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EX-32.1 - CERTIFICATION - Brekford Traffic Safety, Inc.bfdi_ex321.htm
EX-10.1 - FIRST AMENDMENT TO UNSECURED PROMISSORY NOTE - Brekford Traffic Safety, Inc.bfdi_ex101.htm
EX-31.1 - CERTIFICATION - Brekford Traffic Safety, Inc.bfdi_ex311.htm


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

———————
FORM 10-Q
———————
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from: _____________ to _____________

Commission File Number: 000-52719
———————
Brekford International Corp.
(Exact name of registrant as specified in its charter)
———————

Delaware
 
20-4086662
(State or Other Jurisdiction
 
(I.R.S. Employer
of Incorporation)
 
Identification No.)
 
7020 Dorsey Road, Suite C, Hanover, Maryland 21076
(Address of Principal Executive Office) (Zip Code)
 
(443) 557-0200
(Registrant’s telephone number, including area code)
———————
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes  ¨  No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
 
Large accelerated filer  ¨     Accelerated filer  ¨     Non-accelerated filer  ¨     Smaller reporting company  þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ¨  No  þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. The issuer had 40,080,513 shares of Common Stock, par value $0.0001 per share (“Common Stock”) issued and outstanding as of April 20, 2010.



 
 

 
 
Brekford International Corp.
Form 10-Q
 
 
Index

PART I – FINANCIAL INFORMATION   Page  
         
Item 1 Financial Statements.     1  
  Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009     1  
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (Unaudited)     2  
  Condensed Consolidated Statement of Stockholders’ Equity for the Three  Months Ended March 31,2010 (Unaudited)     3  
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)     4  
  Notes to Unaudited Condensed Consolidated Financial Statements     5  
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations     11  
Item 4T.  Controls and Procedures     15  
           
PART II – OTHER INFORMATION        
           
Item 1. Legal Proceedings     16  
Item 2. Unregistered Sales of Equity Securities     16  
Item 5. Other Information     17  
Item 6. Exhibits     17  
SIGNATURES     18  
 
 
 
 

 
 
PART I – FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
 
Brekford International Corp. and Subsidiary
Condensed Consolidated Balance Sheets

   
March 31,
2010
   
December 31,
2009
 
   
(Unaudited)
       
ASSETS
           
CURRENT ASSETS
           
Cash
  $ 1,242,387     $ 1,750,362  
Accounts receivable, net of allowance of $0
    2,517,222       1,236,127  
Prepaid expenses as of March 31, 2010 and December 31, 2009
    124,573       259,762  
Inventory
    641,503       418,833  
Total current assets
    4,525,685       3,665,084  
Property and equipment, net
    414,296       432,832  
Other non-current assets
    20,651       24,872  
TOTAL ASSETS
  $ 4,960,632     $ 4,122,788  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
  $ 1,658,445     $ 836,063  
Accrued payroll and related expenses
    20,648       17,157  
Income taxes payable
    69,480       80,000  
Deferred revenue
          25,000  
Customer deposits
    36,167       27,060  
Obligations under capital leases – current portion
    17,445       24,799  
Deferred rent – current portion
    43,479       42,063  
Total current liabilities
    1,845,664       1,052,142  
                 
LONG - TERM LIABILITIES
               
Notes payable – stockholders, net of discount
    457,945       421,370  
Obligations under capital lease, net of current portion
    10,606       17,628  
Deferred rent, net of current portion
    212,230       223,926  
Total long-term liabilities
    680,781       662,924  
TOTAL LIABILITIES
    2,526,445       1,715,066  
                 
STOCKHOLDERS’ EQUITY
               
Preferred stock, par value $0.0001 per share; 20,000,000 shares
authorized; none issued and outstanding
           
Common stock, par value $0.0001 per share; 150,000,000 shares
authorized;  39,705,513 shares issued and outstanding at March 31, 2010 and December 31, 2009
    3,971       3,971  
Additional paid-in capital
    10,005,201       10,005,201  
Accumulated deficit
    (7,574,985 )     (7,601,450 )
TOTAL STOCKHOLDERS’ EQUITY
    2,434,187       2,407,722  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 4,960,632     $ 4,122,788  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
1

 
 
Brekford International Corp. and Subsidiary
  Condensed Consolidated Statements of Operations (Unaudited)
 
   
Three Months Ended March 31,
 
   
2010
   
2009
 
NET SALES
  $ 3,360,951     $ 3,378,733  
COST OF SALES
    2,929,999       2,833,320  
GROSS PROFIT
    430,952       545,413  
OPERATING EXPENSES
               
Salaries and related expenses
    168,261       207,694  
Selling, general and administrative expenses
    184,341       184,606  
TOTAL OPERATING EXPENSES
    352,602       392,300  
INCOME  FROM OPERATIONS
    78,350       153,113  
OTHER (EXPENSE) INCOME
               
Interest expense
    (58,142 )     (2,323 )
Interest income
    6,257       2,679  
TOTAL OTHER (EXPENSE) INCOME
    (51,885 )     356  
NET INCOME
  $ 26,465     $ 153,469  
NET INCOME  PER SHARE – BASIC AND DILUTED
  $ 0.00     $ 0.00  
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
               
     Basic
    39,705,513       57,815,513  
     Diluted
    49,705,513       60,189,065  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
2

 
 
Brekford International Corp. and Subsidiary
Condensed Consolidated Statement of Stockholders’ Equity for the
 Three  Months Ended March 31, 2010 (Unaudited)
 
                            Additional                          
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Treasury Stock
    Accumulated        
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Capital
   
