Notes to Unaudited Condensed Consolidated Financial
Statements
For the Six Months Ended June 30, 2017 and 2016
NOTE 1 – DESCRIPTION OF THE BUSINESS
Brekford
Traffic Safety, Inc.
(the
“Company” or “Brekford”) (OTCQX: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.
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. (See Note 4).
As used
in these notes, the terms “Brekford”, “the
Company”, “we”, “our”, and
“us” refer to Brekford Traffic Safety, Inc. and, unless
the context clearly indicates otherwise, its consolidated
subsidiary.
NOTE 2 – LIQUIDITY
For the six months ended June 30, 2017, the Company generated net
income of $4,630,799, used $821,321 of cash for continuing
operations, and provided cash from discontinued operations of
$3,758,157. Additionally, at June 30, 2017 the company had
cash available of $1,853,215 and a working capital surplus of
$1,909,840.
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.
(“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 Subsequent Events (Note
15).
On February 28, 2017, as presented elsewhere in this Quarterly
Report, the Company completed a transaction to sell substantially
all assets and certain liabilities related to its vehicle services
business. The sale resulted in approximately $4.0 million in cash
proceeds, which was used to retire all outstanding debts, including
the Loan Agreement, the Investor Note, and the notes payable to 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 August 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, the Company 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 Traffic Safety, Inc. and its wholly owned
subsidiary, Municipal Recovery Agency, LLC (“MRA”).
Intercompany transactions and balances are eliminated in
consolidation. MRA was dissolved in August 2016.
Use of Estimates
The
preparation of financial statements in conformity with U.S.
generally accepted accounting principles (“GAAP”)
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during
the reporting period. In the accompanying unaudited condensed
consolidated financial statements, estimates are used for, but not
limited to, stock-based compensation, allowance for doubtful
accounts, sales returns, allowance for inventory obsolescence, fair
value of long-lived assets, deferred taxes and valuation allowance,
and the depreciable lives of fixed assets. Actual results could
differ from those estimates.
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, from
citizens, are completed and posted to the municipality’s
account. The respective municipality is then billed depending
on the terms of the respective contract, typically 15 days after
the preceding month while collections are
reconciled.
For contracts where the Company receives a percentage of collected
fines, revenue is calculated based upon the posted payments from
citizens multiplied by the Company’s contractual
percentage. For contracts where the Company receives a
specific fixed monthly fee regardless of citations issued or
collected, revenue is recorded once the amount collected from
citizens exceeds the monthly fee per camera. Our fixed fee
contracts typically have a revenue neutral provision whereby the
municipality’s payment to the Company cannot exceed amounts
collected from citizens within a given month.
Share-Based Compensation
The
Company complies with the provisions of Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 718,
Compensation
-
Stock Compensation
, in measuring and
disclosing stock based compensation cost. The measurement objective
in ASC Paragraph 718-10-30-6 requires public companies to measure
the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the award.
The cost is recognized in expense over the period in which an
employee is required to provide service in exchange for the award
(the vesting period). Performance-based awards are expensed ratably
from the date that the likelihood of meeting the performance
measures is probable through the end of the vesting
period.
Treasury Stock
The
Company accounts for treasury stock using the cost method. As of
June 30, 2017 and 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 six months ended June 30, 2017 and 2016, 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 six months ended June
30, 2017 and 2016. 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 $2,132,725 and $152,700 of tax expense to net
income from discontinued operations and an offsetting tax benefit
to net loss from continuing operations in the six months ended June
30, 2017 and 2016, respectively.
Income (Loss) per Share
Basic
income (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
income (loss) per share is calculated by dividing net loss by the
weighted-average number of shares outstanding, adjusted for the
effect of any potentially dilutive common stock
equivalents. There is no dilutive effect on the loss per
share during loss periods. See Note 13 for the calculation of basic
and diluted income (loss) earnings per share.
Fair Value of Financial Instruments
The
carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued expenses approximate their
fair values based on the short-term maturity of these instruments.
The carrying amount of the Company’s promissory note
obligations approximate fair value, as the terms of these notes are
consistent with terms available in the market for instruments with
similar risk.
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 8
to these condensed consolidated financial statements. We determine
the fair value of these derivative liabilities using the
Black-Scholes option-pricing model when appropriate, and in certain
circumstances using binomial lattice models or other accepted
valuation practices.
When
determining the fair value of our financial assets and liabilities
using the Black-Scholes option-pricing model, we are required to
use various estimates and unobservable inputs, including, among
other things, contractual terms of the instruments, expected
volatility of our stock price, expected dividends, and the
risk-free interest rate. Changes in any of the assumptions related
to the unobservable inputs identified above may change the fair
value of the instrument. Increases in expected term, anticipated
volatility and expected dividends generally result in increases in
fair value, while decreases in the unobservable inputs generally
result in decreases in fair value.
Foreign Currency Transactions
The
Company has certain revenue and expense transactions with a
functional currency in Mexican pesos and the Company's reporting
currency is the U.S. dollar. Assets and liabilities are translated
from the functional currency to the reporting currency at the
exchange rate in effect at the balance sheet date and equity at the
historical exchange rates. Revenue and expenses are translated at
rates in effect at the time of the transactions. Resulting
translation gains and losses are accumulated in a separate
component of stockholders' equity - other comprehensive income
(loss). Realized foreign currency transaction gains and losses are
credited or charged directly to operations.
Segment Reporting
FASB
ASC Topic 280,
Segment
Reporting
, requires that an enterprise report selected
information about operating segments in its financial reports
issued to its stockholders. Based on its current analysis,
management has determined that the Company has only one operating
segment, which is Traffic Safety Solutions. The chief operating
decision-makers use combined results to make operating and
strategic decisions, and, therefore, the Company believes its
entire operation is covered under a single segment.
Recent Accounting Pronouncements
In May 2014 the FASB 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.
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 did not have any
material 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
did not have any material 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.
NOTE 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
continues 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.
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.
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.
