XOTC:BFDI Brekford Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

———————
FORM 10-Q
———————
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
or
 
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from: _____________ to _____________

Commission File Number: 000-52719
 
———————
Brekford Corp.
(Exact name of registrant as specified in its charter)
———————
 
Delaware
 
20-4086662
(State or Other Jurisdiction
 
(I.R.S. Employer
of Incorporation)
 
Identification No.)
 
7020 Dorsey Road, Hanover, Maryland 21076
(Address of Principal Executive Office) (Zip Code)
 
(443) 557-0200
(Registrant’s telephone number, including area code)
 
N/A
(Former name, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  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  þ  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ¨  No  þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. The issuer had 44,149,934 shares of Common Stock, par value $0.0001 per share (“Common Stock”) issued and outstanding as of April 18, 2012.
 


 
 

 
Brekford Corp.
Form 10-Q
 
Index

PART I – FINANCIAL INFORMATION
 
Page
 
         
Item 1
Financial Statements (unaudited)
   
1
 
 
Condensed Balance Sheets as of March 31, 2012 and December 31, 2011
   
1
 
 
Condensed Statements of Operations for the Three Months Ended March 31, 2012 and 2011
   
2
 
 
Condensed Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011
   
3
 
 
Notes to Unaudited Condensed Financial Statements
   
4
 
Item 2. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
9
 
Item 4. 
Controls and Procedures
   
13
 
           
PART II – OTHER INFORMATION
       
           
Item 1.
Legal Proceedings
   
14
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
14
 
Item 5.
Other Information
   
14
 
Item 6.
Exhibits
   
14
 
SIGNATURES
   
15
 
EXHIBIT INDEX
   
16
 
 
 
 

 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
Brekford Corp.
Condensed Balance Sheets (Unaudited)

   
March 31,
2012
   
December 31,
2011
 
             
ASSETS
CURRENT ASSETS
           
Cash
 
$
2,167,954
   
$
1,832,969
 
Accounts receivables, net of allowance $298,739 and $261,417 at March 31, 2012 and December 31, 2011, respectively
   
2,952,494
     
3,673,195
 
Unbilled receivables
   
37,258
     
92,969
 
    Prepaid expenses
   
42,294
     
47,305
 
Inventory
   
261,726
     
426,500
 
Total current assets
   
5,461,726
     
6,072,938
 
Property and equipment, net
   
1,922,629
     
1,514,996
 
Other non-current assets
   
550,075
     
551,070
 
TOTAL ASSETS
 
$
7,934,430
   
$
8,139,004
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
 
$
1,814,795
   
$
2,008,372
 
Accrued payroll and related expenses
   
41,465
     
50,645
 
Line of credit
   
     
500,000
 
Income taxes payable
   
48,437
     
68,937
 
Deferred revenue
   
301,139
     
289,593
 
Customer deposits
   
25,800
     
43,624
 
Obligations under capital leases – current portion
   
365,839
     
340,039
 
Deferred rent – current portion
   
40,472
     
39,470
 
Total current liabilities
   
2,637,947
     
3,340,680
 
                 
LONG - TERM LIABILITIES
               
Notes payable – stockholders, net of discount
   
500,000
     
500,000
 
Obligations under capital lease, net of current portion
   
784,222
     
391,038
 
Notes payable - auto
   
26,940
     
30,649
 
Deferred rent, net of current portion
   
122,931
     
137,556
 
Total long-term liabilities
   
1,434,093
     
1,059,243
 
TOTAL LIABILITIES
   
4,072,040
     
4,399,923
 
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, par value $0.0001 per share; 20,000,000 shares authorized; none issued and outstanding
   
     
 
Common stock, par value $0.0001 per share; 150,000,000 shares authorized; 44,105,115 issued and outstanding, at March 31, 2012 and 43,842,265  issued and outstanding at December 31, 2011
   
4,411
     
4,385
 
Additional paid-in capital
   
10,116,975
     
10,117,001
 
Accumulated deficit
   
(6,258,996
)
   
(6,382,305
)
TOTAL STOCKHOLDERS’ EQUITY
   
3,862,390
     
3,739,081
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
7,934,430
   
 $
8,139,004
 
 
The accompanying notes are an integral part of these unaudited condensed financial statements.
 