Shares
   
Cost
   
Deficit
   
Total
 
                                                       
BALANCE – January 1, 2010
                39,705,513     $ 3,971     $ 10,005,201           $     $ (7,601,450 )   $ 2,407,722  
Net Income for the period
                                              26,465       26,465  
BALANCE – March 31, 2010 (Unaudited)
        $       39,705,513     $ 3,971     $ 10,005,201           $     $ (7,574,985 )   $ 2,434,187  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
3

 
 
Brekford International Corp. and Subsidiary
  Condensed Consolidated Statements of Cash Flows (Unaudited)
 
   
Three Months Ended March 31,
 
   
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net Income
  $ 26,465     $ 153,469  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
    23,180       30,452  
Deferred rent
    (10,280 )     (8,903 )
     Amortization of  debt discount
    36,575        
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,281,095 )     (37,800 )
Prepaid expenses and other non-current assets
    139,411       (481,595 )
Inventory
    (222,670 )     84,323  
Customer deposits
    9,107       49,208  
Accounts payable and accrued expenses
    811,861       (182,425 )
Accrued payroll and related expenses
    3,491       17,035  
Deferred revenue
    (25,000 )      
NET CASH USED IN OPERATING ACTIVITIES
    (488,955 )     (376,236 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
    (4,644 )      
NET CASH USED IN INVESTING ACTIVITIES
    (4,644 )      
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Principal payments on lease obligations
    (14,376 )     (7,770 )
NET CASH USED IN FINANCING ACTIVITIES
    (14,376 )     (7,770 )
                 
NET DECREASE IN CASH
    (507,975 )     (384,006 )
                 
CASH – Beginning of period
    1,750,362       436,451  
                 
CASH – End of period
  $ 1,242,387     $ 52,445  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid for interest
  $ 20,712     $ 2,398  
Cash paid for incomes taxes
  $ 10,520     $ 2,398  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
4

 
 
Brekford International Corp. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2010 and 2009
 
NOTE 1 DESCRIPTION OF THE BUSINESS
 
Brekford International Corp. (“Brekford” or the “Company”) is a homeland technology service provider of fully integrated vehicle installation and rugged technology solutions geared towards mission critical operations. For more than a decade, the Company has provided services to branches of the U.S. military, various federal entities and numerous security and public safety agencies throughout the Mid-Atlantic region. Brekford provides these agencies with an end-to-end suite of superior products and services designed to streamline procurement processes and offer maximum functionality to their day to day operations.

Brekford provides end-to-end mobile communications, information technology and vehicle upfitting solutions including:
 
§  
Ruggedized mobile computing, video and communications products and services for homeland security and public safety environments; and,

§  
Bumper-to-bumper vehicle modification products and services, including specialized lights, sirens, prisoner cages and ballistics protection for homeland security, law enforcement, fire and emergency medical vehicles.

Brekford 360 Degree vehicle solutions provides complete vehicle upfitting, mobile data and video solutions including municipal financing and leasing services for agencies. The 360 Degree vehicle solutions approach provides customers with a one-stop upfitting cutting edge technology and installation service.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of Consolidation and Basis of Presentation
 
The consolidated financial statements of Brekford International Corp. include accounts of the Company and its wholly-owned subsidiary, Pelician Mobile Computers, Inc. Intercompany transactions and balances are eliminated in consolidation.

This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s financial statements for the year ended December 31, 2009 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2010.
 
Use of Estimates
 
Preparation of financial statements that follow accounting principles generally accepted in the United States required management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual results could differ from those estimates.
 
Concentration of Credit Risk
 
The Company maintains cash accounts with major financial institutions. Cash deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution as of  March 31, 2009.  From time to time, amounts deposited may exceed the FDIC 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 is based on how recently payments have been received by customers.  Actual collection experience has not differed significantly from the Company’s estimates, due primarily to credit and collections practices and the financial strength of its customers.
 
 
5

 
 
Brekford International Corp. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
Inventory

Inventory principally consists of hardware and third-party packaged software that is modified to conform to customer specifications and held temporarily until the completion of a contract. These amounts are stated at lower of first-in, first-out (“FIFO”) cost or market.

Property and Equipment

Property and equipment are stated at cost. Depreciation of furniture, vehicles, computer equipment and software and phone equipment is calculated using the straight-line method over the estimated useful lives (two to ten years), and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term (which is three to five years).

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

The Company provides its customers with a warranty against defects in the installation of its vehicle upfitting solutions for one year from the date of installation.  Warranty claims were insignificant for the three months ended March 31, 2010 and 2009.  The Company also performs warranty repair services on behalf of the manufacturers of the equipment it sells. The Company does not currently offer separately priced extended warranty and product maintenance contracts, nor does the Company reduce its prices in anticipation of selling extended warranties offered by the manufacturers of the equipment it sells. Revenues from warranty services were insignificant during the three months ended March 31, 2010 and 2009.

Share-Based Compensation

The Company accounts for stock incentive plans by measurement and recognition of compensation expense for all share-based awards on estimated fair values, net of estimated and actual forfeitures.  

Income Taxes

The Company uses the liability method to account for income taxes. Income tax expense includes income taxes currently payable and deferred taxes arising from temporary differences between financial reporting and income tax bases of assets and liabilities. Deferred income taxes are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense, if any, consists of the taxes payable for the current period. Valuation allowances are established when the realization of deferred tax assets are not considered more likely than not.

Net Income  Per Share
 
Basic net income per share is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income per share is computed by adjusting the denominator of the basic income per share computation for the effect of potential dilutive common shares outstanding during the period.
 