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:
|
|
|
|
Current assets -
discontinued operations:
|
|
Accounts
receivable
|
$
776,715
|
Inventory
|
272,679
|
Other current
assets
|
20,117
|
Total current
assets - discontinued operations
|
$
1,069,511
|
|
|
Noncurrent assets -
discontinued operations:
|
|
Property and
equipment, net
|
$
27,362
|
Other non-current
assets
|
13,025
|
Total noncurrent
assets - discontinued operations
|
$
40,387
|
|
|
Current liabilities
- discontinued operations:
|
|
Accounts payable
and accrued liabilities
|
$
664,569
|
Accrued
payroll
|
15,386
|
Customer
deposits
|
34,219
|
Deferred
revenue
|
54,581
|
Line of
credit
|
202,711
|
Total current
liabilities - discontinued operations:
|
$
971,466
|
|
|
Long term
liabilities - discontinued operations:
|
|
Note payable - long
term portion
|
$
452,572
|
Deferred
rent
|
36,948
|
Notes payable -
related parties, long term portion
|
500,000
|
Total long term
liabilities - discontinued operations
|
$
989,520
|
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 three and six months
ended June 30, 2017 and 2016:
|
Three Months
Ended
June
30,
|
Six Months
Ended
June
30,
|
|
|
|
|
|
Revenue
|
$
—
|
$
4,024,475
|
$
425,269
|
$
6,492,655
|
Cost of goods
sold
|
—
|
3,331,404
|
535,376
|
5,616,146
|
Gross
margin
|
—
|
693,071
|
(110,107
)
|
876,509
|
|
|
|
|
|
Salaries and
related expenses
|
—
|
94,465
|
86,327
|
172,145
|
Selling, general
and administrative expenses
|
—
|
99,719
|
73,077
|
209,413
|
Total operating
expenses
|
—
|
194,184
|
159,404
|
381,558
|
|
|
|
|
|
Operating income
(loss)
|
—
|
498,887
|
(269,511
)
|
494,951
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
Gain on sale of
discontinued operations
|
—
|
—
|
5,700,446
|
—
|
Interest expense,
net
|
—
|
(63,425
)
|
(24,788
)
|
(107,864
)
|
Total other income
(expense)
|
—
|
(63,425
)
|
5,675,658
|
(107,864
)
|
|
|
|
|
|
Income from
discontinued operations before tax
|
—
|
435,462
|
5,406,147
|
387,087
|
|
|
|
|
|
Income tax
expense
|
—
|
152,700
|
2,132,725
|
152,700
|
|
|
|
|
|
Income from
discontinued operations, net of tax
|
$
—
|
$
282,762
|
$
3,273,422
|
$
234,387
|
The
following information presents the major classes of line items
constituting significant operating and investing cash flow
activities in the unaudited consolidated statements of cash flows
relating to discontinued operations:
|
|
|
|
|
Cash flows from
operating activities of discontinued operations:
|
|
|
Adjustments to
reconcile net loss to net cash used in operating activities of
discontinued operations:
|
|
|
Gain on sale of
discontinued operations, net of fees
|
$
5,700,446
|
$
—
|
Note
receivable
|
(2,000,000
)
|
—
|
Depreciation and
amortization
|
6,032
|
7,266
|
Changes in
operating assets and liabilities including assets and liabilities
held for sale:
|
|
|
Accounts
receivable
|
522,400
|
909,180
|
Unbilled
receivable
|
—
|
(355,488
)
|
Prepaid expenses
and other noncurrent assets
|
(1,580
)
|
11,062
|
Inventory
|
(131,017
)
|
6,738
|
Other
assets
|
—
|
82,705
|
Accounts payable
and accrued expenses
|
(352,056
)
|
(1,213,445
)
|
Deferred
revenue
|
(54,581
)
|
1,900
|
Other
liabilities
|
68,513
|
(36,510
)
|
Net cash provided
by (used in) operating activities from discontinued
operations
|
3,758,157
|
(586,592
)
|
|
|
|
Cash flows from
investing activities in discontinued operations:
|
|
|
Purchases of
property and equipment
|
—
|
(24,500
)
|
Net cash used in
investing activities in discontinued operations
|
—
|
(24,500
)
|
Cash flows from
financing activities in discontinued operations:
|
|
|
Net change in line
of credit
|
(202,712
)
|
536,136
|
Repayment of
related party notes
|
(500,000
)
|
—
|
Borrowings
(repayments) on term notes
|
(452,571
)
|
51,889
|
Deferred
financing cost
|
—
|
(13,523
)
|
Payments
on term notes
|
—
|
(166,667
)
|
Net cash provided
by (used in) financing activities in discontinued
operations
|
$
(1,155,283
)
|
$
407,835
|
NOTE 5 – 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 provided 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 was $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 was
to 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
were due and payable on the three (3) year anniversary of the
Closing Date (the “Maturity Date”), and thereafter, the
Maturity Date was to be automatically 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 could have
terminated 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 could terminate the Loan Agreement without notice to the
Company, effective immediately. Upon termination by the Lender, the
Company would have been 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 bore 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 bore 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 was 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 was subject to certain monthly or annual fees on the Loans
as set forth in the Loan Agreement.
The remaining portion of the Credit Limit could 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 had occurred under the Loan Agreement. The
Company could 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 Company’s 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, each a Company director, as well as with the Investor
described in Note 6 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 contained 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 contained certain
financial covenants, including, but not limited to, a debt service
coverage ratio.
The Loan Agreement included 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 were due upon a default
under the terms of the Loan Agreement. The Company’s
obligations under the Loan Agreement were guaranteed by C.B.
Brechin, a Company director, pursuant to the terms of a surety
agreement.
At December 31, 2016, the Company had $274,795 in indebtedness
under the Revolving Facility, excluding the finance cost of
$72,084, 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 are due to mature at various dates
through December 2017. Principal maturities in 2017 were $20,150.
The agreements required various monthly payments of principal and
interest until maturity. As of June 30, 2017 and December 31, 2016,
financed assets of $0 and $19,475, respectively, net of accumulated
amortization of $0 and $122,441, respectively, are included in
property and equipment on the balance sheets. The weighted average
interest rate was 3.75% at June 30, 2017 and December 31, 2016. All
notes were repaid in full on February 28, 2017.