 
1

 
 
Brekford Corp.
  Condensed Statements of Operations (Unaudited)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
NET REVENUE
 
$
4,149,003
   
$
3,453,782
 
COST OF REVENUE
   
3,077,467
     
2,700,420
 
GROSS PROFIT
   
1,071,536
     
753,362
 
OPERATING EXPENSES
               
Salaries and related expenses
   
428,213
     
262,520
 
Selling, general and administrative expenses
   
482,694
     
348,509
 
TOTAL OPERATING EXPENSES
   
910,907
     
611,029
 
INCOME  FROM OPERATIONS
   
160,629
     
142,333
 
OTHER INCOME (EXPENSE)
               
Interest expense
   
(38,170
)
   
(27,787
)
Interest income
   
851
     
406
 
Other expense
   
     
(2,000
)
TOTAL OTHER INCOME (EXPENSE)
   
(37,319
)
   
(29,381
)
NET INCOME
 
$
123,310
   
$
112,952
 
NET INCOME  PER SHARE – BASIC AND DILUTED
 
$
0.00
   
$
0.00
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
               
Basic
   
43,856,707
     
40,486,964
 
Diluted
   
47,282,397
     
40,486,964
 
 
The accompanying notes are an integral part of these unaudited financial statements.
 
 
2

 
 
Brekford Corp.
  Condensed Statements of Cash Flows (Unaudited)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
 
$
123,310
   
$
112,952
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
   
130,918
     
64,384
 
Deferred rent
   
(13,623
)
   
(12,140
)
Bad debt expense
   
41,821
     
1,095
 
Changes in operating assets and liabilities:
               
Accounts receivables
   
678,880
     
(571,416
)
Unbilled Receivables
   
55,711
     
 
Prepaid expenses and other non-current assets
   
6,005
     
(7,447
)
Inventory
   
164,774
     
44,259
 
Customer deposits
   
(17,824
)
   
11,406
 
Accounts payable and accrued expenses
   
(193,577
)
   
973,627
 
Accrued payroll and related expenses
   
(9,180
)
   
(25,764
)
Income tax payable
   
(20,500
)
   
 
Deferred revenue
   
11,545
     
253,120
 
NET CASH PROVIDED BY OPERATING ACTIVITIES
   
958,260
     
844,076
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
   
(538,552
)
   
(12,909
)
Restricted cash
   
     
(520,000
)
NET CASH USED IN INVESTING ACTIVITIES
   
(538,552
)
   
(532,909
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net change in line of credit
   
(500,000
)
   
 
Capital  lease originations
   
500,000
     
 
Payments on notes payable - auto
   
(3,708
)
   
(1,996
)
Principal payments on lease obligations
   
(81,015
)
   
(29,728
)
Purchase of treasury stock
   
     
(41,165
)
NET CASH USED IN FINANCING ACTIVITIES
   
(84,723
)
   
(72,889
)
                 
NET INCREASE IN CASH
   
334,985
     
238,278
 
                 
CASH – Beginning of period
   
1,832,969
     
1,534,317
 
                 
CASH – End of period
 
$
2,167,954
   
$
1,772,595
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid for interest
 
$
38,170
   
$
27,787
 
Cash paid for incomes taxes
 
$
20,500
   
$
2,000
 
 
The accompanying notes are an integral part of these unaudited condensed financial statements.
 
 
3

 
 
Brekford Corp.
Notes to Unaudited Condensed Financial Statements
For the Three Months Ended March 31, 2012
 
NOTE 1 DESCRIPTION OF THE BUSINESS
 
Brekford Corp. (OTCBB; OTCQB: BFDI) headquartered in Hanover, Maryland is a technology services provider of mobile computer and video systems through its vehicle upfitting services to homeland security agencies and federal, state, and municipal  law enforcement agencies and of traffic safety solutions to municipalities, including automated photo speed enforcement and red light camera solutions.  Brekford is an established company which, for more than a decade, has provided services to branches of the U.S. military, various federal entities and numerous security and public safety agencies throughout the United States. Brekford provides these departments and agencies with an end-to-end suite of rugged mobile information technology (IT), vehicle upfitting services, and automated traffic safety photo enforcement technology solutions.

Brekford is a one-stop shop with its unique 360° approach to vehicle upfitting installations, cutting edge rugged mobile technology, and automated traffic enforcement services for jurisdictions in the United States. We provide bumper-to-bumper vehicle modification and automated traffic enforcement products, road safety camera programs, including red light and speed photo enforcement systems, and back office processing services. The Brekford 360° approach provides our customers with a one-stop engineered solution.  Our commitment to top quality services, along with the core values that our employees strongly uphold: integrity; accountability; respect; excellence; and teamwork; is why we believe Brekford is the premier all-around vehicle upfitter and automated traffic safety technology solutions provider.

Depending upon the context, the terms “BFDI,” “Brekford Corp.,” “Company,” “we,” “our,” and “us,” as used in this report refer to Brekford Corp.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Use of Estimates
 
Preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no impact on previously reported net income or retained earnings.

Concentration of Credit Risk
 
The Company maintains cash accounts with major financial institutions. From time to time, amounts deposited may exceed the FDIC insured limits.