 
6

 
 
Brekford International Corp. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
 
Recent Issued Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”) Subtopic 105, “Generally Accepted Accounting Principles,” which establishes the ASC as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the codification. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company updated its historical GAAP references to comply with the codification effective at the beginning of its fiscal quarter ending September 30, 2009. The adoption of this guidance did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows, since the codification is not intended to change GAAP.

In May 2009, the FASB issued authoritative guidance included in ASC Subtopic 855 “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Specifically, this guidance provides (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and is to be applied prospectively. The Company adopted this guidance as of July 31, 2009.  The adoption of this guidance did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, or ASU 2009-13. ASU 2009-13, which amends existing revenue recognition accounting pronouncements that are currently within the scope of ASC, Subtopic 605-25 (previously included within EITF 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21). The consensus to EITF Issue No. 08-01, Revenue Arrangements with Multiple Deliverables, or EITF 08-01, provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other means to determine the fair value of that undelivered item. EITF 00-21 previously required that the fair value of the undelivered item be the price of the item either sold in a separate transaction between unrelated third parties or the price charged for each item when the item is sold separately by the vendor. This was difficult to determine when the product was not individually sold because of its unique features. Under EITF 00-21, if the fair value of all of the elements in the arrangement was not determinable, then revenue was deferred until all of the items were delivered or fair value was determined. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  The Company does not expect the implementation of this standard to have a material impact on its financial position and results of operations.

NOTE 3 – LINE OF CREDIT AND LETTER OF CREDIT
 
On July 27, 2009, the Company entered into a $500,000 Standby Letter of Credit and a $250,000 Line of Credit with a bank.  Borrowings under the Standby Letter of Credit are repayable plus accrued interest at a rate equal to the greater of (i) the fluctuating annual rate of interest equal to the prime rate plus 1.00 percentage point, adjusted daily, or (ii) 6.00 per annum.  Borrowings under the Line of Credit are repayable over one year plus accrued interest calculated at prime plus 5% per annum and cannot exceed the lesser of $250,000 or 75% of eligible receivables, as defined in the agreement.  The Standby Letter of Credit and Line of Credit are collateralized by all assets of the Company and are personally guaranteed by officers of the Company.  The Standby Letter of Credit expires in July 2010 and the Line of Credit matures in August 2010.  
 
 
7

 
 
Brekford International Corp. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 
NOTE 4 – NOTES PAYABLE – STOCKHOLDERS

On October 1, 2009, three directors of the Company entered into a stock purchase agreement on behalf of the Company, to repurchase 18,910,000 shares of the Company’s Common Stock and cancel 10,000,000 common stock purchase warrants exercisable, see Note 9. On November 9, 2009, three directors of the Company, in the respective principal amounts of $250,000, $250,000 and $200,000 (each, a “Promissory Note, and together, the “Promissory Notes”) financed the stock purchase agreement for $700,000.  Each Promissory Note is convertible into shares of Common Stock, at the option of each holder, at a conversion price of $.07 per share, and bears 12% interest per annum. The Company has agreed to pay the unpaid principal balance of the Promissory Notes and all accrued and unpaid interest on the date that is the earlier of (i) two (2) years from the issue date of the notes, or (ii) ten (10) business days from the date of closing by the Company of any equity financing generating gross proceeds in the aggregate amount of not less than Five Million Dollars ($5,000,000) (the “Maturity Date”).

The occurrence of any of the following events of default (“Event of Default”) will, at the option of the holder of a Promissory Note, make all sums of principal and interest then remaining unpaid and all other amounts payable immediately due and payable, upon written demand from the holder, which Event of Default has not been cured within sixty (60) calendar days of receipt by the Company of written demand: (i) the Company fails to pay the entire principal and any accrued and unpaid interest due on the Maturity Date; (ii) filing by the Company of a voluntary petition under the United States Bankruptcy Code, or under any other insolvency act or law, state or federal, now or hereafter existing; or any action indicating the Company’s consent to, approval of, or acquiescence in, any such petition or proceeding; or the Company’s consent to the appointment of a receiver or trustee for all or a substantial part of its respective properties; or the making of an assignment to the benefit of the creditors on behalf of the Company; and (iii) filing of an involuntary petition against the Company under the United States Bankruptcy Code, or under any other insolvency act or law, state or federal, now or hereafter existing; or the involuntary appointment of a receiver or trustee for all or a substantial part of the Company’s property; or the issuance of a warrant of attachment, execution or similar process against any substantial part of such properties, which remains undismissed, unbonded or undischarged ninety (90) days’ after issuance.  See Note 7.
 
NOTE 5 – MAJOR CUSTOMERS AND VENDORS
 
Major Customers
 
During the three months ended March 31, 2010, sales to two customers which are agencies of state or local governments represented 39% and 14% respectively, of net sales. Accounts receivable due from two customers amounted to 53% and 10% of total accounts receivable at March 31, 2010.
 
During the three months ended March 2009, sales to two customers which are agencies of state or local governments represented 33% and 20% respectively, of net sales. Accounts receivable due from these customers amounted to 53% and 12%  of total accounts receivable at March 31, 2009.
 
Major Vendors
 
The Company purchased substantially all laptop computers that it resold during the periods presented from a single distributor. Revenues from laptop computers, amounted to 60% and 58% of total revenues for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010 and 2009, accounts payable due to this distributor amounted to 67% and 54% of total accounts payable, respectively.
 
While the Company believes that alternative sources of these products are available, it has yet to identify sources other than this vendor that have the ability to deliver these products to the Company within the time frames and specifications that it currently demands. The loss of this vendor could result in a temporary disruption of the Company’s operations.
 
