Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31,
2016
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Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from: _____to _____
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BREKFORD CORP.
(Exact name of registrant as specified in its charter)
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Delaware
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000-52719
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20-4086662
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(State or Other Jurisdiction
of Incorporation or Organization)
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Commission
File Number
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(I.R.S. Employer
Identification No.)
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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 or former address, if changed since last
report)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $0.0001
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
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 ☐
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 ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act (Check one):
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the
Act). Yes ☐ No ☑
The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, as of June 30,
2016, was approximately $2,507,425. For purposes of the above
statement only, all directors, executive officers and 10%
shareholders are assumed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for
any other purpose.
The number of shares of the registrant’s Common Stock
outstanding as of March 15, 2017 was 49,311,264.
BREKFORD CORP.
INDEX
PART I
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FORWARD-LOOKING STATEMENTS
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1
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ITEM 1.
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BUSINESS
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1
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ITEM 2.
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PROPERTIES
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8
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ITEM 3.
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LEGAL PROCEEDINGS
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8
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ITEM 4.
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MINE SAFETY DISCLOSURES
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8
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PART II
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9
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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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9
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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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11
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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17
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ITEM 9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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44
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ITEM 9A
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CONTROLS AND PROCEDURES
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44
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ITEM 9B.
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OTHER INFORMATION
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46
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PART III
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46
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ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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46
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ITEM 11.
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EXECUTIVE COMPENSATION
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48
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ITEM 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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51
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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52
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ITEM 14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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52
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PART IV
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53
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ITEM 15.
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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53
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SIGNATURES
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54
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”)
may contain forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995 that involve
substantial risk and uncertainties. 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.
ITEM 1. BUSINESS
Our History
The Company (formerly California Cyber Design, Inc.
(“CCDI”)) was incorporated in Delaware on May 27,
1998 and changed its name to American Financial Holdings, Inc.
(“AFHI”) on August 11, 2004. AFHI, a
publicly-traded corporation with no operations, announced the
completion of its share exchange transaction with Pelican Mobile
Computers, Inc., a Maryland corporation (“Pelican
Mobile”), on January 6, 2006. Pelican Mobile exchanged
each issued and outstanding share of Pelican Mobile Computers
(1,000 shares issued and outstanding at the time of the share
exchange) for 25,000 shares of AFHI on a post-split basis (the
“Share Exchange”) with an aggregate of 25,000,000
shares of common stock of AFHI issued to the former stockholders
of Pelican Mobile. At the time of the Share
Exchange, the existing stockholders of AFHI retained 5,512,103
shares of AFHI’s outstanding common stock after the
cancellation of approximately 2,549,000 shares of
common stock. As a result, the former stockholders of Pelican
Mobile became the majority stockholders of AFHI. Under the terms of
the Share Exchange, the Company changed its name to Tactical
Solution Partners, Inc. On April 25, 2008, the Company’s
stockholders approved a proposal to change its name from Tactical
Solution Partners, Inc. to Brekford International Corp. to better
reflect our business strategy. Subsequently, on July 9, 2010, the
Company’s stockholders approved a proposal to change our name
from Brekford International Corp. to Brekford Corp. On October 27,
2010, the Company’s Board of Directors approved the merger of
Pelican Mobile with Brekford Corp. pursuant to Section 253 of the
General Corporation Law of the State of Delaware, with Brekford
Corp. as the surviving corporation. The merger became effective
upon the filing of a Certificate of Ownership and Merger with the
State of Delaware (and the appropriate Articles of Merger with the
State of Maryland), pursuant to the terms of an Agreement and Plan
of Merger. The merger documents were filed with the States of
Delaware and Maryland on October 28, 2010. Effective upon the
completion of the merger, the Company’s corporate name of the
Company remained as Brekford Corp. The operations of Pelican Mobile
were continued by the Company without interruption following the
merger.
1
On February 7, 2017, the Company entered into a Contribution and
Unit Purchase Agreement (the “Agreement”) with LB&B
Associates Inc. (the “Purchaser”) and Global Public
Safety, LLC (“GPS”). The closing for the transaction
set forth in the Agreement occurred on February 28, 2017 (the
“Closing”) and on such date the Company contributed
substantially all of the assets and certain liabilities related to
its vehicle services business (the “Business”) to GPS.
On the Closing, GPS sold units representing 80.1% of the units of
GPS to the Purchaser, and Brekford continues to own 19.9% of the
units of GPS. After the Closing, Brekford will continue to own and
run other business operations that are not related to the
Business. For additional detail regarding this transaction,
refer to Note 18 (Notes to Consolidated Financial Statements)
elsewhere in this Annual Report.
On February 10, 2017, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) to combine
the businesses of Brekford and KeyStone Solutions, Inc., a Delaware
corporation (“KeyStone”). Upon closing of the merger,
Brekford will become a wholly-owned subsidiary of Novume Solutions,
Inc., a Delaware corporation (“Novume”). For
additional detail regarding this transaction, refer to the Sale of
Assets and Investment in Global Public Safety section
and Note 18 (Notes to Consolidated Financial
Statements) elsewhere in this Annual Report.
Overview
The Company, headquartered in Hanover, Maryland, is a leading
public safety technology service provider of fully integrated
automated traffic safety enforcement (“ATSE”)
solutions, including speed, red light, and distracted driving
camera systems. The Company’s 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 reliability to our
clients.
Products and Services
Automated Traffic Safety Enforcement– Red Light and Speed
Camera Systems
Public safety is a major concern for most communities –
especially as populations grow, and yet there is continual pressure
on public safety budgets. 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 net positive 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, nearly 600 communities across the U.S. operate red light or
speed camera enforcement programs.
Despite 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. In 2012, IIHS
reported that 633 people were killed and an estimated 133,000 were
injured in crashes that involved red light
running. Speeding was a factor in 31% of motor vehicle
crash deaths in 2012.
Brekford’s ATSE products offer intersection safety (red
light), speed, and cell phone enforcement options by way of a
complete suite of solution-based products. Our team of
industry professionals has extensive experience in this field,
we have developed equipment and a full turnkey solution that
we believe will ensure the success of any program. 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.
ATSE systems are one of a wide range of measures that are effective
at reducing vehicle speeds and crashes. The ATSE 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 ATSE system
are processed and reviewed in an office environment and violation
notices are mailed to the registered owner of the identified
vehicle. ATSE is a technology available to law enforcement as a
supplement and not a replacement for traditional enforcement
operations. Evaluations of ATSE, both internationally and in the
United States have identified some advantages over traditional
speed enforcement methods. These include:
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High rate of violation detection. ATSE 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.
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Physical safety of ATSE operators and motorists. ATSE 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 ATSE there is normally no vehicle pursuit or confrontation
with motorists. ATSE might also reduce the occurrence of traffic
congestion due to driver distraction caused by traffic stops on the
roadside.
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Fairness of operation. Violations are recorded for all vehicles
traveling in excess of the enforcement speed
threshold. Efficient use of resources. ATSE can act as a
“force multiplier,” enhancing the influence of limited
traffic enforcement staff and resources.
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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:
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Notification continuance
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Mail house and printing
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Data purification and verification
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Back office support
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Call center response (inbound & out bound)
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Lock-box & treasury
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Payment processing
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Sale of Assets and Investment in Global Public Safety
Vehicle Services
Prior to March 1, 2017, part of Brekford’s business included
sales of products and services focusing on law enforcement
vehicles. These products and services included rugged information
technology solutions, mobile data, digital video, electronic
ticketing, and vehicle upfitting. Rugged information technology
solutions included both ruggedized laptops and in-car video
solutions, among other technology offerings, in addition to vehicle
mounting systems, docking stations, and custom-built packages.
Vehicle upfitting solutions included the turnkey installation of
various components including rugged technology, as well as sirens,
lights, radios, gun racks, and decals. .
As previously reported on a Current Report on Form 8-K filed with
the Securities and Exchange Commission on February 7, 2017, on
February 6, 2017, the Company entered into a Contribution and Unit
Purchase Agreement (the “Agreement”) with LB&B
Associates Inc. (the “Purchaser”) and Global Public
Safety, LLC (“GPS”).
The closing for the transaction set forth in the Agreement occurred
on February 28, 2017 (the “Closing”) and on such date
the Company contributed substantially all of the assets and certain
liabilities related to its vehicle services business (the
“Business”) to GPS. After the Closing, Brekford will
continue to own and run other business operations that are not
related to the Business.
On the Closing, GPS sold units representing 80.1% of the units of
GPS to the Purchaser for $6,048,394, after certain purchase price
adjustments of prepaid expenses and unbilled customer deposits.
$4,048,394 was paid in cash, including a $250,000 deposit that was
paid on February 6, 2017, and $2,000,000 was paid by Purchaser
issuing the Company a promissory note (the “Promissory
Note”). After the Closing, Brekford continues to own 19.9% of
the units of GPS.
The Promissory Note is subordinated to the Purchaser’s senior
lender and accrues interest at a rate of 3% per annum. The maturity
date of the Promissory Note is March 31, 2022. The Promissory Note
is to be repaid as follows: (a) $75,000 plus all accrued interest
on each of September 30, 2017; December 31, 2017; March 31, 2018,
June 30, 2018 and September 30, 2018 (or, in the event any such
date is not a business day, the first business day after such
date), (b) $100,000 plus all accrued interest on each of December
31, 2018; March 31, 2019; June 30, 2019 and September 30, 2019 (or,
in the event any such date is not a business day, the first
business day after such date) (c) $125,000 plus all accrued
interest on each of December 31, 2019; March 31, 2020; June 30,
2020; September 30, 2020, December 31, 2020; March 31, 2021, June
31, 2021; September 30, 2021; and December 31, 2021 (or, in the
event any such date is not a business day, the first business day
after such date), and (d) $100,000 on March 31, 2022.
The Promissory Note is secured pursuant to the terms of a Pledge
Agreement (the “Pledge Agreement”) between the Company
and Purchaser. Pursuant to the Pledge Agreement the Purchaser
granted the Company a continuing second priority lien and security
interest in the Purchaser’s units of GPS subject to liens of
the Purchaser’s senior lender.
3
Pursuant to the Agreement, the Company and GPS executed a
Transition Services Agreement (the “Transition Services
Agreement”). Pursuant to the Transition Services Agreement,
the Company will perform certain support services to promote the
efficient transition of the Business for the fees set forth in the
Agreement.
In connection with the Agreement the Company entered into an
Amended and Restated Limited Liability Company Agreement of Global
Public Safety, LLC (the “LLC Agreement”). The LLC
Agreement provides for the operations of GPS and provides that all
limited liability company powers of the Company shall be exercised
by and under the authority of the Board of Representatives except
as otherwise provided by the LLC Agreement or applicable law. The
initial number of representatives constituting the Board of
Representatives is three, of which the Company appointed one member
and if the number of Board of Representatives is increased the
Company shall be able to appoint the number of members required to
maintain 1/3 of the seats on the Board of
Representatives.
Pursuant to a month-to-month sublease agreement between GPS and the
Company, the Company will continue to occupy 3,362 square feet of
office space, located at 7020 Dorsey Road, Suite C, Hanover,
Maryland 21076.
The Company also entered into a Pre-Novation Agreement with GPS
pursuant to which performance under certain contracts being
assigned to GPS will be made while these contracts are being
assigned to GPS. The Company will also enter into a Novation
Agreement pursuant to which the government contracts being assigned
to GPS will be transferred.
With respect to information provided within this Annual Report,
including management’s discussion and analysis of financial
condition and operating results, the sale transaction was
contemplated as having been completed as of December 31, 2016.
Products and services related to vehicle services have been treated
as discontinued operations within this Annual Report.
Purchasing and Order Fulfillment
We work with manufacturers and distributors to secure the lowest
cost possible while taking advantage of any available incentives in
order to provide competitive pricing and minimize delivery time to
our customers while maintaining our product margins. Typically,
once we sign an ATSE contract with our customers, we then purchase
required components from manufacturers and assemble the camera
systems at our facility in Hanover, Maryand. Sales generally are
for services only, with Brekford maintaining ownership of provided
hardware and software.
Merger Agreement
As reported on Amendment Number 1 to a Form 8-K filed with the
Securities and Exchange Commission on February 14, 2017, on
February 10, 2017, Brekford entered into an Agreement and Plan
of Merger (the “Merger Agreement”) to combine the
businesses of Brekford and KeyStone Solutions, Inc., a Delaware
corporation (“KeyStone”). The Merger Agreement provides
that Brekford and KeyStone will each engage in merger transactions
(the “Mergers”) with separate wholly-owned subsidiaries
of a newly-formed company, Novume Solutions, Inc., a Delaware
corporation (“Novume”). Under one merger transaction
(the “Brekford Merger”), one wholly-owned subsidiary of
Novume will merge with and into Brekford, leaving Brekford as a
wholly-owned subsidiary of Novume. Under a separate merger
transaction (the “KeyStone Merger”), KeyStone will
merge with and into another wholly-owned subsidiary of Novume
(“KeyStone Merger Sub”), with KeyStone Merger Sub
surviving such merger. The time at which the Mergers are
completed in accordance with the Merger Agreement is referred to as
the “Effective Time”. As soon as practicable after the
Effective Time, Brekford will change its name to “Brekford
Traffic Safety, Inc.” and KeyStone Merger Sub will change its
name to “KeyStone Solutions, Inc.”
4
Merger Consideration
As consideration for the Mergers, each outstanding share of the
common stock, par value $0.0001 per share, of Brekford
(“Brekford Common Stock”) immediately prior to the
Effective Time will become convertible into and exchangeable for
1/15th of a share of common stock, par value $0.0001 per
share, of Novume (“Novume Common Stock” and such ratio,
the “Brekford Exchange Ratio”). Each outstanding share
of the common stock, par value $0.0001 per share, of KeyStone
(“KeyStone Common Stock”) immediately prior to the
Effective Time, will become convertible into and exchangeable for
1.9975 shares of Novume Common Stock, and each outstanding share of
the Series A Cumulative Convertible Redeemable Preferred Stock, par
value $0.0001 per share, of KeyStone (“KeyStone Preferred
Stock”) will become convertible into and exchangeable for
1.9975 shares of the Series A Cumulative Convertible Redeemable
Preferred Stock of Novume (“Novume Preferred Stock” and
such ratio, the “KeyStone Exchange Ratio”). The
outstanding warrants and options to purchase shares of Brekford
Common Stock and KeyStone Common Stock, as applicable, shall be
exchanged for warrants and options to purchase Novume Common Stock
at the Brekford Exchange Ratio or the KeyStone Exchange Ratio, as
applicable. Collectively, the forgoing is referred to herein as the
“Merger Consideration”.
The Merger Consideration, and each of the Brekford Exchange Ratio
and the KeyStone Exchange Ratio, were determined so that,
immediately after the Effective Time, the pre-merger stockholders
of Brekford will own such portion of the capital stock of Novume as
shall be equal to approximately 20% of the issued and outstanding
NovumeCommon Stock, on a fully-diluted basis, and the pre-merger
stockholders of KeyStone will own that portion of the capital stock
of Novume as is equal to approximately 80% of the issued and
outstanding Novume Common Stock, on a fully-diluted
basis.
Closing Conditions
The closing of the Merger Agreement will take place upon the
fulfillment or waiver of all of the conditions to closing set forth
in Article VIII of the Merger Agreement or as soon thereafter as
practicable, but not later than June 1, 2017, unless otherwise
mutually agreed by Brekford and KeyStone. One closing condition is
that each of Brekford and KeyStone receive all stockholder
approvals and corporate approvals required by the Delaware General
Corporations Code and the organizational documents of each company
to complete the Mergers. This satisfaction of this condition is
assured. On February 10, 2017, the board of directors of Brekford
authorized and approved the Mergers and the adoption of the Merger
Agreement. On the same day, Chandra Brechin, a member of
Brekford’s Board of Directors, Scott Rutherford,
Brekford’s Chief Strategic Officer and a member of its Board
of Directors and Robert West, a member of the Board of Directors of
Brekford who own an aggregate of 25,712,787 shares of Brekford
Common Stock, which represent approximately 52.13% of the issued
and outstanding shares of Brekford's Common Stock entered into
separate agreements (“Voting Agreements”) with Brekford
pursuant to which they separately agreed with Brekford to vote all
of their shares in favor of the Brekford Merger and against any
action or transaction that would delay or compromise the ability of
Brekford to effectuate the Mergers. On February 9, 2017, the board
of directors of KeyStone (the “KeyStone Board”)
authorized and approved the Mergers and the adoption of the Merger
Agreement. On the same date, certain holders of more than 51% of
the issued and outstanding shares of KeyStone Common Stock entered
into Voting Agreements with KeyStone, and such holders indeed
delivered written consents to KeyStone approving the Mergers and
adopt the Merger Agreement.
A second closing condition requires Novume to prepare and file a
Registration Statement on Form S-4 (the “Registration
Statement”), which shall be declared effective by the
Securities and Exchange Commission (the “SEC”) prior to
the Effective Time, registering the Merger Consideration. This
shall not include registration of the options issuable as Merger
Consideration in exchange for options previously received by
stockholders of Brekford under Brekford’s 2008
Director’s Compensation Plan or stockholders of KeyStone
under KeyStone’s 2016 Equity Award Plan, which are
intended to be registered separately on a Registration Statement on
Form S-8 after the Effective Time. The Registration Statement will
include an information statement of Brekford, which Brekford shall
distribute to its stockholders in accordance with the rules and
regulations of the Securities Exchange Act of 1934, as amended,
prior to the Effective Time. In furtherance of this condition,
Novume filed the Registration Statement with the SEC on February
10, 2017. The Registration Statement remains subject to the
SEC’s review and comment, and to amendment, as appropriate,
by Novume.
Finally, prior to the Effective Time, Novume shall enter
into five-year employment agreements with each of Scott
Rutherford, Brekford’s current Chief Strategy Officer, and
Rodney Hillman, Brekford’s current President and Chief
Operating Officer (the “Employment
Agreements”). Pursuant to the Merger Agreement Mr.
Rutherford shall serve as Chief Technology Officer and Mr. Hillman
shall serve as President and Chief Operating officer of Brekford
Traffic Safety, Inc.