Accounts Receivables

Accounts receivable are carried at estimated net realizable value. The Company has a policy of reserving for uncollectable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company calculates the allowance based on a specific analysis of past due balances. Past due status for a particular customer is based on how recently payments have been received from that customer. Historically, the 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.

The Company’s practice of reserving for uncollectable citations is based on its best estimate of the amount of probable losses. This estimate accounts for an initial loss in expected receivables from the existing population of uncollected receivables. The Company calculates allowances based on the historical information from similar programs in the industry.  Past due status is based on varying client business rules for the extension of time allotted for payment.  The Company manages both the issuance and the collection of unpaid fines based on the diverse criteria by each contract.  Thus, calculating “outstanding” with respect to a normal 30/60/90 day collections timeline is not an exact science. To be conservative, the percentage of allowance is calculated from the first day of citation issuance, but this percentage may be decreased at a later date to include collections received.  Historically, the Company’s actual collection experience has not differed significantly from its estimate, due to its ability to leverage its relationship with state and local governments to secure collection of citations issued, as many states will not renew vehicle registrations with outstanding, unpaid citations.
 
 
4

 
 
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. These amounts are stated at lower of first-in, first-out (“FIFO”) cost or market.

Property and Equipment

Property and equipment are 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).

Revenue Recognition
 
The Company recognizes revenue when all four of the following basic criteria are met:  (i) persuasive evidence of an arrangement exists; (ii) delivery or installation has been completed; (iii) the customer accepts and verifies receipt; and (iv) collectability is reasonably assured.  The Company considers delivery to its customers to have occurred at the time products are delivered and/or installation work is completed and the customer acknowledges its acceptance of the work.

The Company provides its customers with a warranty against defects in the installation of its vehicle upfitting solutions for one year from the date of installation. Warranty claims were $10,000 for the three months ended March 31, 2012 and $4,422 for three months ended March 31, 2011. The Company also performs warranty repair services on behalf of the manufacturers of the equipment it sells. Effective January 2011, the Company offers separately priced extended warranty and product maintenance contracts to its customers on the equipment sold by the Company. Revenues from extended warranty services are apportioned over the period of the extended warranties service contracts. Revenue from extended warranties amounted to $78,915 for the three months ended March 31, 2012 and $44,219 for the three months ended March 31, 2011.

For automatic traffic enforcement revenue, the Company recognizes the revenue on the date that the Company determines a valid violation has occurred. The Company records revenue related to automated traffic violations for the Company’s share of the violation amount.

Share-Based Compensation

The Company accounts for stock incentive plans by measurement and recognition of compensation expense for all share-based awards on estimated fair values, net of estimated and actual forfeitures, on a straight line basis over the period during which the employee is required to provide services in exchange for the award.

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 will 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.

Earnings per Share

Basic earnings per share are computed by dividing net income available to holders of our common stock (the “Common Stock”) by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share are computed by adjusting the denominator of the basic earnings per share computation for the effect of potential dilutive shares of Common Stock outstanding during the period.

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 note obligations approximate fair value, as the terms of these notes are consistent with terms available in the market for instruments with similar risk.
 
 
5

 
 
Segment Reporting

Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, requires that an enterprise report selected information about operating segments in its financial reports issued to its shareholders. Based on the analysis performed by the Company, management has determined that the Company only has one operating segment, which is Traffic Safety Solutions. The chief operating decision-makers use combined results to make operating and strategic decisions, and, therefore, the Company believes that it is not required to disclose information for any additional segments.

Newly Issued Accounting Pronouncements

Management does not believe that any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on our financial statements.

NOTE 3 – LINE OF CREDIT AND LETTER OF CREDIT
 
On November 4, 2010, the Company entered into a $500,000 revolving line of credit agreement with a bank. Under this agreement, the Company may repay principal amounts and re-borrow them during the term of the agreement. Interest is payable at the rate of the BBA LIBOR Daily Floating rate plus 4%. The line of credit is collateralized by all assets of the Company and is personally guaranteed by the two principal officers of the Company. The maturity date for the line of credit agreement has been extended to November 30, 2012. As of March 31, 2012 amounts outstanding under the line of credit were $0.

NOTE 4 – NOTES PAYABLE – STOCKHOLDERS

The Company financed the repurchase of shares of Common Stock and warrants from the proceeds of convertible promissory notes issued on November 9, 2009 by the Company in favor of a lender group that included two directors of the Company, Messrs. C.B. Brechin and Scott Rutherford, and a former director, Mr. Bruce Robinson, in the respective principal amounts of $250,000, $250,000 and $200,000 (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 execution was to be convertible into shares of Common Stock, at the option of each holder, at an original conversion price of $.07 per share. At the time of the execution of the Promissory Notes, the Company 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 (2) years from the issue date of the notes, or (ii) ten (10) business days from the date of closing by the Company of any equity financing generating gross proceeds in the aggregate amount of not less than Five Million Dollars ($5,000,000).