NOTE 6 - STOCKHOLDERS’ EQUITY

Securities Purchase Agreement and Warrants

On October 1, 2009, three directors of the Company entered into a stock purchase agreement on behalf of the Company, to repurchase 18,910,000 shares of the Company’s Common Stock, and cancel 10,000,000 common stock purchase warrants exercisable at $.39 per share. The aggregate purchase price for the securities was $700,000. The effectiveness of the stock purchase agreement was required to be approved by the courts.  The court approval was received on November 4, 2009; consequently, the repurchased shares of Common Stock and warrants have been returned to the Company’s treasury and cancelled.  The stock purchase agreement was financed by three notes payable to stockholders.  See Note 7.
 
 
8

 
 
Brekford International Corp. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
 
Settlement of Legal Proceedings

On or about June 19, 2009, Richard A. Sajac, a former employee and former officer of the Company, filed suit against the Company in Anne Arundel County Circuit Court of Maryland, Case No. 02-C-09-141795. The complaint alleged that the Company breached its obligations under an employment agreement and stock option agreement. The plaintiff seeks treble damages in the amount of $382,500, plus 1,062,500 stock options and reasonable attorney’s fees, costs and unreimbursed expenses. On July 17, 2009, the Company filed a notice removing the case from state court to federal court in the United States District Court for the District Of Maryland (Northern Division).  On July 24, 2009, the Company filed an answer in federal court denying the allegations contained in the complaint.   On December 29, 2009 the parties agreed in a Settlement Agreement to issue Sajac 800,000 shares of the Company’s Common Stock.  The shares were valued at the closing price on the date of grant, resulting in $136,000 of compensation expense in year ended December 31,2009.

NOTE 7 – SUBSEQUENT EVENTS
 
Issuance of Shares of Common Stock to Former Employees

On April 6, 2010, the Board authorized issuance of 375,000 shares of  restricted Common Stock to three former employees, Mr. David Tezza, Mr. Michael Wall and Mr. Douglas McQuarrie, or 125,000 shares each, in settlement of their claims for shares forfeited due to termination of employment.

Amendment to Unsecured Promissory Notes

As provided in Notes 4 and 6, the previously Company financed the repurchase of shares of Common Stock and warrants from the proceeds of convertible promissory notes issued on November 9, 2009 by the Company in favor of a lender group including two directors of the Company, Messrs. C.B. Brechin and Scott Rutherford and a former director, Mr. Bruce Robinson, in the respective principal amounts of $250,000, $250,000 and $200,000 (each, a “Promissory Note, and together, the “Promissory Notes”). Each Promissory Note bears 12% interest per annum and at the time of execution was to be convertible into shares of Common Stock, at the option of each holder, at a conversion price of $.07 per share. At the time of the execution of the Promissory Notes, the Company agreed to pay the unpaid principal balance of the Promissory Notes and all accrued and unpaid interest on the date that was the earlier of (i) two (2) years from the issue date of the notes, or (ii) ten (10) business days from the date of closing by the Company of any equity financing generating gross proceeds in the aggregate amount of not less than Five Million Dollars ($5,000,000).

On April 30, 2010, the Company and each member of the lender group executed a respective First Amendment to the Unsecured Promissory Note amending the terms of the Promissory Notes.  Each Promissory Note was amended as described below to:

•           Revise the conversion price to provide the holder of the respective Promissory Note may elect to convert any outstanding and unpaid principal portion of the Promissory Note, and any accrued and unpaid interest into shares of the Common Stock at a price of fourteen cents ($0.14) per share of Common Stock, and

•           Amend the maturity date to provide the Company agrees to pay the unpaid principal balance of the respective Promissory Note and all accrued and unpaid interest on the date that is the earlier of (i) four (4) years from the issue date of the note or (ii) ten (10) business days from the date of closing by the Company of any equity financing generating gross proceeds in the aggregate amount of not less than Five Million Dollars ($5,000,000).
 
 
9

 
 
Brekford International Corp. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 
NOTE 8 – COMMITMENTS AND CONTINGENCIES
 
Brekford International Corp. v. Woot, Inc.
 
On or about January 16, 2009, the Company filed suit against Woot, Inc., a Texas corporation (“Woot”) in the United States District Court of the Southern District of Florida, Miami Division, Case No. 09-20143-Civ-Seitz/O’Sullivan. The complaint alleged that on or about July 29, 2008, the Company agreed to purchase from Woot, and Woot agreed to sell to the Company, ten thousand (10,000) Lexmark printers and digital camera bundles (the “Goods”) for the purchase price of $370,000 (the “Contract Price”). The Company paid Woot the Contract Price and instructed Woot to ship the Goods to a third party. The complaint further alleges Woot breached the contract by failing to deliver the Goods to the third party as directed. The Company demanded Woot return the full Contract Price to the Company, but Woot has failed and refused to do so. As a result of Woot’s alleged breaches, the Company sought damages in the amount of $320,000, plus pre-judgment interest and costs. On March 9, 2009, Woot filed a motion to dismiss for lack of personal jurisdiction and an alternative motion to transfer venue. On April 14, 2009, an order was entered granting the defendant’s request for a change of venue and transferring the case to the United States District Court of the Eastern District of Texas. On May 5, 2009, Woot filed an answer denying liability to the Company, and on May 11, 2009, Woot filed third party complaints against the parties Chiragnee, Inc. and Zenith Distributors, Inc.  On January 21, 2010, the Company entered into a compromise settlement agreement and mutual release whereby the Company agreed to accept $245,000 in full settlement of its claims.  The settlement consideration is payable to the Company pursuant to the terms of the settlement agreement on or about the following dates: $45,000 on or about January 30, 2010 by the defendant Woot; $50,000 on or about January 30, 2010 and an additional $50,000 on February 15, 2010 by the defendants Zenith and Chiragnee; an additional $50,000 on May 15, 2010 and a final payment of $50,000 on August 15, 2010 by defendant Zenith.  As of December 31, 2008 the amount was previously classified as a long-term asset.  As of December 21, 2009, as a result of the settlement, the value of the long-term asset was written down to $245,000 and reclassed to prepaid current assets on the accompanying consolidated balance sheet. The outstanding balance as of March 31, 2010 was $100,000.