NOTE 6 – CONVERTIBLE NOTES PAYABLE –
STOCKHOLDERS
Brekford financed the repurchase of shares of its common stock and
warrants from the proceeds of convertible promissory notes that
were issued by Brekford on November 9, 2009 in favor
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 bore interest
at the rate of 12% per annum and at the time of issuance was to be
convertible into shares of Brekford Traffic Safety, Inc. 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 Traffic Safety, Inc. closes an equity
financing that generates gross proceeds in the aggregate amount of
not less than $5,000,000.
On
April 1, 2010, Brekford Traffic Safety, Inc. and each member of the
lender group executed a First Amendment to the Unsecured Promissory
Note, which amended the Promissory Notes as follows:
●
|
Revise
the conversion price in the provision that allows the holder of the
Promissory Note to elect to convert any outstanding and unpaid
principal portion of the Promissory Note and any accrued but unpaid
interest into shares of the common stock at a price of fourteen
cents ($0.14) per share, and
|
●
|
Each
Promissory Note’s maturity date was extended to the earlier
of (i) four years from the issuance date or (ii) 10 business days
after the date on which Brekford closes an equity financing that
generates gross proceeds in the aggregate amount of not less than
$5,000,000.
|
On
November 8, 2013, Brekford Traffic Safety, Inc. 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 Traffic Safety, Inc.
closes an equity financing that generates gross proceeds in the
aggregate amount of not less than $5,000,000.
On
November 4, 2014, Brekford Traffic Safety, Inc. 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 Traffic Safety, Inc.
closes an equity financing that generates gross proceeds in the
aggregate amount of not less than $5,000,000.
On
November 9, 2015, the maturity dates of the Stockholder Notes were
extended to the earlier of (i) November 9, 2016 or (ii) 10
business days from the date on which Brekford Traffic Safety, Inc.
closes an equity financing that generates gross proceeds in the
aggregate amount of not less than $5,000,000. Mr. Brechin and Mr.
Rutherford indicated that they would not exercise their right of
repayment prior to June 30, 2017.
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.
The
Company anticipated that the maturity date of the Stockholder Notes
would continue to be extended for the foreseeable future; thus,
they were classified as long-term liabilities. As of December 31,
2016, the amounts outstanding under the Stockholder Notes totaled
$500,000. On March 1, 2017, the balance was repaid in
full.
NOTE 7 – 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 bore interest at a rate of 6% per
annum and the principal amount is due on March 17, 2017. Any
interest that accrued under the Investor Note was 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 was 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 could the Conversion
Price have been less than $0.10; provided, however, that if on or
after the date of the Agreement the Company sold any Common Stock
or Common Stock Equivalents (as defined in the Agreement) at an
effective price per share that was less than $0.10 per share, then
the Conversion Price would be equal to the par value of the Common
Stock then in effect. In connection with the Agreement, the
Investor received a warrant to purchase 780,000 shares of Common
Stock (the “Warrant”). The Warrant is exercisable for a
period of five years from the date of issuance at an exercise price
of $0.50 per share, subject to adjustment (the “Exercise
Price”).
On October 23, 2015, the Investor converted $25,000 of principal
and $904 of accrued interest due under the Investor Note into
169,530 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $19,869.
On December 2, 2015, the Investor converted $50,000 of principal
and $2,129 of accrued interest due under the Investor Note into
349,155 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $35,160.
On February 26, 2016, the Investor converted $50,000 of principal
and $2,844 of accrued interest due under the Investor Note into
476,500 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $49,525.
On March 31, 2016, the Investor converted $50,000 of principal and
$3,123 of accrued interest due under the Investor Note into 510,310
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $72,947.
On May 31, 2016, the Investor converted $50,000 of principal and
$3,627 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 June 30, 2017 and December 31, 2016:
|
|
|
Convertible
promissory note payable
|
$
—
|
$
340,000
|
Original issuance
discount, net of amortization of the $65,000 and $61,786 as of June
30, 2017 and December 31, 2016
|
—
|
(3,214
)
|
Beneficial
conversion feature, net of amortization of $557,921 and $530,338 as
of June 30, 2017 and December 31, 2016
|
—
|
(27,583
)
|
Warrant feature,
net of amortization of the $92,079 and $87,527 as of June 30, 2017
and December 31, 2016
|
—
|
(4,552
)
|
Original issuance
cost, net of amortization of $52,500 and $46,996 as of June 30,
2017 and December 31, 2016
|
—
|
(5,504
)
|
Convertible
promissory note payable, net
|
$
—
|
$
299,147
|
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 had 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 were beneficial to the investors at inception, because
the conversion option had an effective strike price that was 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 would 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 $27,583 and $4,552 during
the six months ended June 30, 2017 and $60,514 and $9,987, during
the six months ended June 30, 2016, respectively.
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 $3,214 and $19,336 of interest expense as a
result of the amortization during the six months ended June 30,
2017 and 2016 respectively, which also includes the unamortized
original issue discount attributable to the $150,000 principal
converted to equity for six months ended June 30,
2016.
On February 28, 2017, the Company repaid the remaining balance in
full and retired the note.
NOTE 8 – 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 shares 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 June 30, 2017 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 June
30, 2017 and December 31, 2016, the outstanding fair value of the
derivative liability was $18,228 and $24,360,
respectively. There were no warrants issued during the six
months ended June 30, 2017.
NOTE 9 – LEASES
The Company rents office space under separate non-cancelable
operating leases. Rent expense under our main headquarters lease,
due to expire on April 30, 2020, amounted to $42,540 and
$85,622 for the six months ended June 30, 2017 and 2016,
respectively. On February 28, 2017, the headquarters lease was
assumed by Global Public Safety, and the Company signed a
month-to-month sub-lease with Global Public Safety payable at 15%
of the original lease.
The Company also leases approximately 2,500 square feet of office
space from a related party under a non-cancelable operating lease
expiring on December 31, 2017. Rent expense under this lease
amounted $24,600 for the six months ended June 30, 2017 and 2016,
respectively.
NOTE 10 – MAJOR CUSTOMERS AND VENDORS
Major Customers
The
Company has several ATSE contracts with government agencies, of
which net revenue from four customers during the six months ended
June 30, 2017 represented 60% of the total net revenue. Three
customers accounted for 81% of total accounts receivable as of June
30, 2017, which was subsequently collected.