On April 1, 2010, the Company and each member of the lender group executed a First Amendment to the Unsecured Promissory Note.   Each Promissory Note was amended as described below to:

● 
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 of Common Stock, and

● 
Amend the maturity date provided the Company agrees to pay the unpaid principal balance of the Promissory Note and all accrued but unpaid interest on the date that is the earlier of (i) four (4) years from the issue date of the Promissory Note or (ii) ten (10) business days from the date of closing by the Company of any equity financing generating gross proceeds in the aggregate amount of not less than Five Million Dollars ($5,000,000).
 
On December 12, 2011, the Promissory Note issued to Mr. Bruce Robinson was repaid in full by converting the outstanding balance into 1,428,572 shares of Common Stock.  As of March 31, 2012 and December 31, 2011, the amounts outstanding under the Promissory Notes totaled $500,000.
 
NOTE 5 – LEASES

Capital Leases

The Company financed certain equipment and vehicles under separate non-cancelable equipment loan and security agreements. The agreements mature in July 2012, October 2013, November 2013, May 2012 and March 2015. The agreements require various monthly payments and are secured by the assets under lease. As of March 31, 2012 and 2011, capital lease assets of $1,306,179 and $358,965, respectively, net of accumulated amortization of $224,393 and $47,607, respectively, are included in property and equipment on the balance sheets.
 
 
6

 

Operating Leases

The Company rents office space under separate non-cancelable operating leases expiring June 2013 and January 2015.

The Company records rent expense over the term of the lease on a straight-line basis. Rent expense amounted to $52,502 and $44,125 for the three months ended March 31, 2012 and 2011, respectively.

The Company leases approximately 2,500 square feet of office space from a related party. Rent expense amounted to $10,577 and $8,256 for the three months ended March 31, 2012 and 2011, respectively.

NOTE 6 – MAJOR CUSTOMERS AND VENDORS
 
Major Customers
 
The Company has several contracts with government agencies, of which sales to three major customers during the first quarter of 2012 represented 20%, 11% and 10%, respectively, of the total net sales for that quarter. Accounts receivable due from these three customers at March 31, 2012 amounted to 27%, 17% and 10%, respectively, of total accounts receivable at that date.  Sales to the Company’s three major customers during the first quarter of 2011 represented 36%, 17% and 12%, respectively, of the total net sales for that quarter, and accounts receivable due from two of these customers at March 31, 2011 amounted to 45% and 14%, respectively, of total accounts receivable at that date.  
 
Major Vendors

The Company purchased substantially all rugged IT products that it resold during the periods presented from a single distributor. Revenues from rugged IT products amounted to 52% and 80% of total revenues for the three months ended March 31, 2012 and 2011, respectively. As of March 31, 2012 and 2011, accounts payable due to this distributor amounted to 68% and 77% of total accounts payable, respectively.
 
NOTE 7 - STOCKHOLDERS’ EQUITY

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
 
On September 7, 2010, the Company 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 shares of its outstanding Common Stock over the next 12 months. The stock repurchase program was subsequently extended for an additional twelve (12) months until September 7, 2012. The shares of Common Stock may be purchased from time to time in open market transactions or in privately negotiated transactions at the Company's discretion.
 
There were no repurchases of Common Stock during the quarter ended March 31, 2012.
 
NOTE 8 – SHARE-BASED COMPENSATION

The Company has issued restricted stock and warrants to purchase shares of Common Stock (“Common Stock Purchase Warrants”) and has granted non-qualified stock options to certain employees and non- employees at the discretion of the board of directors. On April 25, 2008, the Company’s shareholders approved the 2008 Stock Incentive Plan (the “Plan”). To date, there have been no stock option grants under the Plan. All stock options granted to employees were granted under previous arrangements, have exercise prices that are less or equal to the fair value of the underlying common stock at the date of grant and have terms of ten  years.

Common Stock Purchase Warrants

For the three months ended March 31, 2012 and 2011, there was no share-based compensation expense for Common Stock Purchase Warrants. As of March 31, 2012, there are no unvested Common Stock Purchase Warrants.
 