Under the Merger Agreement, Novume shall use its best efforts, as
soon as practicable after the Effective Time, to obtain listings
for Novume Common Stock, Novume Preferred Stock and certain
warrants to purchase Novume Common Stock on a national stock
exchange, or, alternatively, to obtain quotations for such
securities on the OTCQX.
5
Leadership of Novume
The leadership of Novume shall be substantially comprised of the
current management of KeyStone.
At the Effective Time, the Board of Directors of Novume (the
“Novume Board”), shall have seven (7) members, four (4)
of whom shall be independent within the meaning of the Exchange
Act, and the national stock exchange to which Novume intends to
apply for listings of the Novume securities indicated above. Six
(6) members of the Novume Board shall be designated by KeyStone,
and one (1) member of the Novume Board shall be designated by
Brekford, subject to the approval of KeyStone.
Termination Fee
If (i) the Merger Agreement (A) is terminated by KeyStone
due to the withdrawal of the recommendation of the Merger Agreement
by the board of directors of Brekford (the “Brekford
Board”), or by Brekford or KeyStone because of the failure to
obtain the requisite Brekford stockholders’ approval, or
(B) is terminated as a result of Brekford’s material
breach of its obligations with regard to Closing and to filing and
distributing of the Registration Statement required for the
transaction, which breach is not cured within thirty (30) days
after notice thereof to Brekford, and (ii) at the time of such
termination there shall have been an Acquisition Proposal (as
defined in the Merger Agreement) involving Brekford or any of its
subsidiaries (whether or not such offer shall have been rejected or
shall have been withdrawn prior to the time of such termination),
Brekford shall pay KeyStone a termination fee of $250,000 (the
“Termination Fee”). The Termination Fee shall be
payable in cash at the date of termination.
Business Strategy
Brekford’s ATSE solutions include speed and red-light camera
technologies that are increasingly in demand, as well as parking
enforcement solutions with a complete turnkey backend citation
management software suite. The U.S. market for red-light
systems is estimated at 20,000 to 30,000 systems and the
market for speed cameras is estimated at 35,000 to 50,000 systems.
According to the IIHS, as of December 2016, 426 communities have
red light cameras currently operating and 142 communities have
speed cameras operating in at least one location. We have
established a foothold in this business by securing contracts with
several municipalities in the Mid-Atlantic region, and we are
currently implementing plans for national and international
expansion. There are only a handful of competitors that are
currently providing ATSE services with three companies that are
considered leaders of this industry. Management believes that
the Company possesses technical and operational advantages over its
competitors. Due to our flexible customized solutions and superior
customer service, we believe we are poised to capture increased
market share in the U.S., Mexico, and other countries in the near
future.
Competition
Although we operate in an industry that has experienced substantial
growth in recent years, it is also characterized by customers and
states with vastly different requirements for photo enforcement
operations. Further, although there are only a handful of
competitors in our industry, competition among those companies is
intense. Larger competitors tend to invest significant capital in
business development and lobbying efforts, providing them with more
leverage in terms of acceptance and contract awards. We believe
that our technology, size, and strategy provide more flexibility
when bidding on contracts in smaller to medium sized municipalities
which collectively constitutes the majority of installation
opportunities within the U.S.
To address these competitive pressures and industry trends,
we intend to grow revenues by:
|
●
|
Increasing
ATSE installation and services (speed, red light, and parking) both
nationally and internationally. The global economic environment may
present opportunities and challenges in the year ahead, yet
municipalities will still need to address road safety issues and
photo-enforcement is a crucial tool in that task;
|
|
●
|
Refining
our strategy to focus on smaller and medium-sized customers, in
states that enable ATSE technology, where we are able to profitably
provide high quality solutions; and
|
|
●
|
Continuing
to invest in research and development to ensure that out
technologies remain at the forefront of the industry.
|
6
Customers
The Company has several ATSE contracts with government agencies, of
which net revenue from four customers during the year ended
December 31, 2016 represented 63% of the total net revenue. Four
customers accounted for 88% of total accounts receivable as of
December 31, 2016, which was subsequently collected in
2017.
Net revenue from five customers during the year ended December 31,
2015 represented 80% of the total net revenue. Accounts receivable
due from three customers at December 31, 2015 amounted to 91% of
total accounts receivable at that date.
Vendors
The Company purchased products and services for fulfillment of ATSE
contracts from several vendors. As of December 31, 2016 and 2015,
accounts payable due to these vendors amounted to 47% and 38% of
total accounts payable, respectively.
Government Contracts and Regulation
All companies engaged in supplying equipment and services to
government agencies, either directly or by subcontract, are subject
to business risks. Government contracts generally contain
provisions permitting termination, in whole or in part, without
prior notice at the government’s convenience, as well as
termination for default based on lack of performance. Upon
termination for convenience, we generally would be entitled to
compensation only for work done, supplier costs and termination
liability at the time of termination and to receive an allowance
for profit on the work performed. A termination arising out of our
default could expose us to liability and have a negative impact on
our ability to obtain future government contracts and orders.
Furthermore, on government contracts for which we are a
subcontractor and not the prime contractor, the government could
terminate the prime contract for convenience or otherwise, which
would likely result in the termination of our
subcontract.
Future Legislation
Because much of our business growth involves providing traffic
enforcement solutions to governmental agencies and municipalities,
the future passage of laws and regulations affecting red light
camera and speed camera systems could have a material adverse
impact on our business. Camera-operated traffic enforcement
solutions have recently been the subject of significant public
criticism and legislators in various jurisdictions have introduced,
or have indicated that they intend to introduce, legislation to
better monitor and control traffic enforcement activities. For
example, legislation passed in Maryland in 2014 imposes a civil
penalty on enforcement contractors if they issue erroneous
citations on behalf of a municipality. It also prohibits
contractors from receiving compensation based on the number of
citations issued by the municipality or citations actually paid. We
cannot predict whether additional pieces of legislation will be
enacted, or the impact they may have on our business.
Employees
As of February 24, 2017, we employed 41 full-time employees.
Employees related to ATSE and discontinued operations were 23 and
18 respectively. We have never had a work stoppage, and none of our
employees are represented by collective bargaining
agreements. We anticipate hiring additional employees to
ensure timely delivery of customer projects and services, as
necessary. Additionally, we intend to use the services of
independent consultants and contractors to perform various
professional services, when appropriate. We believe that this use
of third-party service providers may enhance our ability to contain
general and administrative expenses.
Corporate Information
Our principal executive offices are located at 7020 Dorsey Road,
Hanover, Maryland 21076. Our telephone number is (443)
557-0200.
7
Available Information
We maintain an Internet website at www.brekford.com
on which we make available, free of
charge, our Annual Reports on Form 10-K, our Quarterly Reports on
Form 10-Q, our Current Reports on Form 8-K and all amendments
thereto as soon as reasonably practicable after they are
electronically filed with or furnished to the Securities and
Exchange Commission (“SEC”). Information appearing on
our website is not incorporated by reference in, and is not a part
of, this Annual Report.
ITEM 1A. Risk Factors
As a smaller reporting company, we are not required to provide the
information required by this item.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Hanover, Maryland in an
approximately 3,700 square foot office facility which is sub-leased
from Global Public Services at a rate of 15% of GPS’s
invoiced monthly rent and utilities. The sub-lease permits either
party to terminate upon 120 days advance written notice. The
Company also leases approximately 2,500 square feet of office space
from Peppermill Properties, LLC, a Maryland limited liability
company (“Peppermill”). Peppermill is owned and managed
by Chandra (C.B.) Brechin and Scott Rutherford, who are directors
and principal stockholders of the Company. On June 1, 2010, the
Company entered into a three-year lease with Peppermill, which was
subsequently amended to extend the lease expiration date to June
30, 2017. This space is used for the expansion of business. The
total minimum annual lease payments due under the Company’s
lease agreements under continuing operations are
$116,742.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any legal proceedings, however,
from time to time, we may become a party to various legal actions
and complaints arising in the ordinary course of business. In
addition to commitments and obligations in the ordinary course of
business, we may become subject to various claims, pending and
potential legal actions for damages, investigations relating to
governmental laws and regulations and other matters arising out of
the normal conduct of our business. It is possible that cash flows
or results of operations could be materially affected in any
particular period by the unfavorable resolution of one or more of
these contingencies.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
8
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
As of March 20, 2017, 49,311,364 shares of Brekford Corp. common
stock were outstanding and held by approximately 56 stockholders of
record (based solely on the information provided to us by our
transfer agent). This number of stockholders does not
include:
●
any
beneficial owners of common stock whose shares are held in the
names of various dealers, clearing agencies, banks, brokers and
other fiduciaries, or
●
broker-dealers
or other participants who hold or clear shares directly or
indirectly through the Depository Trust Company, or its nominee,
Cede & Co.
On January 30, 2008, our common stock began trading on the
Over-the-Counter Bulletin Board (the “OTCBB”) under the
ticker symbol “BFDI”. Since April 2010, our common
stock has also been quoted on the OTCQB marketplace of the OTC
Markets Group under the ticker symbol “BFDI”. Beginning
November 2015 our Company began trading on OTCQX under the symbol
“BFDI”. Our common stock is not listed on any national
or regional securities exchange.
The following table sets forth, for the periods presented, the high
and low bid price ranges of our common stock as reported on the
OTCQB and OTCQX. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual
transactions.
|
High
|
Low
|
Fiscal year ended December 31, 2015:
|
|
|
First
Quarter
|
$0.40
|
$0.15
|
Second
Quarter
|
$0.28
|
$0.16
|
Third
Quarter
|
$0.29
|
$0.20
|
Fourth
Quarter
|
$0.28
|
$0.18
|
Fiscal year ended December 31, 2016:
|
|
|
First
Quarter
|
$0.21
|
$0.14
|
Second
Quarter
|
$0.30
|
$0.10
|
Third
Quarter
|
$0.12
|
$0.08
|
Fourth
Quarter
|
$0.12
|
$0.06
|
|
|
|
On March 20, 2017, the closing sales price of our common stock as
reported on the OTCQX was $0.11 per share.
Dividends
We have never declared or paid dividends on our Common Stock. We
intend to use retained earnings, if any, for the operation and
expansion of our business, and therefore do not anticipate paying
cash dividends in the foreseeable future. Moreover, the General
Corporation Law of the State of Delaware provides that the
Company’s board of directors may declare and pay a dividend
on the common stock only out of surplus or, if we have no surplus,
out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Accordingly, there can
be no assurance that dividends will be paid on our common stock
even if our board desires to do so.
Equity Compensation Plan
The following table provides information as of December 31, 2016
with respect to Company’s equity compensation
plans.
9
Plan Category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
(a)
|
Weighted-average exercise price of outstanding options, warrants
and rights
(b)
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a)
(c)
|
Equity compensation plans approved by security holders
|
225,000
|
$ 0.12
|
5,339,000
|
Equity compensation plans not approved by security
holders
|
-
|
-
|
-
|
Total
|
225,000
|
$ 0.12
|
5,339,000
|
(1)
Note: In addition to stock options and stock
appreciation rights, the 2008 Incentive Plan permits the grant of
stock awards, stock units, performance units and other stock-based
awards. As of December 31, 2016, the Company has granted 2,036,000
shares of restricted stock that are not reflected in column (a) of
this table.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Issuer Repurchases
None
Unregistered Sales of Equity Securities
None.
All other equity securities of the Company sold during 2016 in
transactions that were not registered under the Securities Act were
previously reported in the Company’s Quarterly Reports on
Form 10-Q and/or Current Reports on Form 8-K.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
10
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with, and is qualified in its entirety by, our financial statements
(and notes related thereto) and other more detailed financial
information appearing elsewhere in this Annual Report.
Consequently, you should read the following discussion and analysis
of our financial condition and results of operations together with
such financial statements and other financial data included
elsewhere in this Annual Report. Some of the information contained
in this discussion and analysis are set forth elsewhere in this
Annual Report, including information with respect to our plans and
strategy for our business, includes forward-looking statements that
involve risks and uncertainties.
Application of Critical Accounting Policies and
Pronouncements
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States
requires us to make estimates and judgments affecting the reporting
amounts of assets and liabilities, expenses and related
disclosures. We base our estimates on historical experience, our
knowledge of economic and market factors and various other
assumptions we believe to be reasonable under the circumstances. We
may also engage third party specialists to assist us in formulating
estimates when considered necessary. Estimates and judgments used
in the preparation of our financial statements are, by their
nature, uncertain and unpredictable and depend upon, among other
things, many factors outside of our control, such as demand for our
products and economic conditions. Accordingly, our estimates and
judgments may prove to be different from actual amounts that may
only be determined upon the outcome of one or more confirming
events and actual results may differ, perhaps significantly, from
these estimates under different estimates, assumptions or
conditions. The Company believes the critical accounting policies
below are affected by estimates, assumptions and judgments used in
the preparation of our financial statements.
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.
Revenue Recognition
The Company recognizes ATSE 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 or on a monthly basis
for fixed-fee arrangements.
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.
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 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.
11
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.
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’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.
Results of Operations
Prior year balances have been recast to reflect the sale of 80% of
our interest in the Vehicle Services operations on February 28,
2017. Results of discontinued operations are excluded from the
accompanying results of operations for all periods presented,
unless otherwise noted. See Note 4 – discontinued operations
in the accompanying notes to consolidated financial
statements.
Results of Operations for the Years Ended December 31, 2016 and
2015
The following tables summarize and compare selected items from the
statements of operations for the years ended December 31, 2016 and
2015.
|
Year Ended December 31,
|
Increase(Decrease)
|
||
|
2016
|
2015
|
$
|
%
|
Net
Revenues
|
$2,534,264
|
$2,811,929
|
$(277,665)
|
(9.9)%
|
Cost
of Revenues
|
827,304
|
804,171
|
23,133
|
2.9%
|
Gross
Profit
|
$1,706,960
|
$2,007,758
|
$(300,798
)
|
(15.0)%
|
|
|
|
|
|
Gross
Profit Percentage of Revenue
|
67.4%
|
71.4%
|
|
|
Revenues
Revenues for the year ended December 31, 2016 amounted to
$2,534,264 as compared to revenues of $2,811,929 for the year
December 31, 2015, representing a decrease of $277,665 or 9.9%.
ATSE services decrease in revenue was primarily driven by certain
U.S. clients that transitioned to flat fee contract structures, as
well as a decrease in recurring revenue contributed from our
Saltillo, Mexico program which was temporarily suspended by the
City in October 2016 in order to perform an audit of the program
and review collection efforts. Additionally the Company has
requested to establish a direct contract with the City. On March
11, 2017 the City announced that collection efforts for unpaid
fines will resume immediately and continue for the remainder of the
contract, which expires December 31, 2017. The overall revenue
decrease was offset by added revenues from newly added programs and
cameras in New Rochelle, New York, Brice, Ohio, and Calvert County,
Maryland.
12
Our contract structures generate revenue based on either a
percentage of fines collected by our customers or a fixed monthly
flat fee per camera. At December 31, 2016 approximately 80% of our
contracts were based on a percentage of fines collected and 20%
were based on a monthly flat fee per camera. Certain contracts in
the state of Maryland were converted in 2016 from percentage of
fines collected to monthly flat fee as a result of a change in the
law that prohibits ATSE contractors from being compensated in
relation to volume of fines collected. The remainder of our
Maryland contracts will be converted to a flat monthly fee
structure in 2017.
Cost of Revenues
Cost of revenues for the year ended December 31, 2016 amounted to
$827,304 as compared to $804,171 for the year ended December 31,
2015, an increase of $23,133 or 2.9%. This increase was directly
related to direct labor and materials costs associated with ATSE
services for new programs during 2016.
Gross Profit
Gross profit for the year ended December 31, 2016 amounted to
$1,706,960 as compared to $2,007,758 for the year ended December
31, 2015, a decrease of $300,798 or 15.0%. The decrease
was primarily due to U.S. clients who have transitioned to flat fee
contract structures combined with a reduction in recurring revenue
from the Saltillo, Mexico program as discussed
previously. ATSE gross margin for year ended December
31, 2016 was 67.4% as compared to 71.4% for the year ended December
31, 2015.
Expenses
|
Year Ended December 31,
|
Increase(Decrease)
|
||
|
2016
|
2015
|
$
|
%
|
OPERATING
EXPENSES
|
|
|
|
|
Salaries
and related expenses
|
$1,645,073
|
$1,628,150
|
$16,923
|
1.0%
|
Selling,
general and administrative expenses
|
1,071,272
|
1,213,864
|
(142,592)
|
(11.7)%
|
Total
operating expenses
|
$2,716,345
|
$2,842,014
|
$(125,669
)
|
(4.4)%
|
Salaries and Related Expenses
Salaries and related expenses for the year ended December 31, 2016
amounted to $1,645,073 as compared to $1,628,150 for the year ended
December 31, 2015, an increase of $16,923 or 1.0%. There was
no material change to personnel head count or compensation expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended
December 31, 2016 amounted to $1,071,272 as compared to $1,213,864
for the year ended December 31, 2015, a decrease of $142,592 or
11.7%. The decrease was primarily driven by lower ATSE program
management and depreciation expenses.
Other Expense and Income
|
Year Ended December 31,
|
(Decrease)/Increase
|
||
|
2016
|
2015
|
$
|
%
|
OTHER
(EXPENSE) INCOME
|
|
|
|
|
Interest
expense
|
$(402,168)
|
$(455,937)
|
$53,769
|
11.8%
|
Loss
on extinguishment of debt
|
(291,911)
|
(55,021)
|
(236,890)
|
(430.5)%
|
Change
in derivative liability
|
74,676
|
14,784
|
59,892
|
405.1%
|
Total
other (expense) income
|
$(619,403
)
|
$(496,174
)
|
$(123,229
)
|
(24.8)%
|
13
Total interest expense for the year ended December 31, 2016
amounted to $402,168 as compared to $455,937 for the year ended
December 31, 2015, a decrease of $53,769 or 11.8%. The
decrease was due primarily to a net increase in financing cost of
$139,172 for the year end December 31, 2016 compared to $91,896 for
the year ended December 31, 2015 offset by non-cash interest
expense related to debt discount amortization of $263,950 for
the year ended December 31, 2016 compared to $345,614 for the year
ended December 31, 2015. The remainder of the decrease in interest
expense was due to cash interest expense associated with balances
on the Company’s revolving line of credit.