Net
revenue from five customers during the six months ended June 30,
2016 represented 76% of the total net revenue. Accounts receivable
due from four customers at December 31, 2016 amounted to 88% 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 June 30, 2017 and December
31, 2016, accounts payable due to these vendors amounted to 38% and
47% of total accounts payable, respectively.
NOTE 11 – 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”).
Stock Options
The
Company recorded $16,103 and $7,474 in stock option compensation
expense during in the period ending June 30, 2017 and 2016,
respectively, related to the stock option grants. There were no
options granted during the six months ended June 30,
2017.
Summary
of the option activity for six months ended June 30, 2017 is as
follows:
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
Aggregate
Intrinsic
Value
|
Outstanding at
January 1, 2017
|
550,000
|
$
0.20
|
3.00
|
$
0.00
|
Granted
|
—
|
—
|
—
|
—
|
Forfeited or
expired
|
(75,000
)
|
0.12
|
—
|
0.00
|
Exercised
|
—
|
—
|
—
|
|
Outstanding at June
30, 2017
|
475,000
|
$
0.19
|
2.50
|
$
0.00
|
Exercisable at June
30, 2017
|
475,000
|
$
0.19
|
2.50
|
$
0.00
|
Vested and expected
to vest
|
475,000
|
$
0.19
|
2.50
|
$
0.00
|
Restricted Stock Grants
There
were no stock grants during the six months ended June 30, 2017 and
2016.
NOTE 12 – INVENTORY
As of June 30, 2017 and December 31, 2016 inventory consisted
entirely of raw materials of $215,254 and $221,186,
respectively.
NOTE 13 –INCOME (LOSS) PER SHARE
The
following table provides information relating to the calculation of
loss earnings per common share for continuing
operations:
|
Three Months
Ended June 30
|
|
|
|
|
|
|
Basic income (loss)
earnings per share
|
|
|
|
|
Net
income (loss) from continuing operations
|
$
(147,934
)
|
$
(261,921
)
|
$
1,357,377
|
$
(767,830
)
|
Weighted
average common shares outstanding - basic
|
49,311,264
|
46,454,266
|
49,311,264
|
45,876,068
|
Basic
income (loss) per share
|
$
(0.00
)
|
$
(0.01
)
|
$
0.03
|
$
(0.02
)
|
|
|
|
|
|
Diluted loss per
share
|
|
|
|
|
Net
income (loss) from continuing operations
|
$
(147,934
)
|
$
(261,921
)
|
$
1,357,377
|
$
(767,830
)
|
Weighted
average common shares outstanding
|
49,311,264
|
46,454,266
|
49,311,264
|
45,876,068
|
Potential
dilutive securities
|
—
|
—
|
—
|
—
|
Weighted
average common shares outstanding – diluted
|
49,311,264
|
46,454,266
|
49,311,264
|
45,876,068
|
Diluted
income (loss) per share
|
$
(0.00
)
|
$
(0.01
)
|
$
0.03
|
$
(0.02
)
|
Common
stock equivalents excluded due to anti-dilutive effect
|
840,000
|
7,693,782
|
840,000
|
7,693,782
|
The
following table provides information relating to the calculation of
net income per common share for discontinued
operations:
|
Three Months
Ended June 30
|
|
|
|
|
|
|
Basic net income
per share
|
|
|
|
|
Net
income from discontinued operations
|
$
—
|
$
282,762
|
$
3,273,422
|
$
234,387
|
Weighted
average common shares outstanding - basic
|
49,311,264
|
46,454,266
|
49,311,264
|
45,876,068
|
Basic
income per share
|
$
0.00
|
$
0.01
|
$
0.07
|
$
0.01
|
|
|
|
|
|
Diluted net income
per share
|
|
|
|
|
Net
income from discontinued operations
|
$
—
|
$
282,762
|
$
3,273,422
|
$
234,387
|
Weighted
average common shares outstanding
|
49,311,264
|
46,454,266
|
49,311,264
|
45,876,068
|
Potential
dilutive securities
|
—
|
7,693,782
|
—
|
7,693,782
|
Weighted
average common shares outstanding – diluted
|
49,311,264
|
54,148,048
|
49,311,264
|
53,569,850
|
Diluted
income per share
|
$
0.00
|
$
0.01
|
$
0.07
|
$
0.00
|
Common
stock equivalents excluded due to anti-dilutive effect
|
840,000
|
—
|
840,000
|
—
|
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosures
about fair value of financial instruments require disclosure of the
fair value information, whether or not recognized in the balance
sheet, where it is practicable to estimate that value. As of June
30, 2017, the amounts reported for cash, accrued interest and other
expenses, notes payables, and derivative liability approximate
their fair values because of their short maturities.
Fair
value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. ASC Topic 820
established a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for
identical assets or liabilities (level 1 measurements) and the
lowest priority to unobservable inputs (level 3 measurements).
These tiers include:
|
●
|
Level
1, defined as observable inputs such as quoted prices for identical
instruments in active markets;
|
|
|
●
|
Level
2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable such as quoted
prices for similar instruments in active markets or quoted prices
for identical or similar instruments in markets that are not
active; and
|
|
●
|
Level
3, defined as unobservable inputs in which little or no market data
exists, therefore requiring an entity to develop its own
assumptions, such as valuations derived from valuation techniques
in which one or more significant inputs or significant value
drivers are unobservable.
|
We
measure certain financial instruments at fair value on a recurring
basis. Assets and liabilities measured at fair value on a recurring
basis are as follows at June 30, 2017:
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Derivative
liability
|
—
|
—
|
—
|
18,228
|
Total liabilities
measured at fair value
|
$
—
|
$
—
|
$
—
|
$
18,228
|
The
following is a reconciliation of the derivative liability for which
Level 3 inputs were used in determining the approximate fair
value:
Beginning balance
as of December 31, 2016
|
$
24,360
|
Fair value of
derivative liabilities issued
|
—
|
Gain on change in
derivative liability
|
(6,132
)
|
Ending balance as
of June 30, 2017
|
$
18,228
|
NOTE 15 – MERGER SUMMARY
Merger Agreement
On July
12, 2017, the Company entered into a Second Amended and Restated
Agreement and Plan of Merger being the second amended and restated
version of the agreement originally dated February 10, 2017
(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 stipulated within the Merger
Agreement, Brekford changed its name to Brekford Traffic Safety,
Inc. on June 8, 2017.