 
7

 
 
A summary of warrant activity is as follows for three months ended March 31, 2012
 
   
Shares
Underlying
Warrants
   
Weighted
Average
Exercise Price
   
Weighted Average
Remaining Contractual Term
(in years)
 
                   
Outstanding at January 1, 2012
    1,595,000     $ 0.37       0.56  
Granted
    -       -       -  
Forfeited or expired
    -       -       -  
Exercised
    (700,000 )     0.39       -  
Exercisable at March 31, 2012
    895,000     $ 0.35       0.56  

NOTE 9 – INVENTORY

As of March 31, 2012 and December 31, 2011, inventory consisted of the following:

   
March 31,
2012
   
December 31,
2011
 
Raw Materials
 
$
261,726
   
$
426,500
 
Work in Process
   
     
 
Total Inventory
 
$
261,726
   
$
426,500
 

NOTE 10 – NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to holders of our Common Stock by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income per share is computed by adjusting the denominator of the basic income per share computation for the effect of all dilutive potential shares of Common Stock outstanding during the period.
 
   
Three Months Ended
March 31,
 
   
2012
   
2011
 
             
Basic Net income per share
           
Net Income
 
$
123,310
   
$
112,952
 
Weighted average common shares outstanding - basic
   
43,856,707
     
40,486,964 
 
Basic earnings per share
 
$
0.00
   
$
0.00
 
                 
Diluted net income per share
               
Net Income
 
$
123,310
   
$
112,952
 
Weighted average common shares outstanding
   
43,856,707
     
40,486,964
 
Potential dilutive securities
   
3,425,690
     
 
Weighted average common shares outstanding – diluted
   
47,282,397
     
40,486,964
 
Diluted earnings per share
 
$
0.00
   
$
0.00
 
Common stock equivalents excluded due to anti-dilutive effect
   
     
9,595,000 
 
 
 
8

 
 
ITEM 2. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis presents a review of the condensed operating results of the Company for the three months ended March 31, 2012 and 2011 and the financial condition of the Company at March 31, 2012. The discussion and analysis should be read in conjunction with the condensed financial statements and accompanying notes included herein, as well as the Company’s audited financial statements for the year ended December 31, 2011 filed with its Annual Report on Form 10-K on March 9, 2012.
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995.  Readers of this report should be aware of the speculative nature of “forward-looking statements.”  Statements that are not historical in nature, including those that include the words “anticipate”, “estimate”, “should”, “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 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.
 
Overview
 
The Company is a technology services provider of mobile computer and video systems through its vehicle upfitting services to homeland security agencies and federal, state, and municipal law enforcement agencies and of traffic safety solutions to municipalities, including automated photo speed enforcement and red light camera solutions.  Brekford is an established company which has provided services for more than a decade to branches of the U.S. military, various federal entities and numerous security and public safety agencies throughout the United States. Brekford provides these departments and agencies with an end-to-end suite of rugged mobile information technology (IT), vehicle upfitting services, and automated traffic safety photo enforcement technology solutions.

Brekford is a one-stop shop with its unique 360° approach to vehicle upfitting installations, cutting edge rugged mobile technology, and automated traffic enforcement services for jurisdictions in the United States. We provide bumper-to-bumper vehicle modification and automated traffic enforcement products, road safety camera programs, including red light and speed photo enforcement systems, and back office processing services. The Brekford 360° approach provides our customers with a one-stop engineered solution. Our commitment to top quality services, along with the core values that our employees strongly uphold:  integrity; accountability; respect; excellence; and teamwork; is why we believe Brekford is the premier all-around vehicle upfitting and automated traffic safety technology solutions provider.
 
Products and Services
 
Public safety is a major concern for most communities – especially as populations grow, public safety budgets are reduced. One way to help make streets safer while reducing workload is a well-run photo red light or speed enforcement program. The objective of photo enforcement is to help reduce the incidences of aggressive driving through voluntary compliance. Revenue generated from fines routinely goes directly back into supporting other public safety initiatives.

A 1999 study using a sample of 4,526 police reports relating to motor vehicle crashes on public roads in four urban areas showed that 22% of these crashes were caused by the driver disobeying a traffic control device. (Synthesis and Evaluation of Red-Light Running Automated Enforcement Programs in the United States. FHWA-IF-00-004, Sep. 1999). The study also showed that motorists are more likely to be injured in crashes involving a failure to obey a traffic control device than in other types of crashes. Forty-five percent of these crashes cause injuries, compared to 30% for other types of crashes.
 
 
9

 

Speeding and failure to obey traffic control devices are estimated to cause more than 180,000 crashes every year, resulting in approximately 1,000 deaths and 90,000 injuries a year. Although opposition to red light cameras cite the increase in rear end collisions as cause for disapproval of cameras, a recent study conducted by the Insurance Institute for Highway Safety (Feb. 2008) reported that red-light cameras reduce front-into-side collisions and overall injury crashes. Because the types of crashes prevented by red light cameras tend to be far more severe than rear-end crashes, research has shown there is a positive aggregate benefit. Photo Enforcement solutions can reduce collisions, injuries and deaths by providing a useful tool for municipalities and law enforcement agencies – without unduly taxing drivers who do not break the law. Today, nearly 400 communities across the US operate red light or speed camera enforcement programs.

