			44,999,287			44,268,166

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Brekford Corp.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(1,237,258	)	$	(968,960	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		686,963			963,462
Share based compensation		17,863			17,750
Deferred rent		(48,632	)		(47,312	)
Bad debt expense		49,163			232,315
Loss on disposal of property and equipment		319,739			—
Changes In operating assets and liabilities:
Accounts receivables		(1,197,389	)		498,799
Unbilled Receivables		(100,767	)		31,692
Prepaid expenses and other non-current assets		(21,707	)		(61,729	)
Inventory		495,964			16,740
Customer deposits		20,097			(33,317	)
Accounts payable and accrued expenses		856,331			(1,873,103	)
Accrued payroll and related expenses		(39,702	)		5,293
Other payables		(962	)		(154	)
Deferred revenue		(318,192	)		260,757
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(518,489	)		(957,767	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted Cash		(1,034,042	)		—
Purchases of property and equipment		(30,293	)		(304,792	)
NET CASH USED IN INVESTING ACTIVITIES		(1,064,335	)		(304,792	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit		776,854			2,500,000
Payments on notes payable		(46,822	)		(28,386	)
Principal payments on capital lease obligations		(673,738	)		(456,606	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		56,294			2,015,008

NET CHANGE IN CASH		(1,526,530	)		752,449

CASH – Beginning of period		2,052,306			1,415,252

CASH – End of period		525,776		$	2,167,701

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	118,172		$	137,627
Cash paid for income taxes	$	962		$	154
Purchase of property and equipment	$	30,293		$	380,202
Cash paid		(30,293	)		(304,792	)
Amount financed	$	—		$	75,410
Liabilities settled in exchange for equipment	$	260,000		$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Brekford Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 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”) for interim financial information and with the instructions of Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for annual financial statements. 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. 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 nine months ended September 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 nine months ended September 30, 2014 and 2013 amounted to $339,712 and $263,757, 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 September 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.

(Loss) Earnings per Share

Basic (loss) earnings per share is calculated by dividing net (loss) income 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) earnings per share is calculated by dividing net (loss) income 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 (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 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.

Restricted Cash

Restricted cash represents temporarily restricted deposits held as compensating balances against outstanding balances due under our Credit Facility (as defined in Note 3) from Rosenthal. As of September 30, 2014, the Company had restricted cash of approximately $1,034,042.

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.

Recent Accounting Pronouncements

In May 2014, the FASB amended the ASC and created Topic 606, Revenue from Contracts with Customers , to clarify the principles for recognizing revenue. This guidance will be effective for the Company beginning January 1, 2017 and must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. 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. 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 September 30, 2014, we were out of compliance with one of the financial covenants contained in the Credit Facility as a result of the loss recorded for the first nine months of 2014. We reported this non-compliance to Rosenthal, and Rosenthal granted a waiver of the covenant for the quarters ended June 30, 2014 and September 30, 2014.

The Company financed certain vehicles and equipment under finance agreements. The agreements mature in March 2017 and May 2017. The agreements require various monthly payments of principal and interest until maturity. At September 30, 2014 and 2013, financed assets of $83,053 and $127,088, respectively, net of accumulated amortization of $58,863 and $41,876, respectively, were included in property and equipment on the balance sheets. The weighted average interest rate was 3.70% at September 30, 2014 and 3.75% at September 30, 2013.

NOTE 4 – 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 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

At September 30, 2014 and December 31, 2013, the amounts outstanding under the Promissory Notes totaled $500,000.

NOTE 5 – LEASES

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 part of the liability setttlement to the vendor, certain leased obsolete ATSE equipment was disposed and upgraded with the Brekford’s latest integrated technology. At September 30, 2014 and 2013, capital lease assets of $0 and $1,112,741, respectively, net of accumulated amortization of $0 and $1,121,259, respectively, were included in property and equipment on the balance sheets. Our weighted average interest rate was 5.84% and 5.28% at September 30, 2014 and September 30, 2013, respectively.