Richard A. Sajac v. Brekford International Corp.
 
On or about June 19, 2009, Richard A. Sajac, a former employee and executive officer of the Company, filed suit against the Company in Anne Arundel County Circuit Court of Maryland, Case No. 02-C-09-141795. The complaint alleged that the Company breached its obligations under an employment agreement and stock option agreement. The plaintiff sought treble damages in the amount of $382,500, plus 1,062,500 stock options and reasonable attorney’s fees, costs and unreimbursed expenses. On July 17, 2009, the Company filed a notice removing the case from state court to federal court in the United States District Court for the District Of Maryland (Northern Division). The new case number was 1:09-cv-01888(CCB). On July 24, 2009, the Company filed an answer in federal court denying the allegations contained in the complaint. On December 29, 2009, the Company reached an agreement in principle with Mr. Sajac under which the Company agreed to settle all claims arising out of the complaint filed by Mr. Sajac. The terms of a definitive settlement agreement provided that as consideration for the settlement of the lawsuit and release from Mr. Sajac the Company would pay Mr. Sajac an aggregate of $11,000 in cash, payable on or before January 28, 2010 and issue to Mr. Sajac 800,000 shares of the Company’s Common Stock. The definitive settlement agreement was executed and entered with the court on January 26, 2010.  The Company has issued all shares of Common Stock and paid all cash amounts due under the settlement agreement.  The shares were valued at the closing price on the date of grant, resulting in $136,000 of compensation expense in the accompanying income statement.
 
 
10

 
 
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 consolidated operating results of Brekford International Corp. and its wholly-owned subsidiary (Brekford and its subsidiary are referred to together as the “Company”) for the three months ended March 31, 2010 and 2009, respectively, and the financial condition of the Company at March 31, 2010. 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 financial statements for the year ended December 31, 2009 filed with its Annual Report on Form 10-K on March 15, 2010.
 
Forward-Looking Statements
 
Statements included in this Quarterly Report filed on Form 10-Q (“Form 10-Q”) that do not relate to present or historical conditions are “forward-looking statements.” Such forward-looking statements involve risks and uncertainties that could cause results or outcomes to differ materially from those expressed in the forward-looking statements. Forward-looking statements may include, without limitation, statements relating to our plans, strategies, objectives, expectations and intentions and are intended to be made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “believes,” “forecasts,” “intends,” “possible,” “estimates,” “anticipates,” and “plans” and similar expressions are intended to identify forward-looking statements. Our ability to predict projected results or the effect of events on our operating results is inherently uncertain. Forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those discussed in this document. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or management’s good faith belief with respect to future events, and is subject to risks and uncertainties that could cause our growth and actual performance or results to differ materially from those expressed in the statements. Important factors that could cause such differences include, but are not limited to: (i) industry competition, conditions, performance and consolidation, (ii) legislative and/or regulatory developments, (iii) the effects of adverse general economic conditions, both within the United States and globally, (iv) any adverse economic or operational repercussions from terrorist activities, war or other armed conflicts, and (v) the availability of debt and equity financing in view of the current economic crisis.
Forward-looking statements speak only as of the date the statements are made. The Company assumes no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information except to the extent required by applicable securities laws. If the Company updates one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect thereto or with respect to other forward-looking statements.
 
Overview
 
We are a provider of fully integrated vehicle upfitting, rugged technology solutions geared towards mission critical operations. For more than a decade, we have provided services to branches of the U.S. military, various federal entities and numerous security and public safety agencies throughout the Mid-Atlantic region. Through our strategic partnerships with our distributors, we are able to provide products and vehicle upfitting services specially designed for public safety, law enforcement and emergency first responder vehicles and back office operations.
 
Results of Operations
 
Results of Operations for the Three Months Ended March 31, 2010 and 2009 Compared
 
The following tables summarize selected items from the statement of operations for the three months ended March 31, 2010 compared to the three months ended March 31, 2009.
 
   
Three Months Ended March 31,
   
(Decrease) / Increase
 
   
2010
   
2009
    $       %  
Revenues
  $ 3,360,951     $ 3,378,733     $ (17,782 )     (0.53 )%
                                 
Cost of Sales
    2,929,999       2,833,320       96,679       3.41 %
                                 
Gross Profit
  $ 430,952     $ 545,413     $ (114,461 )     (20.99 )%
                                 
Gross Profit Percentage of Revenue
    13 %     16 %                
 
 
11

 
 
Revenues
 
Consolidated revenues for the three months ended March 31, 2010 amounted to $3,360,951 as compared to revenues of  $3,378,733 for the three months ended March 31, 2009, representing a decrease of $17,782 or 0.53%.  Although the change in the revenues is quantitatively immaterial, management attributes this slight decrease to a decrease in vehicle upfitting revenues.
 