In addition, there was an increase in the loss on extinguishment of
debt of $291,911 for the year ended December 31, 2016 compared to
the $55,021 for the year ended December 31, 2015, which was offset
by an increase in warrant liability of $74,676 for the year ended
December 31, 2016 compared to the $14,784 for the year ended
December 31, 2015 related to the March 2015 issuance of a $650,000
convertible promissory note that matures in March 2017 (the
“Investor Note”) and a related five-year common stock
purchase warrant (the
“Warrant”).
Net Loss
Net loss from continuing operations for the year ended December 31,
2016 amounted to $944,830 compared to a net loss from continuing
operations of $1,397,888 for the year ended December 31, 2015, a
decrease of $453,058 or 32.4%. The increase in net loss from
continuing operations was driven by lower gross profit and higher
expenses associated with the Investor Note, offset by a decrease in
operating expenses.
Financial Condition, Liquidity and Capital Resources
At December 31, 2016, we had total current assets of approximately
$2.36 million and total current liabilities of approximately $1.81
million resulting in a working capital surplus of approximately
$0.55 million. At December 31, 2016 inventory totaled approximately
$0.2 million consisting primarily of ATSE cameras components. In
comparison, at December 31, 2015, we had total current assets of
approximately $5.34 million and total current liabilities of
approximately $4.95 million, resulting in a working capital surplus
of approximately $0.39 million.
The Company’s accumulated deficit increased to approximately
$12.0 million at December 31, 2016 from $10.9 million at December
31, 2015, as a result of the net loss recorded for the year ended
December 31, 2016. Cash flows used in continuing operations for the
year ended December 31, 2016 were approximately $0.12 million,
compared to cash flows used in continuing operations for the year
ended December 31, 2015 of approximately $0.03
million.
On July 12, 2016 (the “Closing Date”), the Company
entered into a loan and security agreement (the “Loan
Agreement”) with Fundamental Funding LLC (the
“Lender”). The primary purpose of the new
Loan Agreement is to pay off the prior loan, and provide additional
working capital. The Loan Agreement provides for a multi-draw loan
to the Company for (i) the Company’s accounts receivable, the
lesser of (y) $2,500,000 or (z) 85% of the Company’s
eligible accounts and (ii) the Company’s inventory advances,
the lesser of (y) $500,000 or (z) 50% of the eligible inventory
(the “Revolving Loans”). The maximum amount available
to the Company under the Loan Agreement for the Revolving Loans is
$3,500,000 (the “Credit Limit”). In addition, the
Lender agreed to provide the Company with an accommodation loan in
an amount not to exceed $500,000, which shall be repaid in
thirty-six (36) equal monthly installments of principal and
interest (the “Accommodation Loan” and together with
the Revolving Loans, the “Loans”).
As discussed in Note 6 to the consolidated financial statements
presented elsewhere in this Annual 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 December 31,
2016. On November 7, 2016, the maturity dates of these
unsecured promissory notes were extended to the earlier of (i)
November 7, 2017 or (ii) 10 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.
On March 17, 2015, the Company entered into a note and warrant
purchase agreement providing for immediate funding of $650,000
through the issuance of the Investor Note (see Note 7 to
the consolidated financial statements presented elsewhere in
this Annual Report for additional detail). The primary use of
proceeds was to fund startup costs for the initial phase of a
project in Mexico providing turnkey ATSE services to the City of
Saltillo, which began operations in the second quarter of
2015.
14
On February 28, 2017, as presented elsewhere in this Annual Report,
the Company completed a transaction to sell substantially all
assets and certain liabilities related to its vehicle services
business. From the approximately $4.0 million in cash proceeds, all
outstanding debt of the Company was retired, including the Loan
Agreement, the Investor Note, and the notes payable to Brechin and
Rutherford.
Management believes that the Company’s current level of cash
combined with cash that it expects to generate in its operations
during the next twelve months including anticipated new customer
contracts will be sufficient to sustain the Company’s
business initiatives through at least March 28, 2018, but there can
be no assurance that these measures will be successful or
adequate.
In the event that the Company’s cash reserves and cash flow
from operations 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. Even if
we are able to raise the funds required, it is possible that we
could incur unexpected costs and expenses, fail to collect
significant amounts owed to us, or experience unexpected cash
requirements that would force us to seek alternative financing.
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 or the debt
securities may cause us to be subject to restrictive
covenants. 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 From 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.
Net cash used in operating activities from continuing operations
was $117,213 for the year ended December 31, 2016 compared to net
cash used in operating activities from continuing operations of
$32,608 for the year ended December 31, 2015. Cash was used
primarily to fund our operations and working capital needs, net of
non-cash expenditures such as depreciation and amortization, share
based compensation for services and financing related costs. For
the year ended December 31, 2016, the net loss of $1,054,403,
adjusted for a non-cash net financing related expenses of $500,095,
a decrease in current assets, net, of $99,231 and an increase in
current liabilities, net, of $168,797 were the primary drivers of
the cash provided by operating activities for continuing
operations.
Net cash provided by operating activities from discontinued
operations was $1,211,871 for the year ended December 31, 2016
compared to net cash used in operating activities from discontinued
operations of $783,852 for the year ended December 31,
2015.
Cash Flows From Investing Activities
Net cash used in investing activities from continuing operations
was $133,574 for the year ended December 31, 2016 as compared to
$128,638 for the year ended December 31, 2015. Capital expenditures
during 2016 were related to cameras and technology infrastructure
new ATSE programs implemented in 2016.
Net cash used in investing activities from discontinued operations
was $7,000 for the year ended December 31, 2016 compared to net
cash used in investing activities from discontinued operations of
$0 for the year ended December 31, 2015.
15
Cash Flows From Financing Activities
Net cash used in financing activities from continuing operations
was $30,787 for the year ended December 31, 2016 and net cash
provided by financing activities was $464,718 for the year ended
December 31, 2015. In the year ended December 31, 2016, the Company
paid other notes payable and capital lease obligations of $30,787.
In the year ended December 31, 2015, the Company received $650,000
of proceeds and paid $52,499 in deferring financing costs from the
issuance of the Investor Note in March 2015. Furthermore, the
Company made aggregate principal payments of $154,578 under capital
leases and other note obligations and advanced net proceeds of
$21,795 from the line of credit.
Net cash used in financing activities from discontinued operations
was $913,766 for the year ended December 31, 2016 compared to net
used in financing activities from discontinued operations of
$50,639 for the year ended December 31, 2015.
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.
Contractual Obligations and Commitments
The following table is a summary of contractual cash obligations
for the periods indicated that existed as of December 31, 2016, and
is based on information appearing in the notes to Consolidated
Financial Statements included elsewhere in this Annual Report on
Form 10-K.
|
Payments due by period
|
||||
Contractual
Obligations
|
Total
|
Less than 1 year
|
1-3 years
|
3-5 years
|
More than 5 years
|
Operating
Leases – ATSE (1)
|
$116,742
|
$51,282
|
$65,460
|
$—
|
$—
|
Operating
Leases- Discontinued Operations (2)
|
522,137
|
151,197
|
370,940
|
—
|
—
|
Purchase
Obligations
|
—
|
—
|
—
|
—
|
—
|
Other
Long-Term Liabilities Reflected on the Registrant's Balance Sheet
under GAAP
|
311,171
|
311,171
|
—
|
—
|
—
|
Other
Long-Term Liabilities Reflected on the Registrant's Balance Sheet
under GAAP – Discontinued Operations
|
989,520
|
989,520
|
—
|
—
|
—
|
Total
|
$1,939,570
|
$1,503,170
|
$436,400
|
$—
|
$—
|
(1)
On
February 28, 2017, the Company sub-leased 15% of the Hanover, MD
facility from Global Public Services.
(2)
On
February 28, 2017, Global Public Services assumed the long-term
lease of the Hanover, MD facility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not Applicable.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX
|
|
|||
|
|
Page
|
|
|
Reports of Independent Registered Public Accounting
Firms
|
|
|
18-19
|
|
Consolidated Balance Sheets at December 31, 2016 and
2015
|
|
|
20
|
|
Consolidated Statements of Operations and Comprehensive Loss for
the Years Ended December 31, 2016 and 2015
|
|
|
21
|
|
Consolidated Statements of Changes in Stockholders’ Equity
(Deficit) for the Years Ended December 31, 2016 and
2015
|
|
|
22
|
|
Consolidated Statements of Cash Flows for the Years Ended December
31, 2016 and 2015
|
|
|
23
|
|
Notes to Consolidated Financial Statements
|
|
|
24
|
|
17
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Brekford Corp.
We have
audited the accompanying consolidated balance sheet of Brekford
Corp. (the Company) as of December 31, 2016, and the related
consolidated statements of operations and comprehensive loss,
changes in stockholders’ equity (deficit), and cash flows for
the year ended December 31, 2016. The Company’s management is
responsible for these consolidated financial statements. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free of material misstatement. The company is not required to have,
nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Brekford Corp. as of December 31, 2016, and the results of its
operations and its cash flows for the year ended December 31, 2016,
in conformity with accounting principles generally accepted in the
United States of America.
As
discussed in Note 18 to the consolidated financial statements, the
Company entered into an agreement and plan of merger as well as a
contribution and unit purchase agreement in February
2017.
We have
also audited the adjustments to the 2015 consolidated financial
statements to retrospectively apply the change in accounting for
discontinued operations, as described in Note 4. In our opinion,
such adjustments are appropriate and have been properly applied. We
were not engaged to audit, review, or apply any procedures to the
2015 consolidated financial statements of the Company other than
with respect to the adjustments and, accordingly, we do not express
an opinion or any other form of assurance on the 2015 consolidated
financial statements taken as a whole.
BD
& Company, Inc.
Owings
Mills, MD
March
28, 2017
18
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Brekford Corp.
We have audited, before the effects of the adjustments to
retrospectively apply the presentation of discontinued operations,
the accompanying consolidated balance sheet of Brekford Corp. (the
“Company”) as of December 31, 2015, and the related
consolidated statements of operations and comprehensive loss,
changes in stockholders’ (deficit) equity, and cash flows for
the year then ended. The Company’s management is responsible
for the 2015 financial statements. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 2015 consolidated financial statements, before
the effects of the adjustments to retrospectively apply the
presentation of discontinued operations described in Note 4,
referred to above present fairly, in all material respects, the
financial position of Brekford Corp. as of December 31, 2015, and
the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted
in the United States of America.
We were not engaged to audit, review, or apply any procedures to
the adjustments to retrospectively apply the presentation of
discontinued operations described in Note 4 and, accordingly, we do
not express an opinion or any other form of assurance about whether
such adjustments are appropriate and have been properly applied.
Those adjustments were audited by BD & Company,
Inc.
/s/ Stegman & Company
Stegman
& Company
Baltimore, Maryland
March 24, 2016
19
BREKFORD CORP.
CONSOLIDATED BALANCE
SHEETS
|
December 31,
2016
|
December 31,
2015
|
ASSETS
|
|
|
CURRENT
ASSETS
|
|
|
Cash
|
$591,618
|
$580,400
|
Accounts
receivable, net of allowance $0 at December 31, 2016 and 2015,
respectively
|
115,106
|
131,839
|
Unbilled
receivables
|
314,262
|
304,470
|
Prepaid
expenses
|
53,211
|
49,912
|
Inventory
|
221,186
|
316,775
|
Current
assets - discontinued operations
|
1,069,511
|
3,960,950
|
Total
current assets
|
2,364,894
|
5,344,346
|
Property
and equipment, net
|
208,310
|
176,300
|
Other
non-current assets
|
9,877
|
83,478
|
Non-current
assets - discontinued operations
|
40,387
|
142,777
|
TOTAL
ASSETS
|
$2,623,468
|
$5,746,901
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
(DEFICIT)
|
|
|
CURRENT
LIABILITIES
|
|
|
Accounts
payable and accrued expenses
|
$721,880
|
$638,117
|
Accrued
payroll and related expenses
|
17,062
|
13,840
|
Obligations
under other notes payable – current portion
|
20,150
|
29,277
|
Derivative
liability
|
24,360
|
99,036
|
Other
liabilities
|
55,408
|
46,979
|
Current
liabilities - discontinued operations
|
971,466
|
4,125,526
|
Total
current liabilities
|
1,810,326
|
4,952,775
|
|
|
|
LONG
- TERM LIABILITIES
|
|
|
Other
notes payable - net of current portion
|
—
|
21,660
|
Deferred
rent, net of current portion
|
6,520
|
6,739
|
Convertible
promissory notes, net of debt discounts of $40,853 and $418,730 at
December 31, 2016 and 2015, respectively
|
299,147
|
221,269
|
Long
term liabilities - discontinued operations
|
989,520
|
538,184
|
Total
long-term liabilities
|
1,295,187
|
787,852
|
TOTAL
LIABILITIES
|
3,105,513
|
5,740,627
|
|
|
|
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;
49,311,264 and 45,151,254 issued and outstanding, at December 31,
2016 and 2015, respectively
|
4,931
|
4,515
|
Additional
paid-in capital
|
11,515,472
|
10,951,491
|
Treasury
Stock, at cost 10,600 shares at December 31, 2016 and 2015
respectively
|
(5,890)
|
(5,890)
|
Accumulated
deficit
|
(11,996,783)
|
(10,942,380)
|
Other
comprehensive income (loss)
|
225
|
(1,462)
|
TOTAL
STOCKHOLDERS’ (DEFICIT) EQUITY
|
(482,045
)
|
6,274
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
|
$2,623,468
|
$5,746,901
|
The accompanying notes are an integral part of these consolidated
financial statements.
20
BREKFORD CORP.
CONSOLIDATED STATEMENTS OF
OPERATIONS
AND COMPREHENSIVE LOSS
|
Years Ended December 31,
|
|
|
2016
|
2015
|
|
|
|
Net
Revenue
|
$2,534,264
|
$2,811,929
|
Cost
of Revenue
|
827,304
|
804,171
|
Gross
profit
|
1,706,960
|
2,007,758
|
|
|
|
Operating
expenses:
|
|
|
Salaries
and related expenses
|
1,645,073
|
1,628,150
|
Selling,
general and administrative expenses
|
1,071,272
|
1,213,864
|
Total
operating expenses
|
2,716,345
|
2,842,014
|
Loss
from operations
|
(1,009,385)
|
(834,256)
|
Other
(expense) income:
|
|
|
Interest
expense
|
(402,168)
|
(455,937)
|
Change
in fair value of derivative liability
|
74,676
|
14,784
|
Loss
on extinguishment of debt
|
(291,911)
|
(55,021)
|
Total
other (expense)income
|
(619,403
)
|
(496,174
)
|
Loss
before income taxes
|
(1,628,788)
|
(1,330,430)
|
Income
tax expense (benefit)
|
(230,900
)
|
(385,600
)
|
Net
loss from continuing operations
|
(1,397,888)
|
(944,830)
|
Net
income from discontinued operations
|
343,485
|
573,659
|
Net
loss
|
(1,054,403)
|
(371,171)
|
Other
comprehensive income (loss) – foreign currency
translation
|
1,687
|
(1,462)
|
Comprehensive
loss
|
$(1,052,716
)
|
$(372,633
)
|
|
|
|
Net
loss per share from continuing operations –
basic
|
$(0.03)
|
$(0.02)
|
Net
income per share from discontinued operations –
basic
|
$0.01
|
$0.01
|
Net
loss per share – basic
|
$(0.02)
|
$(0.01)
|
|
|
|
Net
loss per share from continuing operations –
diluted
|
$(0.03)
|
$(0.02)
|
Net
income per share from discontinued operations –
diluted
|
$0.01
|
$0.01
|
Net
loss per share – diluted
|
$(0.02)
|
$(0.01)
|
|
|
|
Weighted
average shares outstanding used in computing per share
amounts:
|
|
|
Basic
|
47,357,787
|
44,690,550
|
Diluted
|
53,154,216
|
52,201,684
|
The accompanying notes are an integral part of these consolidated
financial statements.
21
BREKFORD CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ (DEFICIT) EQUITY
For the Years Ended December 31, 2016 and 2015
|
Common Stock
|
Treasury Stock
|
|
|
|
|
||
|
Shares
|
Par Value
|
Shares
|
Par Value
|
Additional Paid-In Capital
|
Accumulated
.Deficit
|
Other comprehensive
loss
|
Total
|
BALANCE
– January 1, 2015
|
44,500,569
|
$4,450
|
(10,600)
|
$(5,890)
|
$10,204,479
|
$(10,571,209)
|
—
|
$(368,170)
|
Restricted
shares issues to employees
|
132,000
|
13
|
—
|
—
|
44,867
|
—
|
|
44,880
|
Convertible
debt exchanged for common shares
|
518,685
|
52
|
|
|
133,010
|
|
|
133,062
|
Debt
discount feature related to issuance of convertible note
payable
|
|
|
|
|
557,921
|
|
|
557,921
|
Stock
options to non-employees
|
|
|
—
|
—
|
11,214
|
—
|
|
11,214
|
Other
comprehensive loss
|
—
|
—
|
—
|
—
|
—
|
|
(1,462)
|
(1,462)
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(371,171)
|
—
|
(371,171)
|
BALANCE-December
31, 2015
|
45,151,254
|
$4,515
|
(10,600)
|
$(5,890)
|
$10,951,491
|
$(10,942,380)
|
$(1,462)
|
$6,274
|
Restricted
shares issues to employees
|
332,000
|
33
|
—
|
—
|
52,967
|
—
|
|
53,000
|
Convertible
debt exchanged for common shares
|
3,828,010
|
383
|
|
|
496,510
|
|
|
496,893
|
|
|
|
|
|
|
|
|
|
Stock
options to non-employees
|
|
|
—
|
—
|
14,504
|
—
|
|
14,504
|
Other
comprehensive income
|
—
|
—
|
—
|
—
|
—
|
|
1,687
|
1,687
|
Net
loss
|
—
|
—
|
—
|
—
|
—
|
(1,054,403)
|
|
(1,054,403)
|
BALANCE
– December 31, 2016
|
49,311,264
|
$4,931
|
(10,600)
|
$(5,890)
|
$11,515,472
|
$(11,996,783)
|
$225
|
$(482,045)
|
The accompanying notes are an integral part of these consolidated
financial statements.