Operating Leases

The Company records rent expense under a non-cancelable operating leases expiring January 2015. Rent expense under this lease amounted to $110,920 and $138,410 for the nine-month periods ended September 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 these leases amounted to $35,100 and $37,570 for the nine-month periods ended September 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 two major customers during the nine months ended September 30, 2014 represented 21% of the total net revenue for the period. Accounts receivable due from two customers at September 30, 2014 amounted to 65% of total accounts receivable.

For the period ended September 30, 2013, the Company had several contracts with government agencies, of which net revenue from two major customers represented 34% of the total net revenue for the period. Accounts receivable due from two customers at September 30, 2013 amounted to 60% 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 one major distributor. Revenues from hardware products amounted to 54% and 49% of total revenues for the nine-month periods ended September 30, 2014 and 2013, respectively. At September 30, 2014 and 2013, accounts payable due to this distributor amounted to 34% and 56% 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 third quarter of 2014. The stock repusrchase program expired on September 28, 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 nine months ended September 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 $1,870 and $4,364 in stock option compensation expense during the three and nine-month period ended September 30, 2014 respectively related to the stock option grants.

Summary of the option activity for nine months ended September 30, 2014 is as follows:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2014		—	$	0.00		—	$	0.00
Granted		225,000		0.20		—		0.00
Forfeited or expired		—		—		—		0.00
Exercised		—		—		—
Outstanding at September 30, 2014		225,000		0.20		4.4		0.00
Exercisable at September 30, 2014		—				—		0.00
Vested and expected to vest		225,000		0.20		4.4		0.00

The unrecognized compensation cost for unvested stock option awards outstanding at September 30, 2014 was approximately $18,075 to be recognized over approximately 2.39 years.

Restricted Stock Grants

During the nine months ended September 30, 2014, the Company granted an aggregate of 50,000 shares of restricted stock to the directors as part of our director compensation program 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 nine-month period ended September 30, 2014 related to restricted stock grants. For the nine months ended September 30, 2013, the Company recorded $17,750 in share-based compensation expense related to restricted stock grants.

	Restricted Stock Shares			Weighted Average Value

Nonvested restricted stock at January 1, 2014		—		$	—
Granted		50,000			0.27
Vested		(50,000	)		0.27
Forfeited or expired		—			—
Nonvested restricted stock at September 30, 2014		—		$	—

NOTE 9 – INVENTORY

As of September 30, 2014 and December 31, 2013, inventory consisted of the following:

	September 30, 2014		December 31, 2013
Raw Materials	$	768,135	$	1,250,141
Work in Process		—		13,958
Total Inventory	$	768,135	$	1,264,099

NOTE 10 – (LOSS) EARNINGS PER SHARE

The following table sets forth the calculation of basic and diluted net loss per common share for the three- and nine-month periods ended September 30, 2014 and 2013.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014			2013

Basic (loss) earnings per share :
Net (loss) income	$	161,037	$	(568,492	)	$	(1,237,258	)	$	(968,960	)
Weighted average common shares outstanding		44,500,569		44,273,569			44,499,287			44,268,166
Basic (loss) earnings per share	$	0.00	$	(0.01	)	$	(0.03	)	$	(0.02	)

Diluted (loss) earnings per share :
Net (loss) income	$	161,037	$	(568,492	)	$	(1,237,258	)	$	(968,960	)
Weighted average common shares outstanding		44,500,569		44,273,569			44,499,287			44,268,166
Potential dilutive securities		3,571,429		—			—			—
Weighted average common shares outstanding – diluted		48,071,998		44,273,569			44,499,287			44,268,166
Diluted (loss) earnings per share	$	0.00	$	(0.01	)	$	(0.03	)	$	(0.02	)
Common Stock Equivalents excluded due to antidilutive effect		225,000		2,717,184			3,796,429			2,837,501

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 nine-month periods ended September 30, 2014 and 2013 and the financial condition of Brekford Corp. at September 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

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 Nine-Month Periods Ended September 30, 2014 and 2013

The following tables summarize and compare selected items from the statements of operations for the nine–month periods ended September 30, 2014 and 2013.