Merger Consideration
If the Mergers are completed: (1) each share of the common
stock, par value $0.0001 per share, of the Company
(“
Brekford Common
Stock
”) issued and
outstanding immediately prior to the Effective Time and all rights
in respect thereof, shall, without any action on the part of any
holder thereof, cease to exist and be converted into and become
exchangeable for the right to receive 1/15
th
of
a share (the “
Brekford Exchange
Ratio
”) of the common
stock, par value $0.0001 per share, of Novume (“Novume Common
Stock”), (2) each share of the common stock, par value
$0.0001 per share, of KeyStone (“
KeyStone Common
Stock
”) issued and
outstanding immediately prior to the Effective Time and all rights
in respect thereof, shall, without any action on the part of any
holder thereof, cease to exist and be converted into and become
exchangeable for, 1.9399449 (for convenience and readability, this
ratio is referred to as 1.9399 hereinafter, but all calculations
based on the ratio were completed using the actual ratio of
1.9399449) shares of Novume Common Stock (the
“
KeyStone Common
Exchange Ratio
”), and
(3) each share of Series A Cumulative Convertible Redeemable
Preferred Stock, par value $0.0001 per share, of KeyStone
(“
KeyStone Preferred
Stock
”) and all rights in
respect thereof, shall, without any action on the part of any
holder thereof, cease to exist and be converted into and become
exchangeable for 1 share of the Series A Cumulative Convertible
Redeemable Preferred Stock, par value $0.0001 per share, of Novume
(“
Novume Preferred
Stock
” and such 1 for 1
ratio, the “
KeyStone Preferred
Exchange Ratio
”). The Brekford Exchange Ratio, the
KeyStone Common Exchange Ratio and the KeyStone Preferred Exchange
Ratio (collectively the “
Exchange
Ratios
”) have been
determined with the intent that immediately after the Mergers, the
pre-merger stockholders of Brekford will own that portion of the
capital stock of Novume as shall be equal to approximately 20% of
the issued and outstanding Novume Common 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.
Pursuant
to the Merger Agreemen each of the Company and KeyStone may
terminate the Merger Agreement if closing of the transactions
contemplated under the Merger Agreement did not occur by July 31,
2017.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis presents a review of the
condensed operating results of Brekford Traffic Safety, Inc.
(“Brekford” or the “Company”) for the three
and six months ended June 30, 2017 and 2016 and the financial
condition of Brekford Traffic Safety, Inc. at June 30, 2017. The
discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and accompanying notes
included herein, as well as the Company’s audited financial
statements for the year ended December 31, 2016 filed with its
Annual Report on Form 10-K on March 28, 2017.
Forward-Looking Statements
This
Quarterly Report on Form 10-Q (“Quarterly Report”)
may contain forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of
1995. Readers of this report should be aware of the
speculative nature of “forward-looking
statements.” Statements that are not historical in
nature, including those that include the words
“anticipate”, “estimate”,
“should”, “will”, “expect”,
“believe”, “intend”, and similar
expressions, are based on current expectations, estimates and
projections about, among other things, the industry and the markets
in which we operate, and they are not guarantees of future
performance. Whether actual results will conform to
expectations and predictions is subject to known and unknown risks
and uncertainties, including risks and uncertainties discussed in
this Quarterly 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 Quarterly Report, the terms “Brekford”,
“the Company”, “we”, “our”, and
“us” refer to Brekford Traffic Safety, Inc. and, unless
the context clearly indicates otherwise, its consolidated
subsidiary.
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 Traffic Safety, Inc.
On October 27, 2010, the Company’s Board of Directors
approved the merger of Pelican Mobile with Brekford Traffic Safety,
Inc. pursuant to Section 253 of the General Corporation Law of the
State of Delaware, with Brekford Traffic Safety, Inc. 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 Traffic Safety, Inc. The operations of Pelican
Mobile were continued by the Company without interruption following
the merger.
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 4 (Notes to Consolidated Financial Statements)
elsewhere in this Quarterly Report.
On July
12, 2017, the Company entered into a Second Amended and Restated
Agreement and Plan of Merger being the second amended and restated
version of the agreement originally dated
, February 10, 2017, (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 Subsequent Event
footnote
-
Note 15 (Notes to Consolidated Financial
Statements) elsewhere in this Quarterly 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:
●
|
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.
|
●
|
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.
|
●
|
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.
|
Beyond traditional tax collection on income or property, state
agencies and local municipalities rely heavily on fine and fee
revenue generated from a multitude of violator-funded
sources. For example, jurisdictions generate sizable
revenues from court fees, traffic and parking violations, ordinance
infractions, and library and utility arrearages. Each of these
revenue sources funds public safety and community development
initiatives and without the income, the services are curtailed.
Brekford offers client-specific solutions to these agencies and
municipalities to assist them with collecting unpaid fines,
including:
●
|
Notification continuance
|
●
|
Mail house and printing
|
●
|
Data purification and verification
|
●
|
Back office support
|
●
|
Call center response (inbound & out bound)
|
●
|
Lock-box & treasury
|
●
|
Payment processing
|
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.
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 Quarterly Report,
including management’s discussion and analysis of financial
condition and operating results, the sale transaction was completed
on February 28, 2017. Products and services related to vehicle
services have been treated as discontinued operations within this
Quarterly Report. The assets and liabilities of our vehicle
services business are classified as held for sale on the
consolidated balance sheet as of December 31, 2016, and the
operating results of the vehicle services business are reflected as
discontinued operations in the consolidated statements of earnings
for the period of January 1, 2017 through February 28, 2017 and the
three and six months ended June 30, 2016.
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, Maryland. 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 stipulated within the
Merger Agreement, Brekford changed its name to Brekford Traffic
Safety, Inc. on June 8, 2017.