22
BREKFORD CORP.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
Years Ended December 31,
|
|
|
2016
|
2015
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$(1,054,403)
|
$(371,171)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation
and amortization
|
101,564
|
149,232
|
Share-based
compensation
|
67,504
|
56,094
|
Amortization
of debt discount and warrant features
|
234,664
|
328,021
|
Amortization
of financing cost
|
48,195
|
21,741
|
Change
in fair value of derivative liability
|
(74,676)
|
(14,784)
|
Loss
on extinguishment of debt
|
291,911
|
55,021
|
|
|
|
Changes
in operating assets and liabilities including assets and
liabilities held for sale:
|
|
|
Accounts
receivable
|
16,733
|
83,095
|
Unbilled
receivables
|
(9,792)
|
(105,745)
|
Prepaid
expenses and other non-current assets
|
(3,299)
|
40,446
|
Inventory
|
95,589
|
(65,929)
|
Accounts
payable and accrued expenses
|
83,763
|
(105,147)
|
Accrued
payroll and related expenses
|
3,222
|
8,552
|
Customer
deposits
|
—
|
(137,827)
|
Deferred
rent
|
(218)
|
6,738
|
Other
liabilities
|
82,030
|
19,055
|
Net
cash used in operating activities from continuing
operations
|
(117,213
)
|
(32,608)
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
1,211,871
|
(783,852)
|
Net
cash provided by (used in) operating activities
|
1,094,658
|
(816,460)
|
|
|
|
Cash
flows from investing activities including non-current assets held
for sale:
|
|
|
Purchases
of property and equipment
|
(133,574)
|
(128,638)
|
Net
cash used in investing activities from continuing
operations
|
(133,574
)
|
(128,638
)
|
Net
cash used in investing activities from discontinued
operations
|
(7,000)
|
—
|
Net
cash used in investing activities
|
(140,574
)
|
(128,638
)
|
|
|
|
Cash
flows from financing activities:
|
|
|
Net
change in line of credit
|
—
|
21,795
|
Principal
payments on lease obligation
|
—
|
(140,209)
|
Payments
on other notes payable
|
(30,787)
|
(14,369)
|
Borrowings
on term notes
|
—
|
650,000
|
Deferred
financing cost
|
—
|
(52,499)
|
Net
cash provided by (used in) financing activities from continuing
operations
|
(30,787)
|
464,718
|
Net
cash used in discontinued operations financing
activities
|
(913,766)
|
(50,639)
|
Net
cash provided by (used in) financing activities
|
(944,553)
|
414,079
|
|
|
|
Effect
of foreign currency translation
|
1,687
|
(1,462)
|
Net
change in cash
|
11,218
|
(532,481)
|
Cash –
beginning of year
|
580,400
|
1,112,881
|
Cash –
end of year
|
$591,618
|
$580,400
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Cash
paid for interest
|
$292,292
|
$236,355
|
Cash
paid for income taxes
|
$(8,429)
|
$1,690
|
Conversion
of notes payable in exchange for common stock
|
$300,000
|
$75,000
|
The accompanying notes are an integral part of these consolidated
financial statements.
23
BREKFORD CORP.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
For the years ended December 31, 2016 and 2015
NOTE 1 – DESCRIPTION OF THE BUSINESS
Brekford Corp. (“the Company”) (OTCBB; OTCQB; BFDI),
headquartered in Hanover, Maryland, is a leading public safety
technology service provider of fully integrated automated traffic
safety enforcement (“ATSE”) solutions, including speed,
red light, and distracted driving camera systems. The
Company’s 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 reliability to our clients.
Prior to March 1, 2017, part of Brekford’s business included
sales of products and services focusing on law enforcement
vehicles. These products and services included rugged information
technology solutions, mobile data, digital video, electronic
ticketing, and vehicle upfitting. Rugged information technology
solutions included both ruggedized laptops and in-car video
solutions, among other technology offerings, in addition to vehicle
mounting systems, docking stations, and custom-built packages.
Vehicle upfitting solutions included the turnkey installation of
various components including rugged technology, as well as sirens,
lights, radios, gun racks, and decals. Subsequent to the Closing on
February 28, 2017, Brekford will continue to retain a 19.9%
ownership interest in this business, which continues to operate
under the name Global Public Safety (See Subsequent Event Note
18).
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 – LIQUIDITY
For the year ended December 31, 2016 the Company incurred a net
loss of approximately $1,054,403, and provided $1,094,658 of cash
for operations. Additionally, at December 31, 2016 the
company has cash available of $591,618, a working capital surplus
of $554,568 and availability under the established credit
facility (see Note 5) of approximately $2.7 million.
On February 28, 2017, as presented elsewhere in this Annual Report,
the Company completed a transaction to sell substantially all
assets and certain liabilities related to its vehicle services
business. From the approximately $4.0 million in cash proceeds, all
outstanding debt of the Company was retired, including the Loan
Agreement, the Investor Note, and the two of its directors, Messrs.
C.B. Brechin and Scott Rutherford.
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 including anticipated new customer
contracts will be sufficient to sustain the Company’s
business initiatives through at least March 28, 2018, but there can
be no assurance that these measures will be successful or
adequate. In the event that the Company’s cash reserves
and cash flow from operations are not sufficient to fund the
Company’s future operations, it may need to obtain additional
capital.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICES
Principles of Consolidation and Basis of Presentation
The Company’s 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.
24
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 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.
Reclassifications
Certain amounts in prior-year financial statements have been
reclassified for comparative purposes to conform to the
presentation in the current year financial statements.
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
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.
Shipping and Handling Costs
All amounts billed to customers related to shipping and handling
are included in products revenues and all costs of shipping and
handling are included in cost of sales in the accompanying
consolidated statements of operations. The Company incurred
shipping and handling costs of $15,525 and $45,255 for continuing
operations for the years ended December 31, 2016 and 2015,
respectively. The Company incurred shipping and handling costs of
$59,094 and $58,120 for discontinued operations for the years ended
December 31, 2016 and 2015, respectively.
25
Advertising Costs
The Company expenses advertising costs as incurred. These expenses
are included in selling, general and administrative expenses in the
accompanying statements of operations. Advertising expense were
insignificant for the years ended December 31, 2016 and 2015,
respectively.
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 December 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 allowances are established when the
realization of deferred tax assets are not considered more likely
than not. Due to the Company’s continued losses 100%
valuation allowance has been established on all deferred tax
assets.
The Company files income tax returns with the U.S. Internal Revenue
Service and with the revenue services of various states. 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.
In the years ended December 31, 2016 and 2015, we reported
financial results for both operations and discontinued operations.
ASC 740-20-45 sets down the general rule for allocating income tax
expense or benefit between operations and discontinued operations.
The general rule requires the computation of tax expense or benefit
by entity taking into consideration all items of income, expense,
and tax credits. Next, a computation is made taking into
consideration only those items related to continuing operations.
Any difference is allocated to items other than continuing
operations e.g. discontinued operations. Under these general rules,
no tax expense or benefit would be allocated to discontinued
operations.
An exception to these rules apply under ASC 740-20-45-7 where an
entity has 1) a loss from continuing operations and income related
to other items such as discontinued operations and 2) the entity
would not otherwise recognize a benefit for the loss from
continuing operations under the approach described in ASC
740-20-45. This fact pattern applies for the year ended December
31, 2016 and 2015. Application of this rule exception results in
the allocation of tax expense to discontinued operations with an
offsetting amount of tax benefit reported by the continuing
operations.
Overall, we allocated $230,900 and $385,600 of tax expense to net
income from discontinued operations and an offsetting tax benefit
to net loss from continuing operations in the years ended December
31, 2016 and 2015, respectively.
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 11 for the calculation of basic
and diluted loss earnings per share.
26
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.
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 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, 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.
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 Company’s 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 Entity’s Ability to Continue as a
Going Concern. ASU 2014-15 is intended to define management’s
responsibility to evaluate whether there is substantial doubt about
an organization’s 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
management’s responsibility to evaluate whether there is
substantial doubt the organization’s ability to continue as a
going concern or to provide footnote disclosures. The ASU provides
guidance to an organization’s 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 has the adopted the
methodologies prescribed by this ASU by the date required and there
is no material impact on the Company’s consolidated financial
statements.
27
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. By adopting this
standard, we have reclassified certain of our assets and
liabilities.
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 are 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.
In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement
of Inventory (“ASU 2015-11”), to simplify the guidance
on the subsequent measurement of inventory, excluding inventory
measured using last-in, first out or the retail inventory method.
Under the new standard, inventory should be at the lower of cost
and net realizable value. The new accounting guidance is effective
for interim and annual periods beginning after December 15,
2016 with early adoption permitted. The adoption of this standard
will not have any impact on the Company's financial position,
results of operations and disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation: Improvements to Employee
Share-Based Payment Accounting (“ASU 2016-09”), which
simplifies several aspects of the accounting for employee
share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures,
and statutory tax withholding requirements, as well as
classification in the statement of cash flows. ASU 2016-09 is
effective for annual periods beginning after December 15,
2016, and interim periods within annual periods beginning after
December 15, 2018. Early adoption is permitted. The adoption
of this standard will not have any impact on the Company's
financial position, results of operations and
disclosures.
28
4. DISCONTINUED OPERATIONS
On February 6, 2017, the Company entered into a Contribution and
Unit Purchase Agreement (the “Agreement”) with LB&B
Associates Inc. (the “Purchaser”) and Global Public
Safety, LLC (“GPS”).
The closing for the transaction set forth in the Agreement occurred
on February 28, 2017 (the “Closing”) and on such date
the Company contributed substantially all of the assets and certain
liabilities related to its vehicle services business (the
“Business”) to GPS. After the Closing, the Company will
continue to own and run other business operations that are not
related to the Business.
On the Closing, GPS sold units representing 80.1% of the units of
GPS to the Purchaser for $6,048,394, after certain purchase price
adjustments of prepaid expenses and unbilled customer deposits.
$4,048,394 was paid in cash, including a $250,000 deposit that was
paid on February 6, 2017, and $2,000,000 was paid by Purchaser
issuing the Company a promissory note (the “Promissory
Note”). After the Closing, the Company continues to own 19.9%
of the units of GPS. (See Subsequent Event footnote – Note
17).
ASC 360-10-45-9 requires that a long-lived asset (disposal group)
to be sold shall be classified as held for sale in the period in
which a set of criteria have been met, including criteria that the
sale of the asset (disposal group) is probable and actions required
to complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be
withdrawn. This criteria was achieved on December 21, 2016 as the
Company entered into a letter of intent with the purchaser.
Additionally, the discontinued operations are comprised of the
entirety of the vehicle services business, excluding corporate
services expenses. Lastly, for comparability purposes certain prior
period line items relating to the assets held for sale have been
reclassified and presented as discontinued operations for all
periods presented in the accompanying consolidated statements of
operations, consolidated statements of cash flows, and the
consolidated balance sheets.
In accordance with ASC 205-20-S99, "Allocation of Interest to
Discontinued Operations", the Company elected to not allocate
consolidated interest expense to discontinued operations where the
debt is not directly attributable to or related to discontinued
operations.
29
The following information presents the major classes of line item
of assets and liabilities included as part of discontinued
operations in the consolidated balance sheet:
|
December 31,
|
December 31,
|
|
2016
|
2015
|
Current
assets - discontinued operations:
|
|
|
Accounts
receivable
|
$776,715
|
$3,649,425
|
Inventory
|
272,679
|
289,696
|
Prepaid
expenses
|
20,117
|
21,829
|
Total
current assets - discontinued operations
|
$1,069,511
|
$3,960,950
|
|
|
|
Noncurrent
assets - discontinued operations:
|
|
|
Property
and equipment, net
|
$27,362
|
$47,047
|
Other
non-current assets
|
13,025
|
95,730
|
Total
noncurrent assets - discontinued operations
|
$40,387
|
$142,777
|
|
|
|
Current
liabilities - discontinued operations:
|
|
|
Accounts
payable and accrued liabilities
|
$664,569
|
$2,341,016
|
Accrued
payroll and related expenses
|
15,386
|
84,159
|
Customer
deposits
|
34,219
|
36,070
|
Deferred
revenue
|
54,581
|
95,233
|
Term
loan – current
|
—
|
166,667
|
Line
of credit
|
202,711
|
1,402,381
|
Total
current liabilities - discontinued operations:
|
$971,466
|
$4,125,526
|
|
|
|
Long
term liabilities - discontinued operations:
|
|
|
Note
payable - long term portion
|
$452,572
|
$—
|
Deferred
rent
|
36,948
|
38,184
|
Notes
payable - related parties, long term portion
|
500,000
|
500,000
|
Total
long term liabilities - discontinued operations
|
$989,520
|
$538,184
|
The following information presents the major classes of line items
constituting the after-tax loss from discontinued operations in the
consolidated statements of operations for the years ended December
31, 2016 and 2015:
|
Year Ended December 31,
|
|
|
2016
|
2015
|
Revenue
|
$10,311,558
|
$17,021,752
|
Cost
of goods sold
|
8,727,310
|
14,969,013
|
Gross
margin
|
1,584,248
|
2,052,739
|
|
|
|
Salaries
and related expenses
|
338,031
|
410,494
|
Selling,
general and administrative expenses
|
403,165
|
461,966
|
Total
operating expenses
|
741,196
|
872,460
|
|
|
|
Operating
income
|
843,052
|
1,180,279
|
|
|
|
Other
expense:
|
|
|
Interest
expense, net
|
268,667
|
221,020
|
Total
other expense
|
268,667
|
221,020
|
|
|
|
Income
from discontinued operations before tax
|
574,385
|
959,259
|
|
|
|
Income
tax expense
|
230,900
|
385,600
|
|
|
|
Income
from discontinued operations, net of tax
|
$343,485
|
$573,659
|
30
The following information presents the major classes of line items
constituting significant operating and investing cash flow
activities in the consolidated statements of cash flows relating to
discontinued operations:
|
Years Ended December 31,
|
|
|
2016
|
2015
|
Cash
flows from operating activities of discontinued
operations:
|
|
|
Adjustments
to reconcile net loss to net cash used in operating activities of
discontinued operations:
|
|
|
Depreciation
and amortization
|
$26,685
|
$40,382
|
Changes
in operating assets and liabilities including assets and
liabilities held for sale:
|
|
|
Accounts
receivable
|
2,872,709
|
(2,157,654)
|
Prepaid
expenses and other non-current assets
|
84,417
|
(32,693)
|
Inventory
|
17,017
|
141,406
|
Accounts
payable and accrued expenses
|
(1,676,445)
|
1,244,430
|
Deferred
revenue
|
(40,652)
|
(160,172)
|
Other
liabilities
|
(71,860)
|
140,449
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
1,211,871
|
(783,852
)
|
|
|
|
Cash
flows from investing activities in discontinued
operations:
|
|
|
Purchases
of property and equipment
|
(7,000)
|
—
|
Net
cash used in investing activities in discontinued
operations
|
(7,000)
|
—
|
|
|
|
Cash
flows from financing activities in discontinued
operations:
|
|
|
Net
change in line of credit
|
(1,199,670)
|
230,449
|
Payments
on other notes payable
|
—
|
(11,668)
|
Borrowings
on term notes
|
452,571
|
—
|
Deferred
financing cost
|
—
|
(19,420)
|
Payments
on term notes
|
(166,667)
|
(250,000)
|
Net
cash used in financing activities in discontinued
operations
|
$(913,766
)
|
$(50,639)
|
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
December 31,
|
|
|
2016
|
2015
|
Leasehold
improvements
|
$25,792
|
$25,792
|
Computer
equipment and software
|
420,569
|
420,569
|
Vehicles
|
215,358
|
206,702
|
Furniture
|
22,965
|
22,965
|
Cameras
|
819,466
|
703,392
|
Phone
equipment
|
16,811
|
16,811
|
Handheld
ticketing system
|
30,293
|
30,293
|
|
1,551,254
|
1,426,524
|
Accumulated
depreciation and amortization
|
(1,342,944)
|
(1,250,224)
|
|
$208,310
|
$176,300
|
Depreciation and amortization of property and equipment from
continuing operations the years ended December 31, 2016 and 2015
was $101,564 and $149,231, respectively. Depreciation and
amortization of property and equipment for discontinued operations
the years ended December 31, 2016 and 2015 was $26,685 and $40,382,
respectively.
31
NOTE 6 – LINE OF CREDIT AND OTHER NOTES PAYABLE
Line of Credit
On July 12, 2016 (the “Closing Date”), the Company
entered into a loan and security agreement (the “Loan
Agreement”) with Fundamental Funding LLC (the
“Lender”). The Loan Agreement provides for a
multi-draw loan to the Company for (i) the Company’s accounts
receivable, the lesser of (y) $2,500,000 or (z) 85% of the
Company’s eligible accounts and (ii) the Company’s
inventory advances, the lesser of (y) $500,000 or (z) 50% of the
eligible inventory (the “Revolving Loans”). The maximum
amount available to the Company under the Loan Agreement for the
Revolving Loans is $3,500,000 (the “Credit Limit”). In
addition, the Lender agreed to provide the Company with an
accommodation loan in an amount not to exceed $500,000, which shall
be repaid in thirty-six (36) equal monthly installments of
principal and interest (the “Accommodation Loan” and
together with the Revolving Loans, the
“Loans”).
On the Closing Date, the Lender advanced the Company
$533,670. The amounts advanced under the Loan Agreement
are due and payable on the three (3) year anniversary of the
Closing Date (the “Maturity Date”), and thereafter, the
Maturity Date shall automatically be extended for successive
periods of one year unless the Company shall give lender written
notice of termination not less than ninety (90) days prior to the
end of such term or renewal term, as applicable. Lender may
terminate the Loan Agreement at any time in its sole discretion by
giving the Company ninety (90) days prior written notice, provided
that upon an Event of Default (as defined in the Loan Agreement),
Lender may terminate the Loan Agreement without notice to the
Company, effective immediately. Upon termination by the Lender, the
Company shall be required to pay certain termination fees based on
a percentage of the Credit Limit as set forth in the Loan
Agreement.