Brekford’s automated traffic safety enforcement products offer intersection safety (red light), photo speed, work zone and school bus enforcement options by way of a complete suite of solution-based products.  By assembling a team of industry professionals with the most experience in this field, we have developed equipment and a full turn-key solution that we believe will ensure the success of any program.  Having the advantage of a team with experience, we have created and implemented some of the most cutting-edge features into our design – while constructing end-to-end systems specifically with our clients’ needs in mind.
 
Automatic Traffic Safety Enforcement - Photo Speed & Red light Enforcement
 
Automatic traffic enforcement systems are one of a wide range of measures that are effective at reducing vehicle speeds and crashes. The automated speed enforcement (ASE) system is an enforcement technique with one or more motor vehicle sensors producing recorded images of motor vehicles traveling at speeds above a defined threshold. Images captured by the ASE system are processed and reviewed in an office environment and violation notices are mailed to the registered owner of the identified vehicle. ASE, if used, is one technology available to law enforcement as a supplement and not a replacement for traditional enforcement operations. Evaluations of ASE, both internationally and in the United States have identified some advantages over traditional speed enforcement methods.  These include:

High rate of violation detection. ASE units can detect and record multiple violations per minute. This can provide a strong deterrent effect by increasing drivers’ perceived likelihood of being cited for speeding.
Physical safety of ASE operators and motorists. ASE can operate at locations where roadside traffic stops are dangerous or infeasible, and where traffic conditions are unsafe for police vehicles to enter the traffic stream and stop suspected violators. With ASE there is normally no vehicle pursuit or confrontation with motorists. ASE might also reduce the occurrence of traffic congestion due to driver distraction caused by traffic stops on the roadside.
Fairness of operation. Violations are recorded for all vehicles traveling in excess of the enforcement speed threshold.
Efficient use of resources. ASE can act as a “force multiplier,” enhancing the influence of limited traffic enforcement staff and resources.

Electronic Ticketing System- Slick-Ticket ™
 
Many of today’s law enforcement agencies are struggling to balance the increasing demand from their citizens for more services with limited and/or declining budgets. One of the easiest and most cost-effective ways agencies can address this issue is by deploying an electronic ticketing, or E-Ticketing solution. Automating the ticket issuing and processing system can significantly decrease cost, increase productivity and improve officer safety.

Brekford offers a unique functionality that streamlines the data entry process even further.  Many law enforcement agencies that have deployed a mobile data system run background queries from national (NCIC), state, and local databases and Brekford’s solution captures the data from these mobile query files and auto-populates all of the requisite data into the electronic citation (E-Tix) form on the screen.  Brekford’s Slick-Ticket ™ product is a fully portable, over-the-seat organizer for public safety vehicles, specially designed to house a printer and scanner to allow law enforcement officers to quickly access driver's license and registration information as well as issue tickets, warnings and citations.  
 
Rugged Information Technology Solutions –Mobile data & Digital Video

Law enforcement agency, fire department and EMS personnel have unique requirements for fleet vehicle upfitting and IT equipment to include characteristics such as ruggedness and reliability. The equipment must be able to work in extreme environments that include high levels of vibration and shock, wide temperature ranges, varying humidity, electromagnetic interference as well as voltage and current transients. Our rugged and non-rugged IT products and mobile data communication systems provide public safety workers with the unique functionalities necessary to enable effective response to emergency situations.
  
For more than a decade, Brekford has been a distributor for most major brands in the mobile technology arena. We handle everything from Panasonic Toughbooks® and Arbitrator® digital video systems to emergency lighting systems and wireless technology.  We believe that we have all of the high-end products our customers need to handle their day-to-day operations and protect the public they serve. Every product we sell is tested by highly trained technicians and guaranteed to work in even the most extreme conditions. We specialize in seamlessly incorporating custom built solutions within existing networks. We deliver our end-to-end solutions with service programs that work for agencies large and small, from turn-key drop shipping to municipal leases. Our commitment is to design and deliver solutions that meet or exceed industry standards for safety, ergonomics, reliability, serviceability and uniformity.
 
 
10

 

We develop integrated, interoperable, feature-rich mobile systems that enable first responders, such as police, fire and EMS, to obtain and exchange information in real time. The rapid dissemination of real time information is critical to determine and assure timely and precise resource allocation by public sector decision makers. As a premiere Panasonic Toughbook partner, we augment these rugged laptops by designing and manufacturing vehicle mounting systems and docking stations for in-vehicle communications equipment. From rugged laptop computers, tablets and hand-helds, GPS terminals, two-way radios, and full console systems, we provide ergonomically sound mounting products with full port replication.