	Nine Months Ended September 30,						(Decrease) / Increase
	2014			2013			$			%
Net Revenues	$	13,869,147		$	11,759,809		$	2,109,338			17.94	%

Cost of Revenues		11,454,502			9,152,810			2,301,692			25.15	%

Gross Profit	$	2,414,645		$	2,606,999		$	(192,354	)		(7.38	)%

Gross Profit Percentage of Revenue		17.41	%		22.17	%

Revenues

Revenues for the nine months ended September 30, 2014 amounted to $13,869,147 as compared to revenues of $11,759,809 for the nine months ended September 30, 2013, representing an increase of $2,109,338 or 17.94%. The increase in revenues for the nine months ended September 30, 2014 when compared to the same period of last year was primarily due to increased sales of Rugged IT products as well as professional upfitting services for our Vehicle Services product line. ATSE sales experienced a modest decrease year over year as existing programs continue to mature, resulting in improved driver behavior and lower violation rates within communities served. The Company continues to focus on generating efficient and stable growth in our Vehicle Services offerings, while building a pipeline of future recurring revenue streams for ATSE. We anticipate increasing contributions from our ATSE product line as new clients and contracts are added.

Cost of Revenues

Cost of revenues for the nine months ended September 30, 2014 amounted to $11,454,502 as compared to $9,152,810 for the nine months ended September 30, 2013, an increase of $2,301,692 or 25.15%. The increase was primarily due to additional purchases of Rugged IT products corresponding to increased sales, offset by decreased direct labor costs for Vehicle Services installation. Cost of revenues for Vehicle Services increased at a slightly lower rate than the revenue percentage increase, while ATSE cost of revenues decreased at a rate slightly higher than the corresponding revenue rate decrease. These improvements were due mainly to increased operational efficiencies and professional services sales for Vehicle Services and improved conversion and collection rates for ATSE.

Gross Profit

Gross profit for the nine months ended September 30, 2014 amounted to $2,414,645 as compared to $2,606,999 for the nine months ended September 30, 2013, a decrease of $192,354 or 7.38%. Gross margin percentage for the nine months ended September 30, 2014 was 17.41% as compared to 22.17% for the nine months ended September 30, 2013. Although gross margin percentages for both Vehicle Services and ATSE increased year over year, the overall gross margin decrease is attributable to a higher proportion of the gross margin being generated by Vehicle Services. The Company continues to work on limiting costs for all product lines; however, within a given period overall gross margin percentages will be dependent upon the sales mix contributions.

Expenses

	Nine Months Ended September 30,				Increase / (Decrease)
	2014		2013		$		%
OPERATING EXPENSES
Salaries and related expenses	$	1,419,126	$	1,418,759	$	367		0.03%	%
Selling, general and administrative expenses		2,114,605		2,022,214		92,391		4.57%	%
Total operating expenses	$	3,533,731	$	3,440,973	$	92,758		2.70%	%

Salaries and Related Expenses

Salaries and related expenses for the nine months ended September 30, 2014 amounted to $1,419,126 as compared to $1,418,759 for the nine months ended September 30, 2013, an increase of $367 or 0.03%. The Company made a conscious decision to maintain complement levels and adjust tactical focus for the purposes of rebuilding our ATSE sales pipeline in the first two quarters of 2014, with a slight decrease in complement in the third quarter of 2014. We will continue to monitor organizational requirements on a quarterly basis to ensure that investments in personnel ultimately correspond with future sales growth.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended September 30, 2014 amounted to $2,114,605 as compared to $2,022,214 for the nine months ended September 30, 2013, an increase of $92,391 or 4.57%. The slight increase was primarily driven by additional corporate, professional, and consulting expenses.