The outstanding principal balance under the Note for the Revolving
Loans shall bear interest at a rate per annum equal to the
“prime rate” published from time to time in
the Wall Street
Journal (the “Prime
Rate”), plus 1.75% per annum, accruing daily and payable
monthly. The outstanding principal balance under the Accommodation
Loan shall bear interest at a rate per annum equal to the Prime
Rate in effect from time to time, plus 12.75% per annum, accruing
daily and payable monthly. Notwithstanding
any other provision in the Loan Agreement, interest on Loans shall
be calculated on the higher of: (i) the actual average monthly
balance of all Loans from the prior month, or (ii) $1,350,000. In
addition the Company will be subject to certain monthly or annual
fees on the Loans as set forth in the Loan
Agreement.
The remaining portion of Credit Limit may be advanced to the
Company upon written notice provided to the Lender during the
period beginning from the Closing Date through the Maturity Date
provided no default has occurred under the Loan Agreement. The
Company may prepay any portion of the Accommodation Loan, in whole
or in part, to Lender on or prior to the Maturity
Date.
Initial borrowings under the Loan Agreement were subject to, among
other things, the substantially concurrent repayment by the Company
of all amounts due and owing under the Companyís credit
facility, dated May 24, 2014, with Rosenthal & Rosenthal, Inc.
and the satisfaction and termination of such borrowing and all
liens thereunder (collectively, the “Rosenthal
Loan”). All amounts owed under the Rosenthal Loan,
which were $2,253,617, were satisfied and terminated by the Company
on the Closing Date.
In addition, on the Closing Date, the Company entered into a
subordination agreement with each of C.B. Brechin and Scott
Rutherford, the Companyís chief executive officer and chief
strategy officer, respectively, as well as with the Investor
described in Note 8 pursuant to which each of the parties agreed to
subordinate all present and future indebtedness held by each of
them to the obligations of the Lender.
On the Closing Date, as part of the Loan Agreement and to
secure the payment and performance of all of the obligations owed
to Lender under the Loan Agreement when due, the Company granted to
Lender a security interest in all right, title and interest to all
assets of the Borrower, whether now owned or hereafter arising or
acquired and wherever located.
The Loan Agreement contains customary affirmative and negative
covenants for loan agreements of its type, including but not
limited to, limiting the Company’s ability to pay dividends
or make any distributions, incur additional indebtedness, grant
additional liens, engage in any other lime of business, make
investments, merge, consolidate or sell all or substantially all of
its assets and enter into transactions with related
parties. The Loan Agreement also contains certain
financial covenants, including, but not limited to, a debt service
coverage ratio.
32
The Loan Agreement includes customary events of default, including
but not limited to, failure to pay principal, interest or fees when
due, failure to comply with covenants, default under certain other
indebtedness, certain insolvency or bankruptcy events, the
occurrence of certain material judgments the institution of any
proceeding by a government agency or a change of control of the
Company.
All borrowings under the Loan Agreement are due upon a default
under the terms of the Loan Agreement. The Company’s
obligations under the Loan Agreement are guaranteed by C.B.
Brechin, the Company’s chief executive officer pursuant to
the terms of a surety agreement.
At December 31, 2016, the Company had $274,795 in outstanding
indebtedness under the Revolving Facility and $452,571 in
outstanding indebtedness under the Term Loan, and the Company could
have borrowed up to an additional $2,725,205 under the Revolving
Facility. As of December 31, 2016, 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 year ended
December 31, 2016. The Company did not request a waiver for the
year ended December 31, 2016 and the Revolving Facility and Term
Loan were repaid in full on February 28, 2017.
Other Notes Payable
The Company financed certain vehicles and equipment under finance
agreements. The agreements mature at various dates through December
2017. Principal maturities in 2017 are $20,150. The agreements
require various monthly payments of principal and interest until
maturity. As of December 31, 2016 and 2015, financed assets of
$19,475 and $47,732, respectively, net of accumulated amortization
of $122,441 and $98,184, respectively, are included in property and
equipment on the balance sheets. The weighted average interest rate
was 3.75% at December 31, 2016 and December 31, 2015.
NOTE 7 – 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
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
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 closes an
equity financing that generates gross proceeds in the aggregate
amount of not less than $5,000,000.
On April 1, 2010, Brekford and each member of the lender group
executed a First Amendment to each Promissory Note, which amended
the respective Promissory Note 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 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 closes an equity financing that generates
gross proceeds in the aggregate amount of not less than
$5,000,000.
On November 4, 2014, Brekford 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 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 Promissory Notes
were extended to the earlier of (i) November 9, 2016 or
(ii) 10 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.
On November 4, 2016, the maturity dates of the Promissory Notes
were extended to the earlier of (i) November 9, 2017 or
(ii) 10 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. Mr. Brechin and Mr. Rutherford
have indicated that they will not exercise their right of repayment
prior to September 30, 2017.
33
The Company anticipates the maturity date of the Promissory Notes
will continue to be extended for the foreseeable future; thus, they
are classified as long-term liabilities in Discontinued Operations
– Long Term Liabilities (Note 4). As of December 31, 2016 and
2015, the amounts outstanding under the Promissory Notes totaled
$500,000.
NOTE 8 – 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. The note
and accrued interest was repaid on February 28, 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 $19,861.
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.
On May 31, 2016 the Investor converted $50,000 of principal and
$3,625 of accrued interest due under the Investor Note into 605,928
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $38,923.
On July 1, 2016 the Investor converted $50,000 of principal and
$3,880 of accrued interest due under the Investor Note into 699,733
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $40,875.
On July 27, 2016 the Investor converted $50,000 of principal and
$4,093 of accrued interest due under the Investor Note into 758,670
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $45,024.
On August 31, 2016 the Investor converted $50,000 of principal and
$4,381 of accrued interest due under the Investor Note into 776,869
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $44,617.
The following table provides information relating to the Investor
Note at December 31, 2016 and :
|
December 31, 2016
|
December 31, 2015
|
Convertible
promissory note payable
|
$340,000
|
$640,000
|
Original
issuance discount, net of amortization of the $61,786 and $23,002
as of December 31, 2016 and 2015
|
(3,214)
|
(35,180)
|
Beneficial
conversion feature, net of amortization of $530,338 and $197,437 as
of December 31, 2016 and 2015
|
(27,583)
|
(301,959)
|
Warrant
feature, net of amortization of the $87,527 and $32,585 as of
December 31, 2016 and 2015
|
(4,552)
|
(49,835
|
Original
issuance cost, net of amortization of $46,996 and $20,744 as of
December 31, 2016 and 2015
|
(5,504)
|
(31,756)
|
Convertible
promissory note payable, net
|
$299,147
|
$221,269
|
34
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 $274,377 and $45,284 during
the year ended December 31, 2016 and $255,961 and $42,243, during
the year ended December 31, 2015 which also includes the
unamortized beneficial conversion feature and warrant feature
attributable to the $375,000 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 $31,966 and $29,820 of interest expense as a
result of the amortization during the nine months ended December
31, 2016 and the year ended December 31, 2015 respectively, which
also includes the unamortized original issue discount attributable
to the $375,000 principal converted to equity.
NOTE 9 – 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 Company’s 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 December 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% - 105.1%;
(iii) weighted average risk-free interest rate
of 1.14-1.93%; (iv) expected life of five years; and (v)
estimated fair value of the Common Stock of $0.10-$0.26 per
share.
At December
31, 2016 and 2015, the outstanding fair value of the derivative
liability was $24,360 and $99,036,
respectively.
35
NOTE 10 – LEASES
Operating Leases
The Company rents office space under separate non-cancelable
operating leases expiring in April 2020. Rent expense under our
main headquarters lease, expiring on April 30, 2020 amounted to
$171,243 and $169,297 for the years ended December 31, 2016 and
2015, respectively.
Future minimum lease payments under these lease agreements,
exclusive of the Company’s share of operating costs at
December 31, 2016 and 2015 are as follows:
2017
|
$177,878
|
2018
|
183,214
|
2019
|
188,711
|
2020
|
64,475
|
Total
|
614,278
|
Discontinued
operations
|
522,136
|
Total
minimum lease payment under continuing operations
|
$92,142
|
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, 2017. Rent expense under this lease amounted
to $49,200 for the years ended December 31, 2016 and 2015,
respectively.
Future minimum lease payments under these lease agreements,
exclusive of the Company’s share of operating costs at
December 31, 2016 are $24,600 during 2017.
NOTE 11 – INVENTORY
As of December 31, 2016 and December 31, 2015 inventory consisted
entirely of raw materials of $221,816 and $316,775,
respectively.
NOTE 12 – LOSS PER SHARE
The following table provides information relating to the
calculation of loss earnings per common share for continuing
operations:
|
Years Ended December 31,
|
|
|
2016
|
2015
|
|
|
|
Basic
loss earnings per share
|
|
|
Net
loss from continuing operations
|
$(1,397,888
)
|
$(944,830
)
|
Weighted
average common shares outstanding - basic
|
47,357,787
|
44,690,550
|
Basic
loss per share
|
$(0.03)
|
$(0.02)
|
|
|
|
Diluted
loss per share
|
|
|
Net
loss from continuing operations
|
$(1,397,888
)
|
$(944,830
)
|
Weighted
average common shares outstanding
|
47,357,787
|
44,690,550
|
Potential
dilutive securities
|
—
|
—
|
Weighted
average common shares outstanding – diluted
|
44,357,787
|
44,499,610
|
Diluted
loss per share
|
$(0.03)
|
$(0.02)
|
Common
stock equivalents excluded due to anti-dilutive effect
|
6,961,429
|
8,576,134
|
36
The following table provides information relating to the
calculation of net income per common share for discontinued
operations:
|
Years Ended December 31,
|
|
|
2016
|
2015
|
|
|
|
Basic
net income per share
|
|
|
Net
income from discontinued operations
|
$343,485
|
$573,659
|
Weighted
average common shares outstanding - basic
|
47,357,787
|
44,690,550
|
Basic
loss per share
|
$0.01
|
$0.01
|
|
|
|
Diluted
net income per share
|
|
|
Net
income from discontinued operations
|
$343,485
|
$573,659
|
Weighted
average common shares outstanding
|
47,357,787
|
44,690,550
|
Potential
dilutive securities
|
5,796,429
|
7,511,134
|
Weighted
average common shares outstanding – diluted
|
53,154,216
|
52,201,684
|
Diluted
loss per share
|
$0.01
|
$0.01
|
Common
stock equivalents excluded due to anti-dilutive effect
|
1,165,000
|
1,065,000
|
NOTE 13 - STOCKHOLDERS’ EQUITY
At December 31, 2016 and 2015, the Company’s authorized stock
consists of 20,000,000 shares of $.0001 par value preferred stock
and 150,000,000 shares of $.0001 par value common
stock.
The following common stock transactions occurred during the
period:
During the period ended December 31, 2016 the
Company granted an aggregate of 332,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.16 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 $53,000
in share-based compensation expense related to restricted stock
grants.
During the period ended December 31, 2016 the Company issued
3,828,010 shares at an average valued of $0.13 per share to convert
$300,000 of principal and $21,945 of accrued interest due under the
Convertible Note Agreement and recognized a loss on extinguishment
of debt of $291,911.
During the period ended December 31, 2015 the
Company granted an aggregate of 132,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.34 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
$44,880 in share-based compensation expense related to restricted
stock grants.
During the period ended December 31, 2015 the Company issued
518,685 shares at an average valued of $0.26 per share to convert
$75,000 of principal and $3,033 of accrued interest due under the
Convertible Note Agreement and recognized a loss on extinguishment
of debt of $55,021.
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 the 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
was 24 months. The repurchase plan expired in September
2014.
37
Warrants
The assumptions used to value warrant grants during the year ended
December 31, 2015, which consisted solely of the Warrant, were as
follows:
|
Year ended
December 31, 2015
|
Expected
life (in years)
|
5.00
|
Volatility
|
80.50%
|
Risk
free interest rate
|
1.56%
|
Expected
Dividend Rate
|
0%
|
Summary of the warrant activity for year ended December 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, 2015
|
—
|
$—
|
—
|
$0.00
|
Granted
|
840,000
|
0.50
|
4.21
|
0.00
|
Forfeited
or expired
|
—
|
—
|
—
|
0.00
|
Exercised
|
—
|
—
|
—
|
0.00
|
Outstanding
at December 31, 2015
|
840,000
|
0.50
|
4.21
|
0.00
|
Granted
|
—
|
—
|
—
|
0.00
|
Forfeited
or expired
|
—
|
—
|
—
|
0.00
|
Exercised
|
—
|
—
|
—
|
|
Outstanding
at December 31, 2016
|
840,000
|
0.50
|
3.21
|
0.00
|
Exercisable
at December 31, 2016
|
840,000
|
0.50
|
3.21
|
0.00
|
The weighted average remaining contractual life of warrants
outstanding as of December 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
|
3.21
|
|
|
|
|
Total
|
840,000
|
840,000
|
3.21
|
NOTE 14 – 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 year ended December 31, 2016, 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 year ended December 31, 2016 were 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 $0.12 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.
38
Option grants during the year ended December 31, 2015 were 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 $0.24 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 $14,504 and $11,214 in stock option
compensation expense during the period ended December 31, 2016 and
2015, respectively, related to the stock option
grants.
The Company uses the Black-Scholes option pricing model to
determine the fair value of stock options granted to employees and
recognizes the compensation cost of employee share-based awards in
its statement of operations using the straight-line method over the
vesting period of the award, net of estimated
forfeitures.
The use of the Black-Scholes option pricing model to estimate the
fair value of share-based awards requires that the Company make
certain assumptions and estimates for required inputs to the model,
including (1) the fair value of the Company’s common stock at
each grant date, (ii) the expected volatility of the
Company’s common stock value based on industry comparisons,
(iii) the expected life of the share-based award, (iv) the
risk-free interest rate, and (v) the dividend
yield.
The following are the assumptions made in computing the fair value
of share-based awards granted in the years ended December 31, 2016
and 2015:
|
Year ended
December 31, 2016
|
Year ended
December 31, 2015
|
Expected
life (in years)
|
3.50
|
3.50
|
Volatility
|
78.8%
|
80.5%
|
Risk
free interest rate
|
0.88%
|
0.95%
|
Expected
Dividend Rate
|
0
|
0
|
Summary of the option activity for the period ended December 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, 2015
|
225,000
|
$0.00
|
—
|
$0.00
|
Granted
|
225,000
|
0.20
|
—
|
0.00
|
Forfeited
or expired
|
(50,000)
|
—
|
—
|
0.00
|
Exercised
|
—
|
—
|
—
|
|
Outstanding
at January 1, 2016
|
400,000
|
$0.20
|
3.25
|
$0.00
|
Granted
|
225,000
|
0.12
|
3.50
|
0.00
|
Forfeited
or expired
|
(75,000)
|
0.22
|
2.00
|
0.00
|
Exercised
|
—
|
—
|
—
|
|
Outstanding
at December 31, 2016
|
550,000
|
$0.20
|
3.00
|
0.00
|
Exercisable
at December 31, 2016
|
225,000
|
$0.20
|
—
|
0.00
|
Vested
and expected to vest
|
325,000
|
$0.20
|
3.00
|
0.00
|
The unrecognized compensation cost for unvested stock option awards
outstanding at December 31, 2016 was approximately $21,032 to be
recognized over approximately 3years.
39
Restricted Stock Grants
During the period ended December 31, 2016 the
Company granted an aggregate of 332,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.16 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 $53,000
in share-based compensation expense related to restricted stock
grants.
During the period ended December 31, 2015 the
Company granted an aggregate of 132,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.34 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
$44,880 in share-based compensation expense related to restricted
stock grants.
|
Restricted Stock Shares
|
Weighted Average Value
|
Nonvested
restricted stock at January 1, 2015
|
—
|
$—
|
Granted
|
132,000
|
0.34
|
Vested
|
(132,000)
|
0.34
|
Forfeited
or expired
|
—
|
—
|
Nonvested
restricted stock at December 31, 2015
|
—
|
$—
|
Granted
|
332,000
|
0.16
|
Vested
|
(332,000)
|
0.16
|
Forfeited
or expired
|
—
|
—
|
Nonvested
restricted stock at December 31, 2016
|
—
|
$—
|
2008 Stock Incentive Plan
The 2008 Incentive Plan is designed to provide an additional
incentive to executives, employees, directors and key consultants,
aligning the long term interests of participants in the 2008
Incentive Plan with those of the Company and the Company’s
stockholders. The 2008 Incentive Plan provides that up to 8 million
shares of the Company’s common stock may be issued pursuant
to awards granted under the 2008 Incentive Plan. As of December 31,
2016, 5,339,000 shares of common stock remained available for
future issuance under the 2008 Incentive Plan.
2008 Employee Stock Purchase Plan
On February 19, 2008, the Board of Directors authorized the
adoption of the 2008 Employee Stock Purchase Plan (the
“Purchase Plan”), subsequently approved by the
stockholders on April 25, 2008, which is designed to encourage
and enable eligible employees to acquire a proprietary interest in
the Company’s common stock. The Purchase Plan provides that
up to 2 million shares of the Company’s common stock may
be issued under the Plan. No shares have been issued under the
Plan.
NOTE 15 – EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan under Section
401(k) of the Internal Revenue Code. The 401(k) Plan is a defined
contribution plan, which covers substantially all U.S.-based
employees of the Company and its wholly-owned subsidiaries who have
completed three months of service. The 401(k) Plan provides that
the Company will match 50% of the participant salary deferrals up
to 3% of a participant’s compensation for all participants.
The Company contributed $13,352 and $8,718 during the years ended
December 31, 2016 and, 2015, respectively.
NOTE 16 – MAJOR CUSTOMERS AND VENDORS
Major Customers
The Company has several ATSE contracts with government agencies, of
which net revenue from four customers during the year ended
December 31, 2016 represented 63% of the total net revenue. Four
customers accounted for 88% of total accounts receivable as of
December 31, 2016, which was subsequently collected in
2017.
Net revenue from five customers during the year ended December 31,
2015 represented 80% of the total net revenue. Accounts receivable
due from three customers at December 31, 2015 amounted to 91% of
total accounts receivable at that date.