Toughbook Arbitrator is a rugged revolution in law enforcement video capture. The fully integrated system offers unparalleled video capture (up to 360 degrees), storage and transfer, and is designed to work with back-end software for seamless video management, including archiving and retrieving.  Brekford augments this solution with an Automatic License Plate Reader (ALPR / LPR), an image-processing technology used to identify vehicles by their license plates.  License Plate Readers (LPRs) can record plates at about one per second at speeds of up to 70 MPH and they often utilize infrared cameras for clarity and to facilitate reading at any time of day or night. The data collected can either be processed in real-time, at the site of the read, or it can be transmitted to remote centers and processed at a later time.
 
360° Vehicle Solution- Upfitting
 
The Brekford 360° vehicle solution provides complete vehicle upfitting, mobile data and video solutions including municipal financing and leasing services for agencies. The 360° vehicle solutions approach provides customers with a one-stop upfitting, cutting edge technology and installation service. The 360° approach is the only stop our customers need to purchase law enforcement vehicles (GM, Ford, Dodge), have them upfitted with lights, sirens, radio communication and rugged IT technology, and then have them "ready to roll". Our mission is to provide and install equipment that ensures safe and efficient mission critical vehicles while incorporating the latest technological advances. We adhere to strict quality control procedures and provide comprehensive services. The Brekford certified installation team provides our customers the highest level of expertise and service from inception to completion, including maintenance and upgrades.

We distinguish ourselves by truly being a “one-stop shop” for vehicle upfitting, cutting edge technology, and installation services.  Unlike our competitors, we provide customers with one place to purchase law enforcement vehicles that are not only upfitted with the traditional lights and sirens but also with rugged IT hardware and communications equipment.  Our 360° engineered bumper-to-bumper vehicle solution, our commitment to top quality, fast, reliable service, along with our streamlined purchasing process is why we believe Brekford is the best all-around vehicle and automated traffic enforcement technology solutions provider.

Results of Operations
 
Results of Operations for the Three Months Ended March 31, 2012 and 2011
 
The following tables summarize and compare selected items from the statement of operations for the three months ended March 31, 2012 and the three months ended March 31, 2011.
 
   
Three Months Ended March 31,
   
(Decrease) / Increase
 
   
2012
   
2011
(Restated)
   
$
     
%
 
Revenues
 
$
4,149,003
   
$
3,453,782
   
$
695,221
     
20.13
%
                                 
Cost of Sales
   
3,077,467
     
2,700,420
     
377,047
     
13.96
%
                                 
Gross Profit
 
$
1,071,536
   
$
753,362
   
$
318,174
     
      42.23
%
                                 
Gross Profit Percentage of Revenue
   
25.83
%
   
21.81
%
               
 
Revenues
 
Revenues for the three months ended March 31, 2012 amounted to $4,149,003 as compared to revenues of $3,453,782 for the three months ended March 31, 2011, representing an increase of $695,221 or 20.13%. The continued growth of Company’s automated traffic enforcement program and the sale of Slick-Ticket represent the increase in revenue as of March 31, 2012.  Also included is the steady revenue from the Rugged IT and vehicles Upfitting services.
 
 
11

 
 
Cost of Sales
 
Cost of sales for the three months ended March 31, 2012 amounted to $3,077,467 as compared to $2,700,420 for the three months ended March 31, 2011, an increase of $377,047 or 13.96%, primarily due to the increase in cost related to laptops, Slick-Ticket hardware and installations.  Additionally, cost related to the automatic traffic enforcement program increased for the three months ended March 31, 2012.
 
Gross profit for the three months ended March 31, 2012 amounted to $1,071,536 as compared to $753,362 for the three months ended March 31, 2011, an increase of $318,174 or 42.23%, primarily due to an increase in the profit margins from automated traffic and Slick-Ticket sales.
 
Expenses
 
   
Three Months Ended March 31,
   
Increase / (Decrease)
 
   
2012
   
2011
(Restated)
   
$
     
%
 
OPERATING EXPENSES
                         
Salaries and related expenses
 
$
428,213
   
$
262,520
   
$
165,693
     
63.12
 %
Selling, general and administrative expenses
   
482,694
     
348,509
     
134,185
     
38.50
%
Total operating expenses
 
$
910,907
   
$
611,029
   
$
299,878
     
49.08
%
 
Salaries and Related Expenses
 
Salaries and wages for the three months ended March 31, 2012 amounted to $428,213 as compared to $262,520 for the three months ended March 31, 2011, an increase of $165,693 or 63.12%, due to increased staff for the automated traffic enforcement program, business development and the related benefit programs for the employees.