Cost of Sales
 
Cost of sales for the three months ended March 31, 2010 amounted to $2,929,999 as compared to $2,833,320 for the three months ended March 31, 2009, an increase of $ 96,679 or 3.41%, primarily due to the increase in sales of laptops and installations with lower gross profit margins during the three months ended  March 31, 2009.
 
Gross profit for the three months ended March 31, 2010 amounted to $430,952 as compared to $545,413 for the three months ended March 31, 2009, a decrease of $114,461 or 20.99% primarily due to a decrease in the profit margins for laptops sold and a decrease in vehicle upfitting revenue which normally accounts for higher margins.
 
Expenses
 
   
Three Months Ended March 31,
   
Increase / (Decrease)
 
   
2010
   
2009
    $       %  
OPERATING EXPENSES
                         
Salaries and related expenses
  $ 168,261     $ 207,694     $ (39,433 )     (18.99 ) %
Selling, general and administrative expenses
    184,341       184,606       (265 )     %
Total operating expenses
    352,602       392,300       (39,698 )     (10.12 ) %
                                 
INCOME FROM OPERATIONS
    78,350       153,113       (74,763 )     (48.83 ) %
                                 
TOTAL OTHER (EXPENSE) INCOME
                               
Interest expense
    (58,142 )     (2,323 )     (55,819 )     2402.89 %
Interest income
    6,257       2,679       3,578       133.56 %
                                 
NET INCOME
  $ 26,465     $ 153,469     $ (127,004 )     (82.76 ) %
 
Salaries and Related Expenses
 
Salaries and wages paid in cash for the three months ended March 31, 2010 amounted to $168,261 as compared to $207,694 for the three months ended March 31, 2009, a decrease of  $(39,433) or (18.99)% due to an employee being on unpaid extended medical leave and elimination of service charges for the Professional Employer Organization.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses for the three months ended March 31, 2010 amounted to $184,341 as compared to $184,606 for the three months ended March 31, 2009, which remained about the same.
 
Net Income
 
Net income for the three months ended March 31, 2010 amounted to $26,465 compared to $153,469 for the three months ended March 31, 2009, a decrease of $127,004 or 82.76% primarily due to a decrease in gross profit margins and an increase in interest expenses.  Interest expense for the three months ended March 31, 2010 includes payment of interest for the notes payable and the amortization of the discount on the notes payable.
 
 
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Liquidity and Capital Resources
 
The Company had working capital of $2,680,021 at March 31, 2010. The Company’s primary sources of liquidity through March 31, 2010 have been the cash flows it has generated from its operations and funds received in a private placement transaction completed during the year ended December 31, 2007.
 
The Company reported net income of $26,465 for the three months ended March 31, 2010 and its accumulated deficit reduced to $(7,574,985) at  March 31, 2010. Cash flows used by operations for the three months ended March 31, 2010 were $507,975.
 
Management believes that the Company’s current level of working capital combined with funds that it expects to generate in its operations during the next twelve months will be sufficient to sustain the business through at least April 1, 2011.  While the Company has taken certain measures to conserve its liquidity as it continues the effort to pursue its business initiatives, there can be no assurance that the Company will be successful in its efforts to expand its operations or that the expansion of its operations will improve its operating results.  The Company also cannot provide any assurance that unforeseen circumstances, such as the current economic crisis, will not have a material adverse effect on the business that could require it to raise additional capital or take other measures to sustain operations in the event that outside sources of capital are not available.  Although the Company has no specific indication that its business will be affected by the current economic crisis or at a level beyond management’s ability to manage this risk, this matter is an uncertainty that is under continuous review by management. The current economic crisis could also have an effect on the Company’s ability to obtain external funding if needed. If the Company encounters unforeseen circumstances it may need to curtail certain of its operations. Although management believes the Company has access to capital resources, it has not secured any commitments for new financing at this time nor can it provide any assurance that new capital will be available to it on acceptable terms, if at all.
 
Management expects to incur a substantial increase in initial working capital requirement for the Company’s expansion into the automated traffic enforcement business but expects to cover the requirements of this expansion with funds it anticipates to generate in its operations and is also negotiating for extended payment terms from suppliers of the equipment.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
 
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Application of Critical Accounting Policies and Pronouncements
 
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments affecting the reporting amounts of assets and liabilities, expenses and related disclosures. We base our estimates on historical experience, our knowledge of economic and market factors and various other assumptions we believe to be reasonable under the circumstances. We may also engage third party specialists to assist us in formulating estimates when considered necessary. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable and depend upon, among other things, many factors outside of our control, such as demand for our products and economic conditions. Accordingly, our estimates and judgments may prove to be different from actual amounts that may only be determined upon the outcome of one or more confirming events and actual results may differ, perhaps significantly, from these estimates under different estimates, assumptions or conditions. We believe the critical accounting policies below are affected by estimates, assumptions and judgments used in the preparation of our financial statements.
 
Accounts Receivable Allowance
 
We currently record an allowance against our gross accounts receivable based upon our best estimate of the amount of probable credit losses. Historically, our customers have primarily consisted of agencies of federal, state and local law enforcement agencies, and we have not experienced any material credit losses to date. We continually review credit rating reports of customers as well as length of time receivables are past due and collection experience with the customer to determine or modify credit limits. For the three months ended March 31, 2010, we reviewed specific historical collection experience with several accounts to determine no allowance was necessary. We will continue to evaluate the financial conditions and payment history of our customers to determine if we need to record an allowance in the future.
 