Merger Consideration
If the Mergers are completed: (1) each share of the common
stock, par value $0.0001 per share, of the Company
(“
Brekford Common
Stock
”) issued and
outstanding immediately prior to the Effective Time and all rights
in respect thereof, shall, without any action on the part of any
holder thereof, cease to exist and be converted into and become
exchangeable for the right to receive 1/15
th
of
a share (the “
Brekford Exchange
Ratio
”) of the common
stock, par value $0.0001 per share, of Novume (“Novume Common
Stock”), (2) each share of the common stock, par value
$0.0001 per share, of KeyStone (“
KeyStone Common
Stock
”) issued and
outstanding immediately prior to the Effective Time and all rights
in respect thereof, shall, without any action on the part of any
holder thereof, cease to exist and be converted into and become
exchangeable for, 1.9399449 (for convenience and readability, this
ratio is referred to as 1.9399 hereinafter, but all calculations
based on the ratio were completed using the actual ratio of
1.9399449) shares of Novume Common Stock (the
“
KeyStone Common
Exchange Ratio
”), and
(3) each share of Series A Cumulative Convertible Redeemable
Preferred Stock, par value $0.0001 per share, of KeyStone
(“
KeyStone Preferred
Stock
”) and all rights in
respect thereof, shall, without any action on the part of any
holder thereof, cease to exist and be converted into and become
exchangeable for 1 share of the Series A Cumulative Convertible
Redeemable Preferred Stock, par value $0.0001 per share, of Novume
(“
Novume Preferred
Stock
” and such 1 for 1
ratio, the “
KeyStone Preferred
Exchange Ratio
”).
The Brekford Exchange Ratio, the KeyStone Common Exchange Ratio and
the KeyStone Preferred Exchange Ratio (collectively the
“
Exchange
Ratios
”) have been
determined with the intent that immediately after the Mergers, the
pre-merger stockholders of Brekford will own that portion of the
capital stock of Novume as shall be equal to approximately 20% of
the issued and outstanding Novume Common 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 July 31, 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. The 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
adopting 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 SEC declared the Registration Statement effective on
August 3, 2017.
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.
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.
Results of Operations
Results of Operations for the Three Months Ended June 30, 2017 and
2016
The
following tables summarize selected items from the consolidated
statements of operations from continuing operations for the three
months ended June 30, 2017 compared to the three months ended June
30, 2016.
|
Three
Months
Ended June 30,
|
|
|
|
|
|
|
Net
Revenues
|
$
835,822
|
$
607,252
|
$
228,570
|
37.6
%
|
|
|
|
|
|
Cost of
Revenues
|
292,716
|
242,763
|
49,953
|
20.6
%
|
|
|
|
|
|
Gross
Profit
|
$
543,106
|
$
364,489
|
$
178,617
|
49.0
%
|
|
|
|
|
|
Gross Profit
Percentage of Revenue
|
65.0
%
|
60.0
%
|
|
|
Revenues
Revenue for the three months ended June 30, 2017 amounted to
$835,822, the highest quarterly total achieved since 2013, as
compared to revenue of $607,252 for the three months ended
June 30, 2016, representing an increase of $228,570 or 37.6%. The
increase was attributable to the addition of new contracts in
Calvert County, Maryland and Wetaskiwin, Alberta, Canada, as well
as expansion of programs in New Rochelle, New York, Laurel,
Maryland, and Fruitland, Maryland. The increase was offset by a
decrease in revenue from our Saltillo, Mexico program which
reported no revenue for the three months ended June 30, 2017. On
March 11, 2017, the City resumed collection efforts for unpaid
fines and announced that these efforts would continue through the
expiration of the contract on December 31, 2017. We are working
with the City to identify the amount due from recent collections,
and to determine whether the City intends to extend the current
contract beyond the expiration date.
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 June 30, 2017, approximately 40% of our
contracts were based on a percentage of fines collected and 60%
were based on a monthly flat fee per camera. As a result of a
change in the law that prohibits ATSE contractors from being
compensated in relation to volume of fines collected, all Maryland
contracts, with the exception of one which recently expired, have
been converted to a flat monthly fee structure.
Cost of Revenues
Cost of revenues for the three months ended June 30, 2017 amounted
to $292,716 as compared to $242,763 for the three months ended June
30, 2016, an increase of $49,953 or 20.6%. This increase was
related to direct labor and materials costs associated with
increased camera deployments and citation issuances.
Gross Profit
Gross profit for the three months ended June 30, 2017 amounted to
$543,106 as compared to $364,489 for the three months ended June
30, 2016, an increase of $178,617 or 49.0%. The increase
was primarily due to new programs and current program expansions,
offset by a reduction in recurring revenue from the Saltillo,
Mexico program as previously discussed. Gross margin for
the three months ended June 30, 2017 was 65.0% as compared to 60.0%
for the three months ended June 30, 2016. The margin increase was
primarily due to economies of scale reflected by lower proportional
costs of printing, mailing, wireless communications, and parts for
maintenance.
Expenses
|
Three
Months
Ended June 30,
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
Salaries and
related expenses
|
$
403,222
|
$
430,203
|
$
(26,981
)
|
(6.3
)%
|
Selling, general
and administrative expenses
|
302,043
|
275,608
|
26,435
|
9.6
%
|
Total operating
expenses
|
$
705,265
|
$
705,811
|
$
(546
)
|
0.0
%
|
Salaries and Related Expenses
Salaries
and related expenses for the three months ended June 30, 2017
amounted to $403,222 as compared to $430,203 for the three months
ended June 30, 2016, a decrease of $26,981 or
6.3%.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses for the three months ended June
30, 2017 amounted to $302,043 as compared to $275,608 for the three
months ended June 30, 2016, an increase of $26,435 or 9.6%. The
increase was primarily driven by corporate and professional fees
related to our recent transactions.
Other Expenses, net
Total
other expenses, net for the three months ended June 30, 2017
amounted to income of $14,255 compared to an expense $73,299 for
the three months ended June 30, 2016, a change of $87,554 or
120.4%. The change was primarily due to the elimination of
interest, financing, and debt extinguishment expenses in the three
months ended June 30, 2017, compared to finance and interest
related costs of $105,524 and
the loss
on extinguishment of debt of $38,923, offset by a change in fair
value of derivative liability of $71,148 for the three months ended
June 30, 2016.