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses for the three months ended March 31, 2012 amounted to $482,694 as compared to $348,509 for the three months ended March 31, 2011, an increase of $134,185 or 38.50%, primarily due to marketing and business development activities, interest expense and equipment depreciation. There were also expenses related to bad debt expense, investor relations and accounting/audit expenses which amounted to $114,487 for the three months ended March 31, 2012 as compared to $46,077 for the three months ended March 31, 2011.
 
Net Income
 
Net income for the three months ended March 31, 2012 amounted to $123,310 compared to $112,952 for the three months ended March 31, 2011, an increase of $10,358 or 9.17%. 

Financial Condition, Liquidity and Capital Resources

At March 31, 2012, we had total current assets of $5.5 million and current liabilities of $2.6 million resulting in a working capital surplus of $2.9 million.
 
The Company reported net income of $123,310 for the three months ended March 31, 2012 and its accumulated deficit reduced to $6,258,996 at March 31, 2012. Cash flows provided by operations for the three months ended March 31, 2012 were $958,260.
 
Management believes that the Company’s current level of working capital combined with funds that it expects to generate in its operations during the next twelve months and available from its $500,000 revolving line of credit facility will be sufficient to sustain the business through at least April 1, 2013.  While the Company has taken certain measures to conserve its capital and maintain its liquidity as it continues the effort to pursue its business initiatives, there can be no assurance that the Company will be successful in its efforts to expand its operations or that the expansion of its operations will improve its operating results.  The Company also cannot provide any assurance that unforeseen circumstances, such as the current economic crisis, will not have a material adverse effect on the business that could require it to raise additional capital or take other measures to sustain operations in the event that outside sources of capital are not available.  Although the Company has no specific indication that its business will be affected by the current weakened economic conditions or at a level beyond management’s ability to manage this risk, this matter is an uncertainty that is under continuous review by management. The weakened economy could also have an effect on the Company’s ability to obtain external funding if needed. If the Company encounters unforeseen circumstances it may need to curtail certain of its operations. Although management believes the Company has access to adequate capital resources, it has not secured any commitments for new financing at this time nor can it provide any assurance that new capital will be available to it on acceptable terms, if at all.
 
 
12

 
 
Management expects to incur a substantial increase in initial working capital requirement for the Company’s expansion into the automated traffic enforcement business but expects to cover the requirements of this expansion with funds it anticipates to generate in its operations.  In addition, the Company is also negotiating for extended payment terms from suppliers of the equipment.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
  
Critical Accounting Policies and Estimates

In our Annual Report on Form 10-K for the fiscal year ended March 31, 2012, our most critical accounting policies and estimates upon which our fiscal status depends were identified as those relating to accounts receivables allowances, revenue recognition, warrants and other derivative financial instruments and income taxes. We have reviewed our polices and determined that those policies remain our most critical accounting policies for the three months ended March 31, 2012.

ITEM 4.
CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

The Company is required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified by or pursuant to the Exchange Act, and that such information is accumulated and communicated to our management, including our principal executive officer and principal accounting officer (collectively, the “CEO”), as appropriate, to allow for timely decisions regarding required disclosure.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system 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 is also based in part upon certain 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, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of the Company’s disclosure controls as of March 31, 2012 was carried out under the supervision and with the participation of management, including the CEO.  Based on that evaluation, management, including the CEO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting
 
During the quarter ended March 31, 2012, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
13

 
 
PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
The Company was not a party to pending legal proceedings during the period ended March 31, 2012.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
 
ITEM 5.
OTHER INFORMATION

None.

ITEM 6.
EXHIBITS

The exhibits that are filed or furnished with this report are listed in the Exhibit Index which immediately follows the signatures hereto, and that Exhibit Index is incorporated herein by reference.
 
 
14

 
 
SIGNATURES
 
Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
Brekford Corp.
 
       
Date: April 30, 2012
By:
/s/ C.B. Brechin
 
   
Chandra (C.B.) Brechin
 
   
Chief Executive Officer, Chief Financial Officer, Treasurer and Director
 
   
(Principal Executive Officer and Principal Financial Officer)
 
 
 
15

 
 
EXHIBIT INDEX
 
Exhibit Number
 
Description
 
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).
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS
 
XBRL Instance Document (furnished herewith).
101.SCH
 
XBRL Taxonomy Extension Schema (furnished herewith).
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase (furnished herewith).
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase (furnished herewith).
101.LAB
 
XBRL Taxonomy Extension Label Linkbase (furnished herewith).
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase (furnished herewith).
 
 
16

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