Net (Loss) Income

The Company recorded a net loss of $1,237,258 for the nine months ended September 30, 2014 compared to a net loss of $968,960 for the nine months ended September 30, 2013, an increase of $268,298 or 27.69%. The increase was primarily due to lower gross profit margins based on the sales mix contributions of Vehicle Services and ATSE as referenced above. Despite the increased loss year over year, growth in Vehicle Services and a renewed focus on the ATSE pipeline should enable the Company to mitigate losses moving forward.

Results of Operations for the Three-Month Periods Ended September 30, 2014 and 2013

The following tables summarize and compare selected items from the statement of operations for the three-month periods ended September 30, 2014 and 2013.

	Three Months Ended September 30,					(Decrease) / Increase
	2014			2013		$		%
Net Revenues	$	5,314,554		$	3,697,372	$	1,617,182		43.74	%

Cost of Revenues		4,148,130			3,018,873		1,129,257		37.41	%

Gross Profit	$	1,166,424		$	678,499	$	487,925		71.91	%

Gross Profit Percentage of Revenue		21.95	%		18.35

Revenues

Revenues for the three months ended September 30, 2014 amounted to $5,314,554 as compared to revenues of $3,697,372 for the three months ended September 30, 2013, representing an increase of $1,617,182 or 43.74%. The increase in revenues for the three months ended September 30, 2014 when compared to the same period of last year was primarily due to increased sales for rugged IT products, electronic ticketing, and professional upfitting services for our Vehicle Services product line. ATSE sales experienced a modest decrease year over year as existing programs continue to mature, resulting in improved driver behavior and lower violation rates within communities served. The Company continues to focus on generating efficient and stable growth in our Vehicle Services offerings, while building a pipeline of future recurring revenue streams for ATSE. We anticipate increasing contributions from our ATSE product line as new clients and contracts are added.

Cost of Revenues

Cost of revenues for the three months ended September 30, 2014 amounted to $4,148,130 as compared to $3,018,873 for the three months ended September 30, 2013, an increase of $1,129,257 or 37.41%. The increase was primarily due to additional purchases of Rugged IT products corresponding to increased sales, offset by decreased direct labor costs for Vehicle Services installation. Cost of revenues for Vehicle Services increased at a slightly lower rate than the revenue percentage increase, while ATSE cost of revenues decreased at a rate significantly higher than the corresponding revenue rate decrease. These improvements were due mainly to increased operational efficiencies and professional services sales for Vehicle Services and improved conversion and collection rates for ATSE.

Gross Profit

Gross profit for the three months ended September 30, 2014 amounted to $1,166,424 as compared to $678,499 for the three months ended September 30, 2013, an increase of $487,925 or 71.91%. Gross margin percentage for the three months ended September 30, 2014 was 21.95% as compared to 18.35% for the three months ended September 30, 2013. Gross margin percentages for both Vehicle Services and ATSE increased year over year, with Vehicle Services driving a higher percentage of the sales mix contribution, resulting in the overall increase. The Company continues to work on limiting costs for all product lines; however, within a given period overall gross margin percentages will be dependent upon the sales mix contributions.

Expenses

	Three Months Ended September 30,				Increase / (Decrease)
	2014		2013		$			%
OPERATING EXPENSES
Salaries and related expenses	$	485,530	$	513,474	$	(27,944	)		(5.44	)%
Selling, general and administrative expenses		473,392		683,899		(210,507	)		(30.78	)%
Total operating expenses	$	958,922	$	1,197,373	$	(238,451	)		(19.91	)%

Salaries and Related Expenses

Salaries and related expenses for the three months ended September 30, 2014 amounted to $485,530 as compared to $513,474 for the three months ended September 30, 2013, a decrease of $27,944 or 5.44%. The decrease was primarily due to a slight reduction in complement in conjunction with certain cost mitigation initiatives. The Company will continue to monitor organizational requirements on a quarterly basis to ensure that investments in personnel ultimately correspond with future sales growth.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2014 amounted to $473,392 as compared to $683,899 for the three months ended September 30, 2013, a decrease of $210,507 or 30.78%, primarily due to decreases in depreciation, and bad debt expenses. Lower depreciation expense was the result of the disposal of certain obsolete ATSE equipment as reported in the second quarter of 2014. Lower bad debt expense was the result of recognizing ATSE revenue when collection efforts have been completed and the respective client has been billed.