Revenue Recognition
 
We apply the revenue recognition principles set forth under SEC Staff Accounting Bulletin (SAB) 104 with respect to all of our revenue. We adhere strictly to the criteria outlined in SAB 104, which provides for revenue to be recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery and installation has been completed, (iii) the customer accepts and verifies receipt, and (iv) collectability is reasonably assured.
 
Warrants and Other Derivative Financial Instruments
 
We apply the provisions of EITF 00-19 to all issuances of common stock purchase warrants and other free standing derivative financial instruments. Under the provisions of EITF 00-19, we classify any contracts that require physical settlement or net-share settlement, or provide us the option net-cash settlement or net-share settlement as equity. We classify as equity or liabilities any contracts that require net-cash settlement, including a requirement to net-cash settle the contract if an event occurs that is outside our control, or gives the counterparty to the contract a choice of net-cash settlement or net-share settlement. We evaluate the classification of free standing derivative instruments at each reporting date to determine if a change in classification between equity and liabilities is necessary. All of our free standing derivatives, which principally consist of warrants to purchase common stock, at March 31, 2010 satisfy the criteria for classification as equity instruments.
 
Income Taxes
 
We apply the provisions of SFAS No. 109 “Accounting for Income Taxes” in determining our effective tax rate, provision for tax expense, deferred tax assets and liabilities and the related valuation allowance, all of which involves significant judgments and estimates. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in our consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Valuation allowances are provided against assets, including net operating losses, if it is anticipated that the asset is not more likely than not to be realized through future taxable earnings or implementation of tax planning strategies. We have a valuation allowance against the full amount of our net deferred tax assets, because in the opinion of management, it is not more likely than not that these deferred tax assets will be realized. Our effective tax rate in a given period could be affected if we determine the allowance is or is not required, or if we were required to pay amounts in excess of established reserves.
 
On January 1, 2007, we adopted FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (FIN 48), which provides additional clarification related to accounting for uncertainty in tax positions, requiring companies to recognize in financial statements the impact of a tax position if the position is more likely than not of being sustained on audit. FIN 48 inherently requires judgment and estimates by management. For the three months ended March 31, 2010 and 2009, we do not believe we have any material uncertain tax positions that would require us to measure and reflect the potential lack of sustainability of a position on audit in our financial statements. We will continue to evaluate our tax positions in future periods to determine if measurement and recognition in our financial statements is required.
 
 
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ITEM 4T.
CONTROLS AND PROCEDURES
 
Disclosure Controls and Internal Controls
 
As required by Rule 13a-15(b) under the Exchange Act, management carried out an evaluation, with the participation of the Company’s Principal Executive Officer and Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as of March 31, 2010. Based on the evaluation as of March 31, 2010, the Principal Executive Officer and Financial Officer of the Company has concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)and 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules and forms of the SEC.
 
Disclosure controls and procedures are controls and other procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Principal Executive Officer and Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  Internal controls are procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, recorded and reported and our assets are safeguarded against unauthorized or improper use, to permit the preparation of our financial statements in conformity with generally accepted accounting principles.
 
In designing disclosure controls and procedures, our management necessarily is required to apply its judgment in evaluating the costs-benefit relationship of possible disclosure controls and procedures.  The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events.  Accordingly, internal controls, however well conceived, provide reasonable but not absolute assurance in that their design will succeed in achieving their stated goals under all potential future conditions.
 
Changes in Internal Control over Financial Reporting
 
There was no change in our internal control over financial reporting during our quarter ended March 31, 2010, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS
 
Brekford International Corp. v. Woot, Inc.

On or about January 16, 2009, we filed suit against Woot, Inc., a Texas corporation (“Woot”) in the United States District Court of the Southern District of Florida, Miami Division, Case No. 09-20143-Civ-Seitz/O’Sullivan. The complaint alleges that on or about July 29, 2008, we agreed to purchase from Woot, and Woot agreed to sell to us, ten thousand (10,000) Lexmark printers and digital camera bundles (the “Goods”) for the purchase price of $370,000 (the “Contract Price”). We paid Woot the Contract Price and instructed Woot to ship the Goods to a third party. The complaint further alleges Woot breached the contract by failing to deliver the Goods to the third party as directed. We demanded Woot return the full Contract Price to us but Woot has failed and refused to do so. As a result of Woot’s alleged breaches, we are seeking damages in the amount of $320,000, plus pre-judgment interest and costs. On March 9, 2009, Woot filed a motion to dismiss for lack of personal jurisdiction and an alternative motion to transfer venue. On April 14, 2009, an order was entered granting the defendant’s request for a change of venue and transferring the case to the United States District Court of the Eastern District of Texas. On May 5, 2009, Woot filed an answer denying liability to the Company, and on May 11, 2009, Woot filed third party complaints against the parties Chiragnee, Inc. and Zenith Distributors, Inc.  On January 21, 2010, the Company entered into a compromise settlement agreement and mutual release whereby the Company agreed to accept $245,000 in full settlement of its claims.  The settlement consideration is payable to the Company pursuant to the terms of the settlement agreement on or about the following dates: $45,000 on or about January 30, 2010 by the defendant Woot; $50,000 on or about January 30, 2010 and an additional $50,000 on February 15, 2010 by the defendants Zenith and Chiragnee; an additional $50,000 on May 15, 2010 and a final payment of $50,000 on August 15, 2010 by defendant Zenith.  To date $145,000 has been paid to the Company under the settlement agreement.

Richard A. Sajac v. Brekford International Corp.