Major Vendors
The Company purchased products and services for fulfillment of ATSE
contracts from several vendors. As of December 31, 2016 and 2015,
accounts payable due to these vendors amounted to 47% and 38% of
total accounts payable, respectively.
40
NOTE 17 – INCOME TAXES
As of December 31, 2016, the Company has approximately $7.55
million of federal and state net operating loss carryforwards
available to offset future taxable income, if any, through 2034.
These net operating losses begin to expire in 2028. If,
however, there is an ownership change in the Company,
some of
the Company’s tax attributes may limit the Company’s ability to utilize loss
carryforwards. Therefore, these operating loss carryforwards could
become limited in future years if ownership changes were to occur
as defined in the Internal Revenue Code and similar state income
tax provisions. The Company files income tax returns with the U.S.
Internal Revenue Service and with the revenue services of various
states.
The Companyís deferred tax assets and liabilities at December
31, 2016 and 2015 are as follows:
|
December 31,
|
|
|
2016
|
2015
|
|
|
|
Net
operating loss carry forwards
|
$3,112,000
|
$2,780,000
|
Property
and Equipment
|
(490,000)
|
(500,000)
|
Other
|
—
|
—
|
|
2,622,000
|
2,280,000
|
Valuation
allowance
|
(2,622,000)
|
(2,280,000)
|
Net
deferred tax asset
|
$—
|
$—
|
The Company’s recorded income tax, net of the change in the
valuation allowance for each of the periods presented, is as
follows:
|
Years Ended December 31,
|
|
|
2016
|
2015
|
Current
|
|
|
Federal
|
$—
|
$—
|
State
|
—
|
—
|
|
—
|
—
|
|
|
|
Deferred
|
|
|
Federal
|
(369,000)
|
(130,000)
|
State
|
(55,000)
|
(20,000)
|
|
(424000)
|
(150,000)
|
Change
in valuation allowance
|
424,000
|
150,000
|
Income
tax expense
|
$—
|
$—
|
Management has evaluated the recoverability of the deferred income
tax assets and the level of the valuation allowance required with
respect to such deferred income tax assets. After considering all
available facts, the Company fully reserved for its deferred tax
assets because management believes that it is more likely than not
that their benefits will not be realized in future periods. The
Company will continue to evaluate its deferred tax assets to
determine whether any changes in circumstances could affect the
realization of their future benefit. If it is determined in future
periods that portions of the Company’s deferred income tax
assets satisfies the realization standard, the valuation allowance
will be reduced accordingly.
41
A reconciliation of the expected Federal statutory rate of 35% to
the Company’s actual rate as reported for each of the periods
presented is as follows:
|
Years Ended December 31,
|
|
|
2016
|
2015
|
Expected
statutory rate
|
(35.0)%
|
(35.0)%
|
State
income tax rate, net of Federal benefit
|
(5.2)%
|
(5.2)%
|
Permanent
differences
|
|
|
Other
|
—%
|
—%
|
|
40.2
|
40.2%
|
Valuation
allowance
|
(40.2)%
|
(40.2)%
|
|
—%
|
—%
|
NOTE 18 – SUBSEQUENT EVENTS
Merger Agreement
On February 10, 2017, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) to combine
the businesses of Brekford and KeyStone Solutions, Inc., a Delaware
corporation (“KeyStone”). The Merger Agreement provides
that Brekford and KeyStone will each engage in merger transactions
(the “Mergers”) with separate wholly-owned subsidiaries
of a newly-formed company, Novume Solutions, Inc., a Delaware
corporation (“Novume”). Under one merger transaction
(the “Brekford Merger”), one wholly-owned subsidiary of
Novume will merge with and into Brekford, leaving Brekford as a
wholly-owned subsidiary of Novume. Under a separate merger
transaction (the “KeyStone Merger”), KeyStone will
merge with and into another wholly-owned subsidiary of Novume
(“KeyStone Merger Sub”), with KeyStone Merger Sub
surviving such merger. The time at which the
Mergers are completed in accordance with the Merger Agreement is
referred to as the “Effective Time”. As soon as
practicable after the Effective Time, Brekford will change its name
to “Brekford Traffic Safety, Inc.” and KeyStone Merger
Sub will change its name to “KeyStone Solutions,
Inc.”
Merger Consideration
As consideration for the Mergers, each outstanding share of the
common stock, par value $0.0001 per share, of Brekford
(“Brekford Common Stock”) immediately prior to the
Effective Time will become convertible into and exchangeable for
1/15th of a share of common stock, par value
$0.0001 per share, of Novume (“Novume Common Stock” and
such ratio, the “Brekford Exchange Ratio”). Each
outstanding share of the common stock, par value $0.0001 per share,
of KeyStone (“KeyStone Common Stock”) immediately prior
to the Effective Time, will become convertible into and
exchangeable for 1.9975 shares of Novume Common Stock, and each
outstanding share of the Series A Cumulative Convertible Redeemable
Preferred Stock, par value $0.0001 per share, of KeyStone
(“KeyStone Preferred Stock”) will become convertible
into and exchangeable for 1.9975 shares of the Series A Cumulative
Convertible Redeemable Preferred Stock of Novume (“Novume
Preferred Stock” and such ratio, the “KeyStone Exchange
Ratio”). The outstanding warrants and options to purchase
shares of Brekford Common Stock and KeyStone Common Stock, as
applicable, shall be exchanged for warrants and options to purchase
Novume Common Stock at the Brekford Exchange Ratio or the KeyStone
Exchange Ratio, as applicable. Collectively, the forgoing is
referred to herein as the “Merger
Consideration”.
The Merger Consideration, and each of the Brekford Exchange Ratio
and the KeyStone Exchange Ratio, were determined so that,
immediately after the Effective Time, the pre-merger stockholders
of Brekford will own such portion of the capital stock of Novume as
shall be equal to approximately 20% of the issued and outstanding
NovumeCommon
Stock, on a fully-diluted
basis, and the pre-merger stockholders of KeyStone will own that
portion of the capital stock of Novume as is equal to approximately
80% of the issued and outstanding Novume Common Stock, on a
fully-diluted basis.
Contribution and Unit Purchase Agreement
On February 6, 2017, the Company entered into a Contribution and
Unit Purchase Agreement (the “ LB&B Agreement”)
with LB&B Associates Inc. (the “Purchaser”) and
Global Public Safety, LLC (“GPS”).
The closing for the transaction set forth in the Agreement occurred
on February 28, 2017 (the “LB&B Closing”) and on
such date the Company contributed substantially all of the assets
and certain liabilities related to its vehicle services business
(the “Business”) to GPS. After the LB&B Closing,
the Company will continue to own and run other business operations
that are not related to the Business.
42
On the LB&B Closing, GPS sold units representing 80.1% of the
units of GPS to the Purchaser for $6,048,394, after certain
purchase price adjustments of prepaid expenses and unbilled
customer deposits. $4,048,394 was paid in cash, including a
$250,000 deposit that was paid on February 6, 2017, and $2,000,000
was paid by Purchaser issuing the Company a promissory note (the
“Promissory Note”). After the LB&B Closing, the
Company continues to own 19.9% of the units of GPS.
The Promissory Note is subordinated to the Purchaser’s senior
lender and accrues interest at a rate of 3% per annum. The maturity
date of the Promissory Note is March 31, 2022. The Promissory Note
is to be repaid as follows: (a) $75,000 plus all accrued interest
on each of September 30, 2017; December 31, 2017; March 31, 2018,
June 30, 2018 and September 30, 2018 (or, in the event any such
date is not a business day, the first business day after such
date), (b) $100,000 plus all accrued interest on each of December
31, 2018; March 31, 2019; June 30, 2019 and September 30, 2019 (or,
in the event any such date is not a business day, the first
business day after such date) (c) $125,000 plus all accrued
interest on each of December 31, 2019; March 31, 2020; June 30,
2020; September 30, 2020, December 31, 2020; March 31, 2021, June
31, 2021; September 30, 2021; and December 31, 2021 (or, in the
event any such date is not a business day, the first business day
after such date), and (d) $100,000 on March 31, 2022.
The Promissory Note is secured pursuant to the terms of a Pledge
Agreement (the “Pledge Agreement”) between the Company
and Purchaser. Pursuant to the Pledge Agreement the Purchaser
granted the Company a continuing second priority lien and security
interest in the Purchaser’s units of GPS subject to liens of
the Purchaser’s senior lender.
Pursuant to the Agreement, the Company and GPS executed a
Transition Services Agreement (the “Transition Services
Agreement”). Pursuant to the Transition Services Agreement,
the Company will perform certain support services to promote the
efficient transition of the Business for the fees set forth in the
Agreement.
In connection with the Agreement the Company entered into an
Amended and Restated Limited Liability Company Agreement of Global
Public Safety, LLC (the “LLC Agreement”). The LLC
Agreement provides for the operations of GPS and provides that all
limited liability company powers of the Company shall be exercised
by and under the authority of the Board of Representatives except
as otherwise provided by the LLC Agreement or applicable law. The
initial number of representatives constituting the Board of
Representatives is three, of which the Company appointed one member
and if the number of Board of Representatives is increased the
Company shall be able to appoint the number of members required to
maintain 1/3 of the seats on the Board of
Representatives.
Pursuant to a month-to-month sublease agreement between GPS and the
Company, the Company will continue to occupy 3,362 square feet of
office space, located at 7020 Dorsey Road, Suite C, Hanover,
Maryland 21076.
The Company also entered into a Pre-Novation Agreement with GPS
pursuant to which performance under certain contracts being
assigned to GPS will be made while these contracts are being
assigned to GPS. The Company will also enter into a Novation
Agreement pursuant to which the government contracts being assigned
to GPS will be transferred.
Director Resignation
On February 18, 2017, Edward Parker notified Brekford Corporation
(the “Company”) that he was resigning from the
Company’s board of directors effective
immediately.
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On June 9, 2016, the Company engaged BD & Company, Inc.
(“BD”) as the new independent registered public
accounting firm for the Company and its subsidiaries. There were no
disagreements between the Company and our former audit firm Stegman
& Company on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or
procedures.
ITEM 9A. 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 Exchange Act with the SEC,
such as this Annual 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 executive officer and
principal financial and accounting officer (“CEO”), to
allow for timely decisions regarding required
disclosure.
An evaluation of the effectiveness of these disclosure controls and
procedures as of December 31, 2016 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.
During the quarter ended December 31, 2016, there was no change in
the Company’s internal control over financial reporting that
has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
Limitation on Effectiveness of Controls and Procedures
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.
As required by Section 404 of the Sarbanes-Oxley Act of 2002,
management has performed an evaluation and testing of the
Company’s internal control over financial reporting as of
December 31, 2016. Management’s report on the Company’s
internal control over financial reporting is included on the
following page. The Company is a “smaller reporting
company” as defined by Rule 12b-2 promulgated under the
Exchange Act and, accordingly, its independent registered public
accounting firm is not required to attest to the foregoing
management report.
44
Management’s Report on Internal Control Over Financial
Reporting
Board of Directors
Brekford Corp.
Management of Brekford Corp. (the “Company”) is
responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. This internal
control system was designed to provide reasonable assurance to
management and the Board of Directors as to the reliability of the
Company’s financial reporting and the preparation and
presentation of financial statements for external purposes in
accordance with accounting principles generally accepted in the
United States, as well as to safeguard assets from unauthorized use
or disposition.
An internal control system, no matter how well designed, has
inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation and may not
prevent or detect misstatements in the financial statements or the
unauthorized use or disposition of the Company’s assets.
Also, projections of any evaluation of effectiveness of internal
controls to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with policies and procedures may
deteriorate.
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.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2016,
based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
2013 Internal Control – Integrated Framework. Based on this
assessment and on the foregoing criteria, management has concluded
that, as of December 31, 2016, the Company’s internal control
over financial reporting was not effective due to the material
weakness described below.
Management has concluded that, as of December 31, 2016, a material
weakness exists because the Company does not currently 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. The Company intends to address 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.
Dated: March 28,
2017
/s/ Rodney Hillman
Rodney
Hillman
President
and Chief Financial Officer
(Principal
Executive Officer and Principal Accounting and
Financial Officer)
45
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Nominee
|
|
Age
|
|
Position with the Company
|
Rodney Hillman
|
|
51
|
|
President and Chief Operating Officer
|
Scott Rutherford
|
|
57
|
|
Chief Strategic Officer and Director
|
C.B. Brechin
|
|
44
|
|
Director
|
Robert West
|
|
47
|
|
Director
|
Steve Ellis
|
|
54
|
|
Director
|
The following discussion sets forth biographical and other
information about our directors, as well as the specific
experience, qualifications, other attributes and skills of each
director nominee that led the Board of Directors to determine that
such person should serve on the Board of Directors.
Rodney
Hillman, President
and Chief Operating Officer. Mr. Hillman, age 51, joined the
Company in May 2012 and served as its Strategy & Finance
Analyst since October 2012 and as its Director of Operations from
May 2012 to September 2012. He was appointed as our
President and Chief Operating Officer in December
2013. Prior to joining the Company, Mr. Hillman served
in various executive level capacities during his 28 year
career. Most recently, he spent 10 years as Chief Operating
Officer, Chief Financial Officer, and Director of Game Trading
Technologies, Inc. (“GMTD”), a publicly-traded company
in the consumer electronics industry that he
co-founded. Prior to his tenure at GMTD, Mr. Hillman was
Vice President of Product Development at InterAct Accessories, Inc.
and held various management positions at both Baltimore Gas &
Electric and Constellation Energy Group. Mr. Hillman has
an M.S. degree in Finance from Loyola College in Baltimore,
Maryland, an M.B.A. degree from the University of Baltimore, and a
B.S. degree in Electrical and Computer Engineering from The Johns
Hopkins University.
Scott Rutherford. Mr. Rutherford has served as Chief
Strategic Officer since December 2013 and, prior to that, as our
President since July 8, 2008. Prior to 2008, he was Director
of Engineering of our Pelican division since January 2006. He
has also served as a director of the Company since
January 2006. He co-founded Pelican in 1997 and served as its
Vice President from 1997 to 2006. Mr. Rutherford has more than
25 years of entrepreneurial experience in conceiving, developing
and building technical solutions for clients in both the corporate
and government sectors. For Pelican, Mr. Rutherford was
responsible for all aspects of technology evaluation and deployment
to meet its clients’ needs for mobile, ruggedized computing
solutions. This included locating and assimilating complex
solutions from various vendors to ensure a turnkey installation in
highly variable models of police and fire vehicles. In addition,
Mr. Rutherford launched and continues to develop
Pelican’s technical support infrastructure, for which he and
his team of engineers have been presented with awards for
Outstanding Technical Support by various clients, including the
Maryland State Police. Leveraging his extensive mechanical,
electronic and computer expertise, Mr. Rutherford has
developed a large array of products from concept, including a
Mobile Training Center for the Department of Defense and
proprietary irrigation control filters to eliminate RF interference
from the Annapolis Naval Radio Transmitter Station.
Mr. Rutherford is the recipient of several awards for his
innovative technology systems, including the “Comdex Most
Innovative” award in 1998. In nominating Mr.
Rutherford for election to the Board of Directors, the Board
considered Mr. Rutherford’s experience discussed above,
particularly his extensive technical knowledge in areas of
mechanical, electronics and computers, his familiarity with and
involvement in the Company’s key market areas, and his
significant business experience gained through the ownership and
operation of the Company.
C.B. Brechin. Mr. Brechin served as our Chief Executive
Officer from July 2008 until November 2016, as our Chief Financial
Officer from March 2011 until November 2016, and as a director of
the Company since January 2006. Mr. Brechin co-founded the
Companyís predecessor, Pelican Mobile, in 1996 which had been
a leading provider of rugged, mobile technology solutions providing
services to branches of the U.S. military, various federal entities
and numerous security and public safety agencies throughout the
Mid-Atlantic region for more than a decade. Mr. Brechin possesses
several years of technology expertise in the areas of hardware
configuration, software installation, troubleshooting and network
administration as a computer consultant for a number of
organizations before founding the company. Mr. Brechin managed all
aspects of the Pelicanís corporate and government sales,
including sales strategy, partner/vendor relations, corporate
structure, contract acquisition, training and development. In
addition, Mr. Brechin managed Pelicanís financial planning,
cash flow and risk analysis. He successfully closed over $20
million in sales and secured key client relationships. Through his
sales efforts and strategic vision, Pelican was twice been
recognized as a top reseller of Panasonic equipment, including
“Reseller of the Year” in 2004. Mr. Brechin has a
Bachelorís Degree in Political Science and International
Affairs from Kalamazoo College and a Masterís Degree in
Information and Telecommunications Systems from Johns Hopkins
University. In nominating Mr. Brechin for election to the Board of
Directors, the Board considered Mr. Brechinís experience
discussed above, particularly his management experience in running
a successful company involved in sales and contracts with
government agencies as well was his expertise in technology,
corporate governance and financial management.
46
Steve
Ellis. Mr.
Ellis has
served as a director of the Company since July 2015.
He is a
partner of EagleFirst, LLC, an advisory firm providing CFO, Merger
and Acquisition (“M&A”) and business development
support services to small and medium sized businesses with a focus
on government contracting, technology and
manufacturing. Mr. Ellis has more than 25 years of
experience in M&A and senior accounting roles in the United
States and internationally. He has managed the
negotiation and due diligence processes of more than 30
acquisitions and divestments globally, as well as creating and
executing post-acquisition integration plans. Prior to
EagleFirst, Mr. Ellis was a CFO at Smith’s Group plc, where
he helped create Smiths Detection, a manufacturer of sensors used
by government agencies that detect and identify explosives,
weapons, chemical agents, and biohazards. Over an
eight-year period, he was instrumental in growing Smiths
Detection’s revenues from $20 million to nearly $1
billion
Robert West. Mr. West has served as a director of the Company
since October 2012. He has been the Managing Partner at
C3 Healthcare Solutions, LLC since he led its formation in March
2008 with five other members. C3 Healthcare Solutions
provides business development and marketing consulting services to
health care organizations including hospitals and physician
practices. Additionally, Mr. West is the Chief Executive
Officer of Pulmonary and Critical Care Associates of Baltimore, PA
(“PCCAB”), a 43 physician group practice specializing
in pulmonology, critical care, and sleep medicine. He is
responsible for oversight of all financial, accounting, and billing
operations and has led the organization to 55% revenue growth in
the past five years. Mr. West is also the President of
Proximall, LLC, a physician billing company that is a wholly owned
subsidiary of PCCAB, formed in January 2012. Prior to
these endeavors, Mr. West served as Administrative Director of
Orthopedics, Neurosciences, and Bariatrics at Greater Baltimore
Medical Center from August 2003 to February 2007. Mr.