Net Income (Loss)
Net
loss from continuing operations for the three months ended June 30,
2017 amounted to $147,934 compared to a net loss of $261,921 for
the three months ended June 30, 2016, a decrease of $113,987 or
43.5%. A tax benefit of $0 versus $152,700 was a primary driver of
the decrease for the three months ended June 30, 2017 and 2016,
respectively. Excluding the tax benefit, net loss from continuing
operations before income taxes for the three months ended June 30,
2017 amounted to $147,934, compared to a net loss of $414,621 for
the three months ended June 30, 2016, a decrease of $266,687 or
64.3%. The decrease was primarily driven by significantly higher
gross profit, combined with flat operating expenses and lower other
expenses, as discussed previously.
Results of Operations
Results of Operations for the Six Months Ended June 30, 2017 and
2016
The
following tables summarize selected items from the consolidated
statements of operations from continuing operations for the six
months ended June 30, 2017 compared to the six months ended June
30, 2016.
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
Net
Revenues
|
$
1,583,990
|
$
1,220,197
|
$
363,793
|
29.8
%
|
|
|
|
|
|
Cost of
Revenues
|
587,902
|
426,893
|
161,009
|
37.7
%
|
|
|
|
|
|
Gross
Profit
|
$
996,088
|
$
793,304
|
$
202,784
|
25.6
%
|
|
|
|
|
|
Gross Profit
Percentage of Revenue
|
62.9
%
|
65.0
%
|
|
|
Revenues
Revenue for the six months ended June 30, 2017 amounted to
$1,583,990 as compared to revenue of $1,220,197 for the six
months ended June 30, 2016, representing an increase of $363,793 or
29.8%. The increase was attributable to the addition of new
contracts in Calvert County, Maryland and Wetaskiwin, Alberta,
Canada, as well as expansion of programs in New Rochelle, New York,
Laurel, Maryland, and Fruitland, Maryland. The increase was offset
by a decrease in revenue from our Saltillo, Mexico program which
reported no revenue for the three months ended June 30, 2017. On
March 11, 2017, the City resumed collection efforts for unpaid
fines and announced that these efforts would continue through the
expiration of the contract on December 31, 2017. We are working
with the City to identify the amount due from recent collections,
and to determine whether the City intends to extend the current
contract beyond the expiration date.
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 June 30, 2017 approximately 40% of our
contracts were based on a percentage of fines collected and 60%
were based on a monthly flat fee per camera. As a result of a
change in the law that prohibits ATSE contractors from being
compensated in relation to volume of fines collected, all Maryland
contracts, with the exception of one which recently expired, have
been converted to a flat monthly fee structure.
Cost of Revenues
Cost of revenues for the six months ended June 30, 2017 amounted to
$587,902 as compared to $426,893 for the six months ended June 30,
2016, an increase of $161,009 or 37.7%. This increase was related
to direct labor and materials costs associated with increased
camera deployments and citation issuances.
Gross Profit
Gross profit for the six months ended June 30, 2017 amounted to
$996,088 as compared to $793,304 for the six months ended June 30,
2016, an increase of $202,784 or 25.6%. The increase was
primarily due to new programs and current program expansions,
offset by a reduction in recurring revenue from the Saltillo,
Mexico program as discussed previously. Gross margin for six
months ended June 30, 2017 was 62.9% as compared to 65.0% for the
six months ended June 30, 2016. The margin reduction was primarily
due to increased maintenance parts cost in the first quarter as
certain systems were upgraded for performance
enhancements.
Expenses
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
Salaries and
related expenses
|
$
830,185
|
$
832,383
|
$
(2,198
)
|
(0.3
)%
|
Selling, general
and administrative expenses
|
654,516
|
577,254
|
77,262
|
13.4
%
|
Total operating
expenses
|
$
1,484,701
|
$
1,409,637
|
$
75,064
|
5.3
%
|
Salaries and Related Expenses
Salaries
and related expenses for the six months ended June 30, 2017
amounted to $830,185 as compared to $832,383 for the six months
ended June 30, 2016, a decrease of $2,198 or
0.3%.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses for the six months ended June
30, 2017 amounted to $654,516 as compared to $577,254, for the six
months ended June 30, 2016, an increase of $77,262 or 13.4%. The
increase was primarily driven by corporate and professional fees
related to our recent transactions.
Other Expenses, net
Total
other expenses, net for the six months ended June 30, 2017 amounted
to $222,142 as compared to $304,197 for the six months ended June
30, 2016, a decrease of $82,055, or 27.0%. The primary driver of
the decrease was no extinguishment of debt for the six months ended
June 30, 2017, as compared to $161,395 loss on extinguishment of
debt, offset by $70,308 change in fair value of derivative
liability, for the six months ended June 30, 2016.
Net Income (Loss)
Net
income from continuing operations for the six months ended June 30,
2017 amounted to $1,357,377 compared to a net loss of $767,830 for
the six months ended June 30, 2016, a change of $2,125,207. A tax
benefit of $2,068,132 versus $152,700 was the primary driver of the
increase for the six months ended June 30, 2017 and 2016,
respectively. Excluding the tax benefit, net loss from continuing
operations before income taxes for the six months ended June 30,
2017 amounted to $710,755, compared to a net loss of $920,530 for
the six months ended June 30, 2016, a decrease of $209,775 or
22.8%. The decrease was primarily driven by significantly higher
gross profit and lower other expense, offset by slightly higher
operating expenses, as discussed previously.
Financial Condition, Liquidity and Capital Resources
At June 30, 2017, we had total current assets of approximately
$3.02 million and total current liabilities of approximately $1.11
million resulting in a working capital surplus of approximately
$1.91 million. At June 30, 2017, inventory totaled approximately
$0.2 million consisting primarily of ATSE cameras components. In
comparison, 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.
The Company’s accumulated deficit decreased to approximately
$7.4 million at June 30, 2017 from $12.0 million at December 31,
2016, as a result of the net income recorded for the six months
ended June 30, 2017. Cash flows used in continuing operations for
the six months ended June 30, 2017 were approximately $0.8 million,
compared to cash flows used in continuing operations for the six
months ended June 30, 2016 of approximately $0.01
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 condensed consolidated financial
statements presented elsewhere in this Quarterly Report, the
Company is indebted to C.B. Brechin and Scott Rutherford under
unsecured promissory notes in the aggregate balance of $500,000 as
of 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 Quarterly 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.