On or about June 19, 2009, Richard A. Sajac, a former employee and executive officer of the Company, filed suit against the Company in Anne Arundel County Circuit Court of Maryland, Case No. 02-C-09-141795. The complaint alleges that the Company breached its obligations under an employment agreement and stock option agreement. The plaintiff seeks treble damages in the amount of $382,500, plus 1,062,500 stock options and reasonable attorney’s fees, costs and unreimbursed expenses.  On July 17, 2009, the Company filed a notice removing the case from state court to federal court in the United States District Court for the District Of Maryland (Northern Division). The new case number is 1:09-cv-01888(CCB). On July 24, 2009, the Company filed an answer in federal court denying the allegations contained in the complaint. On December 29, 2009, the Company reached an agreement in principle with Mr. Sajac under which the Company agreed to settle all claims arising out of the complaint filed by Mr. Sajac. The terms of a definitive settlement agreement provided that as consideration for the settlement of the lawsuit and releases from Mr. Sajac the Company would pay Mr. Sajac an aggregate of $11,000 in cash, payable on or before January 28, 2010 and issue to Mr. Sajac 800,000 shares of the Company’s Common Stock. The definitive settlement agreement was executed and entered with the court on January 26, 2010.  The Company has issued all shares of Common Stock and paid all cash amounts due under the settlement agreement.

ITEM 2.    UNREGISTERED SALE OF EQUITY SECURITIES

In December 2009, the Company entered into an agreement in principle to issue 800,000 shares of its Common Stock in the settlement of a litigation proceeding with our former executive officer. These shares were valued at $136,000 at the time of the agreement in principle. A formal settlement agreement was executed by the Company and the former executive officer on January 26, 2010.  

The Company believes that the offer and sale indicated above was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, for, among other things, the following reasons:

    ·      
the subject securities were sold to one individual;

    ·      
the individual was reasonably believed to possess one or more of the following characteristics:
 
 
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    ·      
the investor was a sophisticated investor at the time of the sale; and

    ·      
the investor had a pre-existing business relationship with the Company and the Company’s management.

ITEM 5.    OTHER INFORMATION

As previously reported in a Current Report on Form 8-K filed with the SEC, during October 2009 three directors of the Company, Messrs. C.B. Brechin, Scott Rutherford, and Bruce Robinson, entered into a stock purchase agreement on behalf of the Company (the “Stock Purchase Agreement”), with the court-appointed receiver, Robert D. Gordon (the “Receiver”), for its stockholder Legisi Marketing, Inc, to repurchase 18,910,000 shares of the Common Stock and cancel 10,000,000 common stock purchase warrants exercisable at $.39 per share (the “Warrants”), which shares of Common Stock and Warrants had been in the custody of the Receiver. The aggregate purchase price for the securities under the Stock Purchase Agreement was $700,000. The effectiveness of the Stock Purchase Agreement was subject to court approval which was received on November 4, 2009. The repurchased shares of Common Stock and Warrants have been returned to the Company’s treasury and cancelled.

The Company financed the transaction from the proceeds of convertible promissory notes issued on November 9, 2009 by the Company in favor of a lender group including two directors of the Company, Messrs. C.B. Brechin and Scott Rutherford and a former director, Mr. Bruce Robinson, in the respective principal amounts of $250,000, $250,000 and $200,000 (each, a “Promissory Note, and together, the “Promissory Notes”). Each Promissory Note bears 12% interest per annum and at the time of execution was to be convertible into shares of Common Stock, at the option of each holder, at a conversion price of $.07 per share. At the time of the execution of the Promissory Notes, the Company agreed to pay the unpaid principal balance of the Promissory Notes and all accrued and unpaid interest on the date that was the earlier of (i) two (2) years from the issue date of the notes, or (ii) ten (10) business days from the date of closing by the Company of any equity financing generating gross proceeds in the aggregate amount of not less than Five Million Dollars ($5,000,000).

On April 30, 2010, the Company and each respective member of the lender group executed a First Amendment to the Unsecured Promissory Note (each an “Amendment” and, collectively, the “Amendments”) amending the terms of the Promissory Notes.  Each Promissory Note was amended as described below to:

    ·      
revise the conversion price to provide the holder of the respective Promissory Note may elect to convert any outstanding and unpaid principal portion of the Promissory Note, and any accrued and unpaid interest into shares of the Common Stock at a price of fourteen cents ($0.14) per share, and
    ·      
amend the maturity date to provide the Company agrees to pay the unpaid principal balance of the respective Promissory Note and all accrued and unpaid interest on the date that is the earlier of (i) four (4) years from the issue date of the note or (ii) ten (10) business days from the date of closing by the Company of any equity financing generating gross proceeds in the aggregate amount of not less than Five Million Dollars ($5,000,000).

The preceding description of the terms of the Amendments is qualified in its entirety by each respective Amendment, a form of which is attached to this Form 10-Q as Exhibit 10.1 and incorporated herein by reference.
 
ITEM 6.
EXHIBITS
 
Exhibit
Number
 
Description
 
Form of First Amendment to Unsecured Promissory Note, dated April 30, 2010, between Brekford International Corp. and each member of the Company’s lender group
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
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SIGNATURES
 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

 
Brekford International Corp.
   
 
     
Date: May 5, 2010
By:
/s/ C.B. Brechin
   
Chandra (C.B.) Brechin
   
Chief Executive Officer, Chief Financial Officer,Treasurer and Director
   
(Principal Executive Officer and Principal Financial Officer)
     
 
 

 
 
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EXHIBIT INDEX
 
Exhibit
Number
 
Description
 
Form of First Amendment to Unsecured Promissory Note, dated April 30, 2010, between Brekford International Corp. and each member of the Company’s lender group
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


 
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