West’s board experience includes the Baltimore Spine Center
from January 2005 to February 2007 and he is currently on the
Executive Advisory Board of The Doctors Company. Mr.
West earned a Master of Science in Management from The University
of Maryland in 1999 and a Bachelor of Science from James Madison
University in 1991. In nominating Mr. West for election
to the Board of Directors, the Board considered Mr. West’s
experience discussed above in relation to the financial,
management, and organizational aspects of these
positions.
CORPORATE GOVERNANCE MATTERS
Committees of the Board of Directors
The Board of Directors has established an Audit Committee, a
Compensation Committee and a Corporate Governance Committee, each
of which is briefly described below.
Audit Committee
The Audit Committee assists the Board of Directors in maintaining
the integrity of our financial statements, and of our financial
reporting processes and systems of internal audit controls, and our
compliance with legal and regulatory requirements. The Audit
Committee reviews the scope of independent audits and assesses the
results. The Audit Committee meets with management to consider the
adequacy of the internal control over, and the objectivity of,
financial reporting. The Audit Committee also meets with the
Company’s independent registered public accounting firm and
with appropriate financial personnel concerning these matters. The
Audit Committee selects, determines the compensation of, appoints
and oversees our independent registered public accounting firm.
Representatives of the independent registered public accounting
firm periodically meet with the Audit Committee and always have
unrestricted access to the Audit Committee. The Audit Committee,
which currently consists of Steve Ellis and Robert West, met four
times during 2016. The Board of Directors has determined
that Mr. Ellis is an “audit committee financial
expert,” as defined by the SEC in Item 407 of Regulation
S-K. The Audit Committee has adopted a charter, a copy
of which is available on our website
at: http://ir.issuerdirect.com/bfdi/corporate_governance.
Compensation Committee
The Compensation Committee administers incentive compensation
plans, including stock option plans, and advises the Board of
Directors regarding employee benefit plans. The Compensation
Committee establishes the compensation structure for our senior
managers, approves the compensation of our senior executives, and
makes recommendations with respect to compensation of the Chief
Executive Officer and our other executive officers. The
Compensation Committee advises and makes recommendations to the
Board of Directors on all matters concerning director compensation.
The Compensation Committee, which currently consists of Robert West
(Chairman) and Steve Ellis, met once during 2016. The
Compensation Committee has adopted a charter, a copy of which is
available on our website at: http://ir.issuerdirect.com/bfdi/corporate_governance.
47
Compensation Committee Interlocks and Insider
Participation
None
of the members of our compensation committee was, during 2016, an
officer or employee of ours, was formerly an officer of ours or had
any relationship requiring disclosure by us under Item 404 of
Regulation S-K. No interlocking relationship as described in
Item 407(e)(4) of Regulation S-K exists between any of our
executive officers or Compensation Committee members, on the one
hand, and the executive officers or compensation committee members
of any other entity, on the other hand, nor has any such
interlocking relationship existed in the past.
Corporate Governance Committee
The Corporate Governance Committee evaluates and recommends
candidates for election to the Board of Directors, reviews the
performance and contribution of directors, recommends membership
for standing committees, reviews director independence, and adopts
and reviews Company corporate governance guidelines and codes of
conduct. The Corporate Governance Committee, which was established
in February 2008, currently consists of Robert West (Chairman)
and Steve Ellis. The Corporate Governance Committee met
once during 2016. The Corporate Governance Committee has
not adopted a charter.
Director
Independence
To determine whether directors are “independent”, the
Board of Directors has adopted the independence standards of The
NASDAQ Stock Market Rules (the “NASDAQ
Rules”). The Board has determined that each of
Messrs. Ellis, Parker and West is an “independent
director” as defined by NASDAQ Rule
5605(b)(1). Each member of the Compensation Committee
and the Corporate Governance Committee other than Mr. Brechin and
Mr. Rutherford is an “independent director,” and
Messrs. West and Ellis satisfy the independence requirements of
NASDAQ Rule 5605(c)(2)(A) relating to the independence of Audit
Committee members. The Company’s criteria for
independence as approved by the Board of Directors is available on
our website at: http://www.brekford.com/investorrelations.html.
Family Relationships
There are no family relationships among the executive officers and
directors of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section 16(a) of the Exchange Act requires our officers,
directors, and persons who own more than ten percent (10%) of
a registered class of our equity securities to file reports of
securities ownership and changes in such ownership with the SEC on
Forms 3, 4 and 5. Officers, directors, and greater-than-ten-percent
stockholders are required by SEC regulations to provide us with
copies of all Section 16(a) forms that they file.
Section 16(a) of the Exchange Act requires our directors and
executive officers and persons who own more than 10% of the issued
and outstanding shares of our common stock to file reports of
initial ownership of common stock and other equity securities and
subsequent changes in that ownership with the SEC. Officers,
directors and greater than ten percent stockholders are required by
SEC regulation to furnish us with copies of all Section 16(a) forms
they file. To our knowledge, during the fiscal year ended December
31, 2016, all Section 16(a) filing requirements applicable to our
officers, directors and greater than 10% beneficial owners were
complied with, except that Robert West filed a late form
4.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for each of the last two fiscal
years, the total remuneration awarded to, earned by, or paid to (i)
each person who served as the Company’s principal executive
officer at any time during 2016, (ii) the Company’s two most
highly compensated executive officers other than the persons
described in item (i) who were serving as executive officers as of
December 31, 2016 and whose total compensation (excluding
above-market and preferential earnings on nonqualified deferred
compensation) exceeded $100,000 during 2015, and (iii) up to two
additional individuals for whom disclosure would have been provided
pursuant to item (ii) had they been serving as executive officers
of the Company as of December 31, 2016 (the principal executive
officers and such other persons are referred to as the “named
executive officers”). The Company has determined
that its named executive officers for 2016 are C.B. Brechin, who
served as its Chief Executive Officer, Chief Financial Officer and
Treasurer, Rodney Hillman, who served as its President and Chief
Operating Officer, and Scott Rutherford, who served as its Chief
Strategic Officer.
48
Summary Compensation Table
Name and Principal Position
|
Year
|
Salary
($)
|
Stock awards
($)(2)
|
Option awards
($)(2)
|
Total
($)
|
C.B
Brechin
|
2016
|
200,000
|
-
|
-
|
200,000
|
(CEO
and CFO until November 2016)
|
2015
|
191,539
|
-
|
-
|
191,539
|
|
|
|
|
|
|
|
|
|
|
|
|
Rodney
Hillman
|
2016
|
157,000
|
13,200
|
-
|
170,200
|
President
& Chief Operations Officer, Chief Financial
Officer
|
2015
|
137,270
|
13,200
|
-
|
150,470
|
|
|
|
|
|
|
Scott
Rutherford
|
2016
|
185,000
|
-
|
-
|
185,000
|
Chief
Strategic Officer (1)
|
2015
|
177,174
|
-
|
-
|
177,174
|
Notes:
(1)
|
Messrs. Brechin and Rutherford also serve on the Board of Directors
of the Company but do not receive any separate compensation for
such service.
|
(2)
|
The amounts shown reflect the aggregate grant date fair value of
stock and option awards computed in accordance with Financial
Accounting Standards Board Accounting Standards Codification
718. See Note 10 to the audited consolidated financial
statements contained herein for the year ended December 31, 2016
regarding assumptions underlying valuation of equity
awards.
|
Employment Agreements and Change in Control Agreements
None of the named executive officers is a party to an employment
agreement with the Company, and all of them serve at the discretion
of the Board of Directors.
The terms of their employment arrangements entitle Messrs. Brechin,
Hillman and Rutherford to annual base salaries of $200,000,
$157,000 and $185,000, respectively, payable in accordance with our
normal payroll practices. Between January 1, 2015 and June 30,
2015, the salary levels for Messrs. Brechin and Rutherford were
$170,000 and $185,000, respectively. None of the named executive
officers received any bonus, equity or other non-salary
compensation for 2016 or 2015, except that Mr. Hillman received a
grant of 66,000 shares of Common Stock in 2016 for service in 2015
and a grant of 66,000 shares of Common Stock in 2015 for service in
2014.
Potential Payments Upon Termination Or Change In
Control
We have no liabilities under termination or change in control
conditions as of December 31, 2016 other than noted below. We do
not have a formal policy to determine executive severance benefits.
Each executive severance arrangement is negotiated on an individual
basis.
Separation
Agreement – Brechin
On
November 23, 2016, Brekford entered into a separation agreement
(the “Separation Agreement”) with C.B. Brechin, the
Company’s Chief Executive Officer and Chief Financial
Officer. Pursuant to the Separation Agreement, as of the
Effective Date Mr. Brechin commenced a sabbatical leave from his
positon as the Company’s Chief Executive Officer and Chief
Financial Officer. Mr. Brechin will continue to serve as a member
of the Board of Directors of the Company. For a period of 18 months
from the Effective Date, Mr. Brechin will continue to be paid at
the rate of $200,000 per year and will continue to participate in
the Company’s sponsored retirement plan and medical and
dental insurance plans. The salary and benefits described
above will continue beyond the 18 months until such time as Mr.
Brechin is removed as a personal guarantor for certain Company
obligations.
Commencing 18 months after the Effective Date, Mr. Brechin will
serve as a consultant to the Company for a period of four years
pursuant to the terms of a consulting agreement between the Company
and Mr. Brechin (the “Consulting Agreement”). Pursuant
to the Consulting Agreement, Mr. Brechin will provide consulting,
organizational and strategic services, including, but not limited
to, assistance or implementation of the strategic business plans of
the Company and assistance with customer relations and project
management and he will be paid an annual fee of
$150,000.
49
DIRECTOR COMPENSATION
The following table sets forth the compensation paid to all persons
who served as members of our Board of Directors (other than our
named executive officers) during 2016 Information about
the compensation paid to our named executive officers is provided
below in the section entitled “EXECUTIVE
COMPENSATION”.
Director Compensation Table
Name
|
Fees earned or paid in cash
($)
|
Stock awards
($) (1)(2)
|
Option awards
($) (1)(2)
|
All other compensation
($)
|
Total
($)
|
Steve
Ellis
|
3,000
|
-
|
4,141
|
-
|
7,141
|
Gregg
Smith
|
1,000
|
-
|
2,907
|
-
|
3,907
|
Robert
West
|
2,000
|
-
|
6,634
|
-
|
8,634
|
Edward
Parker (resigned from the Board In February 2016)
|
1,000
|
-
|
821
|
-
|
1,821
|
Notes:
(1)
|
The amounts shown reflect the aggregate grant date fair value of
stock and option awards computed in accordance with Financial
Accounting Standards Board Accounting Standards Codification
718. See Note 10 to the audited consolidated financial
statements contained in the Company’s Annual Report on Form
10-K for the year ended December 31, 2016 regarding assumptions
underlying valuation of equity awards.
|
(2)
|
As of December 31, 2016, each of Messrs. Ellis held options to
purchase 150,000 shares of Common Stock, Messrs. Smith held options
to purchase 100,000 shares of Common Stock, Messrs. West held
options to purchase 225,000 shares of Common Stock and Messrs.
Parker held options to purchase 75,000 share of Common
Stock.
|
In April 2008, the Company’s Board of Directors adopted
the 2008 Director’s Compensation Plan, which provides for the
following compensation:
Equity Grants
During the second quarter of 2016, each non-employee director who
attended at least 75% of the regular and special meetings of the
Board of Directors and of any committees to which he was appointed
during the preceding year received an option to purchase shares of
Common Stock. Each of Messrs. Ellis, West and Parker
satisfied the foregoing requirement and received a stock option
exercisable for 75,000 shares of Common Stock at an exercise price
of $0.12 per share. These options will vest ratably over
a three-year period commencing on their grant dates.
Cash
The Chairman of the Board is entitled to receive cash in the amount
of $1,000 per calendar quarter and each other non-employee director
is entitled to receive cash in the amount of $1,000 per calendar
quarter as compensation for attending Board meetings held during
that quarter, provided that a director must attend a minimum of 75%
of the regular and special meetings of the full Board and of any
committees upon which they sit. The Board held four meetings during
2016.
Out-of-Pocket Expenses
The Company reimburses a director’s out-of-pocket expenses
for in-person meetings upon submission of an expense statement and
receipts, up to a maximum of $500 per in-person
meeting.
50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Outstanding Equity Awards at 2016 Fiscal Year-End
The
following table sets forth information for the named executive
officers regarding the number of shares subject to both exercisable
and unexercisable stock options and restricted stock, as well as
the exercise prices and expiration dates thereof, as of
December 31, 2016.
|
Option Awards
|
Stock Awards
|
|||||||
Name
|
Number of Securities underlying Unexercised Options
(#)
Exercisable
|
Number of Securities underlying Unexercised Options
(#)
Un-exercisable
|
Equity Incentive Plan Awards: Number of securities Underlying
Unexercised Unearned Options (#)
|
Option Exercise Price ($)
|
Option Expiration Date
|
Number of Shares or Units of Stock That Have Not Vested
(#)
|
Market Value of Shares or Units of Stock That Have not Vested
($)
|
Equity Incentive Plan Awards: Number of Unearned Shares, Units
or Other Rights That Have Not Vested (#)
|
Equity Incentive Plan Awards: Market or Payout Value of Unearned
Shares, Units or Other Rights That Have Not Vested (#)
|
CB. Brechin
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Chief
Executive Officer and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
Rodney Hillman
|
—
|
—
|
—
|
—
|
—
|
66,000
|
$13,200
|
—
|
—
|
President
& Chief Operating Officer
|
|
|
|
|
|
|
|
|
—
|
Scott Rutherford
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
Chief
Technology Officer
|
|
|
|
|
|
|
|
|
|
(1)
|
Mr. Hillman was awarded 198,000 shares of restricted stock vesting
at the date of grant in consideration of services rendered and part
of employment agreement. A vesting schedule at a maximum of 66,000
shares at the end of years 1, 2, and 3 based upon attainment of
goals set forth by the company.
|
(2)
|
Based on the closing trading price of our Common Stock on April 13,
2016 or $0.20 per share.
|
51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The Company’s Audit Committee has the responsibility to
review and approve all related-party transactions, as contemplated
by Item 404 of the SEC’s Regulation S-K, to prevent potential
conflicts of interest and to ensure that related party transactions
are disclosed in the reports that the Company files with the SEC as
and when required by applicable securities laws and
regulations. The term “related party
transaction” is generally defined as any transaction (or
series of related transactions) in which the Company is a
participant and the amount involved exceeds the lesser of
(i) $120,000 or (ii) one percent of the Company’s
average total assets at year-end for the last two completed fiscal
years, and in which any director, director nominee or executive
officer of the Company, any holder of more than 5% of the
outstanding voting securities of the Company, or any immediate
family member of the foregoing persons will have a direct or
indirect interest. The term includes most financial transactions
and arrangements, such as loans, guarantees and sales of property,
and remuneration for services rendered (as an employee, consultant
or otherwise) to the Company and its subsidiaries.
The following paragraphs discuss related party transactions that
occurred during 2015 and 2016 (other than compensation paid or
awarded to the Company’s directors, director nominees and
executive officers that is required to be discussed, or is exempt
from discussion, in the sections of this proxy statement entitled
“DIRECTOR COMPENSATION” and “EXECUTIVE
COMPENSATION”).
On October 1, 2009, C.B. Brechin and Scott Rutherford, as well as
one other individual, entered into a stock purchase agreement on
behalf of the Company (the “Stock Purchase Agreement”),
with the court-appointed receiver, Robert D. Gordon (the
“Receiver”), for our former stockholder Legisi
Marketing, Inc., to repurchase 18,910,000 shares of our common
stock, par value $.0001 per share (“Common Stock”), and
cancel warrants to purchase 10,000,000 shares of Common Stock that
were exercisable at $.39 per share (the “Warrants”),
which shares of Common Stock and Warrants had been in the custody
of the Receiver. The aggregate purchase price for the securities
under the Stock Purchase Agreement was $700,000. The effectiveness
of the Stock Purchase Agreement was subject to court approval which
was received on November 4, 2009. The repurchased shares of Common
Stock and Warrants were returned to our treasury and
cancelled.
Brekford financed the repurchase of these shares and Warrants from
the proceeds of convertible promissory notes that were issued by
Brekford on November 9, 2009 in favor of a lender group 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 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 closes an equity financing that generates
gross proceeds in the aggregate amount of not less than
$5,000,000. The Promissory Notes have since been
extended and are currently due on the earlier of (x) November 9,
2016 or (y) 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. In
addition to the extensions, the Promissory Notes were amended in
April 2010 to increase the conversion price to $.14 per
share.
On March 1, 2017 the promissory note to Mr. CB. Brechin and Mr.
Scott Rutherford was fully settled through payment of principal
amount of $250,000 each.
While we do not maintain a written policy with respect to related
party transactions, our Audit Committee routinely reviews potential
transactions with those parties we have identified as related
parties.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Board’s Audit Committee has appointed BD & Company,
Inc. to serve as the Company’s independent registered public
accounting firm for 2016. Representatives of BD & Company, Inc.
are expected to be present at the 2017 annual meeting of
stockholders, in person or by telephone, to make a statement if so
desired, and to respond to any appropriate questions.