Net (Loss) Income

The Company recorded net income of $161,037 for the three months ended September 30, 2014 compared to a net loss of $568,492 for the three months ended September 30, 2013, an increase of $729,529 or 128.33%, primarily due to increased sales and higher gross profit margins coupled with lower operating expenses. The positive turnaround for the three months ended September 30, 2014 is a result of continued efforts to increase Vehicle Services sales and margins and improve conversion and collection rates for existing ATSE clients, while restricting unnecessary operating costs. The Company continues to focus on building the ATSE pipeline as well with a goal to begin converting prospects to contracted clients in the future.

Financial Condition, Liquidity and Capital Resources

At September 30, 2014, we had total current assets of $5.2 million and total current liabilities of $5.0 million resulting in working capital of $0.2 million. Inventory totaled $0.8 million at September 30, 2014 and primarily consisted of raw materials related to future product sales. The Company’s accumulated deficit increased to $10,305,820 at September 30, 2014 compared to $9,068,562 at December 31, 2013, as result of the net loss recorded for the first nine months of 2014. Cash used in operating activities for the nine months ended September 30, 2014 was $518,489.

At September 30, 2014, we had approximately $0.5 million unrestricted 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 facility with Rosenthal & Rosenthal will be sufficient to sustain the Company’s business initiatives through at least September 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. At September 30, 2014, the Company had $1.7 million in outstanding indebtedness under its line of credit and the term loan with Rosenthal & Rosenthal. As of September 30, 2014, we were out of compliance with one of the financial covenants contained in our credit facility from Rosenthal & Rosenthal as a result of the loss recorded for the first nine months of 2014. We reported this non-compliance to Rosenthal and Rosenthal granted a waiver of the covenant for the quarters ended June 30, 2014 and September 30.

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 September 30, 2014. On November 4, 2014 their maturity dates were extended to the earlier of (i) November 9, 2015 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

Our cash flows from operating activities are significantly affected by our cash to support the growth of our business in areas such as selling, general and administrative. Our operating cash flows are also affected by our working capital needs to support growth and fluctuations in inventory, personnel related expenditures, accounts payable and other current assets and liabilities

Changes in cash flow used in operating activities resulted primarily from our net loss of $1.24 million during the nine-month period ended September 30, 2014.

Cash Flows used in Investing Activities

There were capital expenditures of $30,293 in the third quarter of 2014 as compared to $304,792 for the same period in 2013. Capital expenditure during the 2013 period were primarily related to infrastructure to support our growth and to improve efficiencies.

Cash Flows provided by Financing Activities Changes in cash flows provided by financing activities resulted primarily from borrowings on our line of credit offset by principal payments under our capital equipment leases for the period ended September 30, 2014 as compared to the same 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 nine months ended September 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 September 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 September 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 September 30, 2014, the Company engaged in an interview process to identify an outside consultant to provide assistance with the remediation of this weakness. The Company intends to select a consultant and define a specific engagement prior to December 31, 2014 given the availability of adequate funding.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2014, other than the search for the consultant as 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

ITEM 1. LEGAL PROCEEDINGS

The Company was not a party to pending legal proceedings during the period ended September 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 September 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 September 30, 2014.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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.


Date: November 5, 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
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).
101.INS		XBRL Instance Document (filed herewith).
101.SCH		XBRL Taxonomy Extension Schema (filed herewith).
101.CAL		XBRL Taxonomy Extension Calculation Linkbase (filed herewith).
101.DEF		XBRL Taxonomy Extension Definition Linkbase (filed herewith).
101.LAB		XBRL Taxonomy Extension Label Linkbase (filed herewith).
101.PRE		XBRL Taxonomy Extension Presentation Linkbase (filed herewith).

Brekford Traffic Safety, Inc. - FORM 10-Q - November 7, 2014

Attached files

Brekford Traffic Safety, Inc. Reports