On February 28, 2017, as presented elsewhere in this Quarterly
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 August 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 Used in Operating Activities
Our cash flows from operating activities are significantly affected
by our cash to support the growth of our business in areas such as
selling, general and administrative. Our operating cash flows are
also affected by our working capital needs to support growth and
fluctuations in inventory, personnel related expenditures, accounts
payable and other current assets and liabilities.
Net cash used in operating activities from continuing operations
was $821,321 for the six months ended June 30, 2017 compared to net
cash used in operating activities from continuing operations of
$90,423 for the six months ended June 30, 2016. 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 six months ended June 30, 2017, net income of $4,630,799,
offset by a gain on sale of the vehicle services business of
$5,700,446, a decrease in current assets, net, of $159,213 and an
increase in current liabilities, net, of $301,691, were the primary
drivers of the cash used in operating activities for continuing
operations.
During
the six months ended June 30, 2016, the net loss of $533,443 offset
by a non-cash loss on the extinguishment of debt of $161,394,
a decrease in current assets, net, of
$152,499 and an increase in current liabilities, net, of $214,135
were the primary drivers of the cash used in operating activities
for continuing operations.
Net cash provided by operating activities from discontinued
operations was $3,758,157 for the six months ended June 30, 2017
compared to net cash used in operating activities from discontinued
operations of $586,592 for the six months ended June 30, 2016. In
the six months ended June 30, 2017, the gain on sale of the vehicle
services of $5,700,446 was offset by a $2,000,000 note receivable,
providing $3,700,446 in proceeds, net of costs, offset by net cash
used to fund operating activities from discontinued operations of
$57,711.
Cash Flows Used in Investing Activities
Net
cash used in investing activities was $165,310 related to capital
expenditures for the period ended June 30, 2017 and there was no
cash used for the period ended June 30, 2016.
Cash Flows Provided by Financing Activities
Net cash used in financing activities from continuing operations
was $354,646 for the six months ended June 30, 2017 and net cash
provided by financing activities was $159,699 for the six months
ended June 30, 2016. In the six months ended June 30, 2017, the
Company paid other notes payable of $354,646. In the six months
ended June 30, 2016, the Company made aggregate principal payments
of $49,625 under capital leases and other note obligations and
advanced net proceeds of $209,324 from the line of
credit.
Net cash used in financing activities from discontinued operations
was $1,155,283 for the six months ended June 30, 2017 compared to
net cash provided by financing activities from discontinued
operations of $407,835 for the six months ended June 30,
2016.
Off-Balance Sheet Arrangements
We do
not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on
our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures
or capital resources.
Critical Accounting Policies and Estimates
Certain
of our accounting policies are considered critical, as these
policies require significant, difficult or complex judgments by
management, often requiring the use of estimates about the effects
of matters that are inherently uncertain. Our Annual Report on Form
10-K for the fiscal year ended December 31, 2016
discusses those critical accounting policies and estimates
that management uses to prepare our consolidated financial
statements, which include those relating to accounts receivables
allowances, revenue recognition and income taxes. We have reviewed
those polices and believe that they remain our most critical
accounting policies for the three and six months ended June 30,
2017, and that no material changes therein have
occurred.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that material information required to be disclosed in our
periodic reports filed under the Exchange Act, as amended, or 1934
Act, is recorded, processed, summarized, and reported within the
time periods specified in the SEC’s rules and forms and to
ensure that such information is accumulated and communicated to our
management, including our Principal Executive Officer and Chief
Financial Officer (Principal Financial Officer) as appropriate, to
allow timely decisions regarding required disclosure. During
the quarter ended June 30, 2017, we carried out an evaluation,
under the supervision and with the participation of our management,
including the Principal Executive Officer and Chief Financial
Officer (Principal Financial Officer), of the effectiveness of the
design and operation of our disclosure controls and procedures, as
defined in Rule 13(a)-15(e) under the Exchange Act. Based on
this evaluation, because of the Company’s limited resources
and limited number of employees
as discussed below
, management concluded that our disclosure
controls and procedures were ineffective as of June 30,
2017.
Management has identified the major control deficiencies as
the lack of segregation of duties and limited accounting knowledge
of Company debt and equity transactions. Our management
believes that these material weaknesses are due to the small size
of our accounting staff. The small size of our accounting
staff may prevent adequate controls in the future, such as
segregation of duties, due to the high cost of such remediation
relative to the benefit expected to be derived
thereby.
To mitigate the current limited resources and limited employees, we
rely heavily on direct management oversight of transactions, along
with the use of external legal and accounting professionals.
As we grow, we expect to increase our number of employees,
which will enable us to implement adequate segregation of duties
within the internal control framework. These control
deficiencies could result in a misstatement of account balances
that would result in a reasonable possibility that a material
misstatement to our consolidated financial statements may not be
prevented or detected on a timely basis. Accordingly, we have
determined that these control deficiencies as described above
together constitute a material weakness. In light of this
material weakness, we performed additional analyses and procedures
in order to conclude that our consolidated financial statements for
the quarter ended June 30, 2017 included in this Quarterly Report
on Form 10-Q were fairly stated in accordance with US GAAP.
Accordingly, management believes that despite our material
weaknesses, our financial statements for the quarter ended June 30,
2017 are fairly stated, in all material respects, in accordance
with U.S. GAAP. This report does not include an attestation
report of our registered public accounting firm regarding internal
control over financial reporting. Management’s report
was not required to attestation by our registered public accounting
firm under section 404(a) of the Sarbanes-Oxley Act.
Limitations on Effectiveness of Controls and
Procedures
Our management, including our Principal Executive Officer and
Principal Financial Officer, does not expect that our disclosure
controls and procedures or our internal controls will prevent all
errors and all fraud. 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. Because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected.
These inherent limitations include, but are not limited to,
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 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.
Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and
not be detected.
Changes in Internal Controls
During the quarter ended June 30, 2017, there have been no changes
in our internal control over financial reporting that have
materially affected or are reasonably likely to materially affect
our internal controls over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The
Company was not a party to pending legal proceedings during the six
months ended June 30, 2017 that are material to the Company or its
assets.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Recent Sales of Unregistered Securities
None.
Issuer Repurchases of Equity Securities
Neither
Brekford Traffic Safety, Inc. nor any of its affiliated purchasers
(as defined by Rule 10b-18 under the Exchange Act) purchased any
shares of its common stock during the three months ended June 30,
2017.