52
The following table presents fees for professional services
rendered to the Company by BD & Company, Inc. during fiscal
year 2016 and Stegman & Company during fiscal year
2015.
|
Year Ended December 31,
|
|
|
2016
|
2015
|
Audit
fees
|
$67,000
|
$74,670
|
Audit-related
fees
|
-
|
-
|
Tax
fees
|
4,500
|
9,500
|
All
other fees
|
-
|
-
|
Total fees
|
$71,500
|
$84,170
|
Audit Fees for 2016 and 2015 include fees associated with the
audits of the annual financial statements, the quarterly reviews of
the unaudited interim financial statements included in the
Company’s Quarterly Reports on Form 10-Q, and services
related to other reports filed with the
SEC. Audit-Related Fees for 2015 also include fees
associated with the restatement of our form 10-Q for the three
quarterly periods in the year ended December 31, 2015. Tax Fees for
2016and 2015 include fees associated with the preparation and
reviews of tax returns, advising on the impact of local tax laws,
and tax planning.
It is the Audit Committee’s policy to pre-approve all
services to be performed by the Company’s independent
registered public accounting firm, subject to the de minimis
exceptions for non-audit services described in Section 10A(i)(l)(B)
of the Exchange Act, which, when needed, are approved by the Audit
Committee prior to the completion of the independent registered
public accounting firm’s audit. Pre-approval may
be granted by action of the full Audit Committee or, in the absence
of such Audit Committee action, by the Chairman of the Audit
Committee whose action shall be considered to be that of the entire
Audit Committee. All of the 2016 and 2015 services
described above were pre-approved by the Audit
Committee.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
(a)(1), (2) and (c) Financial Statements.
Reports of Independent Registered Public Accounting
Firms
|
Consolidated Balance Sheets as of December 31, 2016 and
2015
|
Consolidated Statements of Operations and Comprehensive loss for
the Years Ended December 31, 2016 and 2015
|
Consolidated Statements of Changes in Stockholders’ Equity
(Deficit) for the Years Ended December 31, 2016 and
2015
|
Consolidated Statements of Cash Flows for the Years Ended December
31, 2016 and 2015
|
Notes to Consolidated Financial Statements
|
(a)(3) and (b) Exhibits.
The exhibits filed or furnished with this annual report are listed
on the Exhibit Index that follows the signatures to this Annual
Report, which list is incorporated herein by
reference.
53
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of 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.
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Brekford Corp.
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Date: March 28, 2017
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By:
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/s/ Rodney
Hillman
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Rodney Hillman
President and Chief Operating Officer, Chief Financial Officer
(Principal Executive Officer and Principal Financial
Officer)
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
Signature
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Title
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Date
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/s/ Rodney
Hillman
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President and Chief Operating Officer, Chief Financial
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March 28, 2017
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Rodney Hillman
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Officer (Principal
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Executive Officer and Principal Financial and Accounting
Officer)
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/s/ CB,
Brechin
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Director
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March 28, 2017
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CB Brechin
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/s/ Scott
Rutherford
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Director
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March 28, 2017
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Scott Rutherford
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/s/ Stephen
Ellis
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Director
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March 28, 2017
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Stephen Ellis
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/s/ Robert S.
West
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Director
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March 28, 2017
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Robert S. West
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54
EXHIBIT INDEX
Exhibit Number
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Description
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2.1
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Agreement and Plan of Merger among Pelican Mobile Computers, Inc.,
American Financial Holdings Inc. and the Pelican Stockholders
(previously filed as Exhibit 2.1 to the Company’s
Registration Statement on Form 10-SB (SEC File
No. 000-52719) filed on July 6, 2007 and incorporated
herein by reference)
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2.2
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Agreement and Plan of Merger by and between the Company and Pelican
Mobile Computers, Inc., dated October 27, 2010 (previously filed as
Exhibit 2.2 to the Company’s form 10-Q filed on November 2,
2010 and incorporated herein by reference)
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3.1.1
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Certificate of Incorporation of California Cyber Design, Inc. as
filed with the State of Delaware on May 27,
1998 (previously filed as Exhibit 3.1.1 to the Company’s
Registration Statement on Form 10-SB (SEC File
No. 000-52719) filed on July 6, 2007 and incorporated
herein by reference)
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3.1.2
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Certificate of Correction of Certificate of Incorporation of
California Cyber Design, Inc. as filed with the State of Delaware
on July 17, 1998 (previously filed as Exhibit 3.1.2 to
the Company’s Registration Statement on Form 10-SB (SEC File
No. 000-52719) filed on July 6, 2007 and incorporated herein by
reference)
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3.1.3
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Certificate of Amendment of Certificate of Incorporation of
California Cyber Design, Inc. as filed with the State of Delaware
on August 11, 2004 (previously filed as Exhibit 3.1.3 to
the Company’s Registration Statement on Form 10-SB (SEC
File No. 000-52719) filed on July 6, 2007 and
incorporated herein by reference)
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3.1.4
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Certificate of Amendment of Certificate of Incorporation of
American Financial Holdings Inc. (formerly known as California
Cyber Design, Inc.) as filed with the State of Delaware on
January 6, 2006 (previously filed as Exhibit 3.1.4 to the
Company’s Registration Statement on Form 10-SB (SEC File
No. 000-52719) filed on July 6, 2007 and incorporated
herein by reference)
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3.1.5
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Certificate of Amendment of Certificate of Incorporation of
American Financial Holdings Inc. as filed with the State of
Delaware on January 6, 2006 (previously filed as Exhibit
3.1.5 to the Company’s Registration Statement on
Form 10-SB (SEC File No. 000-52719) filed on July 6,
2007 and incorporated herein by reference)
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3.1.6
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First Amended and Restated Certificate of Incorporation of Brekford
International Corp. as filed with the State of Delaware on
January 4, 2006 (previously filed as Exhibit 3.1.6 to the
Company’s Registration Statement on Form 10-SB (SEC File
No. 000-52719) filed on July 6, 2007 and incorporated
herein by reference)
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3.1.7
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Certificate of Amendment to the First Amended and Restated
Certificate of Incorporation of Tactical Solution Partners, Inc. as
filed with State of Delaware on April 29,
2008. (previously filed as Exhibit 3.1.7 to the
Company’s Quarterly Report on Form 10-Q filed on May 15, 2008
and incorporated herein by reference)
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3.1.8
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Second Amended and Restated Certificate of Incorporation of
Brekford International Corp. as filed with the State of Delaware on
February 4, 2010 (previously filed as Exhibit 3.1.8 to
the Company’s Annual Report on Form 10-K filed on March 15,
2010 and incorporated herein by reference)
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3.1.9
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Certificate of Amendment to the Second Amended
and Restricted Certificate of Incorporation of the
Company as filed with the State of Delaware on July 9, 2010
(previously filed as Exhibit 3.1 to the Company’s Quarterly
Report on Form 10-Q filed on August 4, 2010 and incorporated herein
by reference)
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3.1.10
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Certificate of Ownership and Merger of Pelican Mobile Computers,
Inc. (previously filed as Exhibit 3.1 to the Company’s
Quarterly Report on Form 10-Q, filed on November 2, 2010, and
incorporated herein by reference)
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3.2
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Bylaws of Brekford Corp. (previously filed as Exhibit 3.2 to the
Company’s Registration Statement on Form 10-SB (SEC File No.
000-52719) filed on July 6, 2007 and incorporated herein by
reference)
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4.1
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Stock Purchase Agreement by and between Brekford International
Corp. and Paul Harary and Paris McKenzie TBE (Subscriber) dated
January 31, 2007 (previously filed as Exhibit 4.2 to the
Company’s Amendment No. 1 to the Registration Statement
on Form 10-SB (SEC File No. 000-52719) filed on
September 21, 2007 and incorporated herein by
reference)
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4.2
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Warrant to Purchase Brekford International Corp. Common Stock in
favor of Paul Harary and Paris McKenzie TBE (Warrant Holder) dated
January 31, 2007 (previously filed as Exhibit 4.3 to the
Company’s Registration Statement on Form 10-SB (SEC File No.
000-52719) filed on July 6, 2007 and incorporated herein by
reference)
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4.3
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Form of Subscription Agreement to Purchase Units of Brekford
International Corp. (previously filed as Exhibit 4.4 to the
Company’s Registration Statement on Form 10-SB (SEC File No.
000-52719) filed on July 6, 2007 and incorporated herein by
reference)
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4.4
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Form of Warrant to Purchase Brekford International Corp.
Common Stock by and among Brekford International Corp. and the Unit
purchasers signatory thereto (previously filed as Exhibit 4.5
to the Company’s Registration Statement on Form 10-SB (SEC
File No. 000-52719) filed on July 6, 2007 and incorporated herein
by reference)
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55
4.5
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Form of Registration Rights Agreement, by and among Brekford
International Corp. and the Unit purchasers signatory
thereto (previously filed as Exhibit 4.6 to the
Company’s Registration Statement on Form 10-SB (SEC File No.
000-52719) filed on July 6, 2007 and incorporated herein by
reference)
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4.6
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Form of Warrant issued to Sierra Equity Group, Ltd. Inc. with
respect to the Company’s March 2007 private offering
closed March 30, 2007 and its assigns (previously filed
as Exhibit 4.7 to the Company’s Registration Statement on
Form 10-SB (SEC File No. 000-52719) filed on July 6, 2007 and
incorporated herein by reference)
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4.7
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Form of Warrant issued to Sierra Equity Group, Ltd. Inc. under
the Investment Banking Advisory Agreement dated December 18,
2006 and its assigns (previously filed as Exhibit 4.8 to the
Company’s Registration Statement on Form 10-SB (SEC File No.
000-52719) filed on July 6, 2007 and incorporated herein by
reference)
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4.8
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Warrant issued to Trilogy Capital Partners, Inc., dated
May 23, 2007 (previously filed as Exhibit 4.9 to the
Company’s Annual Report on Form 10-K filed on March 23, 2009
and incorporated herein by reference)
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4.9
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Form of Warrant issued to Birch Systems, LLC pursuant to the
General Release and Settlement Agreement between the Company and
Birch Systems, LLC (previously filed as Exhibit 4.10 to the
Company’s Annual Report on Form 10-K filed on March 23, 2009
and incorporated herein by reference)
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10.1
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Lease Agreement by and between Brekford International Corp. and
Greenbrier Point Partners, L.P. dated February 13,
2006 (previously filed as Exhibit 10.13 to the Company’s
Registration Statement on Form 10-SB (SEC File No. 000-52719) filed
on July 6, 2007 and incorporated herein by reference)
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10.2
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Contract by and between Pelican Mobile Computers, Inc. and the
State of Maryland dated July 15, 2001 (previously filed as
Exhibit 10.19 to the Company’s Registration Statement on Form
10-SB (SEC File No. 000-52719) filed on July 6, 2007 and
incorporated herein by reference)
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10.3
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Lease Agreement by and between Brekford International Corp. and FRP
Hillside LLC #3 dated May 16, 2007 (previously filed as
Exhibit 10.21 to the Company’s Registration Statement on Form
10-SB (SEC File No. 000-52719) filed on July 6, 2007 and
incorporated herein by reference)
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10.4
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Letter from Panasonic Personal Computer Company confirming Pelican
Mobile Computers, Inc. as the only Maryland based Company
authorized to sell the fully ruggedized line of Panasonic Notebooks
to Maryland State and Local government agencies dated
February 8, 2006 (previously filed as Exhibit 10.29 to the
Company’s Amendment No. 1 to the Registration Statement
on Form 10-SB (SEC File No. 000-52719) filed on
September 21, 2007 and incorporated herein by
reference)
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10.5
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Sublease Agreement by and between Brekford International Corp. and
TSO Armor and Training, Inc. dated December 8, 2008
(previously filed as Exhibit 10.30 to the Company’s Annual
Report on Form 10-K filed on March 23, 2009 and incorporated herein
by reference)
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10.6
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Stock Purchase Agreement, effective November 4, 2009, by and
between the receiver of stockholder Legisi Marketing, Inc. and
certain directors of Brekford International Corp., on behalf of the
Company (previously filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed on November 10, 2009 and
incorporated herein by reference)
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10.7
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Form of Promissory Note, dated November 9, 2009, in favor of
certain directors of Brekford International Corp. (previously filed
as Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on November 10, 2009 and incorporated herein by
reference)
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10.8
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Form of First Amendment to Unsecured Promissory Note, dated April
30, 2010, between the Company and each member of the
Company’s lender group (previously filed as Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q filed on May 6,
2010 and incorporated herein by reference)
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10.9
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Form of Promissory Note Extension Agreement, dated as of November
4, 2014, between the Company and C.B. Brechin and Scott Rutherford
(filed herewith)
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10.10
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Landlord –Tenant Lease, by and between Peppermill,
Properties, LLC and Brekford Corp., dated June 1, 2010 (previously
filed as Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q filed on August 4, 2010 and incorporated herein by
reference)
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10.11
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Loan and Security Agreement dated November 4, 2010 by and between
Brekford Corp. and Bank of America N.A. (previously filed as
Exhibit 10.10 to the Company’s Annual Report on Form 10-K for
the year ended December 31, 2011 and incorporated herein by
reference)
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10.12
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Form of Non-Qualified Option Agreement to Purchase Shares of
Common Stock of Brekford International Corp. (previously filed
as Exhibit 4.9 to the Company’s Registration Statement on
Form 10-SB (SEC File No. 000-52719) filed on July 6, 2007 and
incorporated herein by reference)
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10.13
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2008 Stock Incentive Plan (previously filed as Appendix C to the
Company’s definitive proxy statement on Schedule 14A filed on
April 10, 2008 and incorporated herein by reference)
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10.14
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Loan Agreement, dated as of June 28, 2012, between the Company and
PNC Bank, National Association (previously filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed on July 18,
2012 and incorporated herein by reference)
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10.15
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Committed Line of Credit Note, dated as of June 28, 2012, issued by
the Company to the order of PNC Bank, National Association
(previously filed as Exhibit 10.2 to the Company’s Current
Report on Form 8-K filed on July 18, 2012 and incorporated herein
by reference)
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10.16
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Subordination Agreement, dated as of June 28, 2012, by and among
PNC Bank, National Association, the Company and C.B. Brechin
(previously filed as Exhibit 10.3 of the Company’s Current
Report on Form 8-K filed on July 18, 2012 and incorporated herein
by reference)
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10.17
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Subordination Agreement, dated as of June 28, 2012, by and among
PNC Bank, National Association, the Company and Scott Rutherford
(previously filed as Exhibit 10.4 of the Company’s Current
Report on Form 8-K filed on July 18, 2012 and incorporated herein
by reference)
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10.18
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Second Amendment to Loan Documents, dated as of September 27, 2013,
between the Company and PNC Bank, National Association (filed
herewith)
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10.19
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Borrowing Base Rider, effective as of September 28, 2013, between
the Company and PNC Bank, National Association (filed
herewith)
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10.20
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Waiver and Fourth Amendment to Loan Documents, dated as of March
24, 2014, by and between Brekford Corp. and PNC Bank, National
Association (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q filed on May 15,
2014)
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10.21
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Financing Agreement, dated as of May 27, 2014, between Brekford
Corp. and Rosenthal & Rosenthal Inc. (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on May 28, 2014)
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10.22
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Term
Note, dated as of May 27, 2014, issued by Brekford Corp. to the
order of Rosenthal & Rosenthal, Inc. (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on May 28, 2014)
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10.23
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Form of Agreement of Subordination and Assignment, dated May 27,
2014, between C.B. Brechin and Rosenthal & Rosenthal, Inc. and
Scott Rutherford and Rosenthal & Rosenthal, Inc. (incorporated
by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed on May 28, 2014)
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10.22
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Term Note, dated as of May 27, 2014, issued by Brekford Corp. to
the order of Rosenthal & Rosenthal, Inc. (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on May 28, 2014
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10.23
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Form of Agreement of Subordination and Assignment, dated May 27,
2014, between C.B. Brechin and Rosenthal & Rosenthal, Inc. and
Scott Rutherford and Rosenthal & Rosenthal, Inc. (incorporated
by reference to Exhibit 10.3 to the Company’s Current Report
on Form 8-K filed on May 28, 2014)
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10.24
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Note
and Warrant purchase agreement, dated as of March 17, 2015, between
Brekford Corp. and Gemini Master Fund , Ltd. (filed
herewith)
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10.25
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Contribution and Unit Purchase Agreement (previously filed as
Exhibit 10.1 of the Company’s Current Report on Form 8-K
filed on February 7, 2017 and incorporated herein by
reference)
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10.26
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Agreement
and Plan of Merger dated February 10, 2017, among Novume Solutions,
Inc., KeyStone Solutions, Inc., Brekford Corp., KeyStone Merger
Sub, Inc., and Brekford Merger Sub, Inc. (previously filed as
Exhibit 10.1 to Amendment No. 1 to the Company’s Current
Report on Form 8-K filed on February 14, 2017 and incorporated
herein by reference)
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10.27
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Subordinated Promissory Note issued to Brekford Corp.
(previously
filed as Exhibit 10.2 of the Company’s Current Report on Form
8-K filed on March 6, 2017 and incorporated herein by
reference)
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10.28
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Pledge Agreement by LB&B Associates Inc. in favor of Brekford
Corp. (previously filed
as Exhibit 10.3 of the Company’s Current Report on Form 8-K
filed on March 6, 2017 and incorporated herein by
reference)
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10.29
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Transition Services Agreement between Brekford Corp. and Global
Public Safety, LLC (previously filed as
Exhibit 10.4 of the Company’s Current Report on Form 8-K
filed on March 6, 2017 and incorporated herein by
reference)
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10.30
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Sublease Agreement between Global Public Safety, LLC and Brekford
Corp. (previously filed
as Exhibit 10. 5 of the Company’s Current Report on Form 8-K
filed on March 6, 2017 and incorporated herein by
reference)
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10.31
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Amended and Restated Limited Liability Company Agreement
(previously
filed as Exhibit 10. 6 of the Company’s Current Report on
Form 8-K filed on March 6, 2017 and incorporated herein by
reference)
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Subsidiaries of the Company (filed herewith)
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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)
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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)
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101
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Financial statements from the annual report on Form 10-K of
Brekford Corp. for the year ended December 31, 2016, filed on March
__, 2016, formatted in Extensible Business Reporting Language
(XBRL): (i) the Consolidated Balance Sheets, (ii) the
Consolidated Statements of Operations, (iii) the Consolidated
Statement of Stockholders Equity (Deficit) (iv) the
Consolidated Statements of Cash Flows and (v) the Notes to
Consolidated Financial Statements tagged as blocks of text. (filed
herewith)
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57