Brekford Traffic Safety, Inc. - FORM 10-Q

Attached files

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EXCEL - IDEA: XBRL DOCUMENT - Brekford Traffic Safety, Inc.	Financial_Report.xls
EX-31.1 - CERTIFICATION - Brekford Traffic Safety, Inc.	bfdi_ex311.htm
EX-32.1 - CERTIFICATION - Brekford Traffic Safety, Inc.	bfdi_ex321.htm
EX-10.1 - FOURTH AMENDMENT TO LOAN DOCUMENTS - Brekford Traffic Safety, Inc.	bfdi_ex101.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, 2014

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

For the transition period from: _____________ to _____________

Commission File Number: 000-52719

———————

Brekford Corp.

(Exact name of registrant as specified in its charter)

———————

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

7020 Dorsey Road, Hanover, Maryland 21076

(Address of Principal Executive Office) (Zip Code)

(443) 557-0200

(Registrant’s telephone number, including area code)

N/A

(Former name, if changed since last report)

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date. The issuer had 44,500,569 shares of Common Stock, par value $0.0001 per share (“Common Stock”) outstanding as of April 22, 2014.

Brekford Corp.

Form 10-Q

Index

PART I – FINANCIAL INFORMATION		Page

Item 1	Financial Statements.		3
	Condensed Consolidated Balance Sheet as of March 31, 2014 and December 31, 2013 (Unaudited)		3
	Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		4
	Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (Unaudited)		5
	Notes to Unaudited Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 4.	Controls and Procedures		18

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		19
Item 3.	Defaults Upon Senior Securities		19
Item 5.	Other Information		19
Item 6.	Exhibits		19
SIGNATURES			20

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Brekford Corp.

Condensed Consolidated Balance Sheet (Unaudited)

	March 31, 2014			December 31, 2013

ASSETS
CURRENT ASSETS
Cash	$	1,180,479		$	2,052,306
Accounts receivable, net of allowance $0 at March 31, 2014 and December 31, 2013, respectively		3,309,808			1,390,300
Unbilled receivables		177,600			125,831
Prepaid expenses		128,610			47,148
I Inventory		506,603			1,264,099
Total current assets		5,303,100			4,879,684
Property and equipment, net		1,297,317			1,593,202
Other non-current assets		74,632			187,132
TOTAL ASSETS	$	6,675,049		$	6,660,018
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	2,981,042		$	1,731,706
Accrued payroll and related expenses		64,698			104,100
Line of credit		1,026,955			1,470,533
Other liabilities		49,361			49,922
Deferred revenue		586,239			677,622
Customer deposits		124,026			27,640
Obligations under capital lease – current portion		625,762			616,115
Obligations under other notes payable – current portion		31,262			32,763
Deferred rent – current portion		42,316			48,632
Total current liabilities		5,531,661			4,759,033

LONG - TERM LIABILITIES
Convertible notes payable – stockholders		500,000			500,000
Obligations under capital lease, net of current portion		14,923			197,832
Other notes payable, net of current portion		71,210			78,514
Deferred rent, net of current portion		—			9,895
Total long-term liabilities		586,133			786,241
TOTAL LIABILITIES		6,117,794			5,545,274

STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.0001 per share; 20,000,000 shares authorized; none issued and outstanding		—			—
Common stock, par value $0.0001 per share; 150,000,000 shares authorized; 44,500,569 issued and outstanding, at March 31, 2014 and 44,450,569 issued and outstanding at December 31, 2013		4,451			4,445
Additional paid-in capital		10,198,869			10,184,751
Treasury Stock, at cost 10,600 shares at March 31, 2014 and December 31, 2013		(5,890	)		(5,890	)
Accumulated deficit		(9,640,175	)		(9,068,562	)
TOTAL STOCKHOLDERS’ EQUITY		557,255			1,114,744
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,675,049		$	6,660,018

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

Brekford Corp.

Condensed Consolidated Statement of Operations (Unaudited)

	Three Months Ended March 31,
	2014			2013

NET REVENUE	$	4,662,287		$	4,394,839

COST OF REVENUE		4,074,128			3,131,486

GROSS PROFIT		588,159			1,263,353

OPERATING EXPENSES
Salaries and related expenses		487,629			448,088
Selling, general and administrative expenses		636,284			702,464

TOTAL OPERATING EXPENSES		1,123,913			1,150,552

(LOSS) INCOME FROM OPERATIONS		(535,754	)		112,801

OTHER INCOME (EXPENSE)
Interest expense		(35,859	)		(37,361	)
Interest income		—			159

TOTAL OTHER INCOME (EXPENSE)		(35,859	)		(37,202	)

NET (LOSS) INCOME	$	(571,613	)	$	75,599

(LOSS) EARNINGS PER SHARE – BASIC	$	(0.01)		$	0.00
(LOSS) EARNINGS PER SHARE – DILUTED	$	(0.01)		$	0.00
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC		44,496,680			44,257,180
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED		44,496,680			47,265,133

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

Brekford Corp.

Condensed Consolidated Statement of Cash Flows (Unaudited)

	Three Months Ended March 31,
	2014			2013

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income	$	(571,613	)	$	75,599
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		295,885			329,533
Share based compensation		14,123			17,750
Deferred rent		(16,211	)		(16,326	)
Bad debt expense		19,051			64,160
Changes in operating assets and liabilities:
Accounts receivable		(1,938,578	)		400,856
Unbilled Receivables		(51,769	)		34,242
P Prepaid expenses and other non-current assets		31,038			(5,113	)
I Inventory		757,496			(702,920	)
Customer deposits		96,406			41,352	)
Accounts payable and accrued expenses		1,249,335			(1,739,193	)
Accrued payroll and related expenses		(39,402	)		(5,113	)
Deferred revenue		(91,384	)		(22,944
Other liabilities		(561	)		(130	)
NET CASH USED IN OPERATING ACTIVITIES		(246,184	)		(1,528,247	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		—			(245,452	)
NET CASH USED IN INVESTING ACTIVITIES		—			(245,452	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit		(443,578	)		(2,000,000	)
Payments on other notes payable		(173,262	)		(9,917	)
Principal payments on capital lease obligations		(8,803	)		(164,126	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		(625,643	)		1,825,957

NET CHANGE IN CASH		(871,827	)		52,258
CASH – Beginning of period		2,052,306			1,415,252
CASH – End of period	$	1,180,479		$	1,467,510

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	35,859		$	37,361
Cash paid for income taxes	$	561		$	130
Property and equipment acquisitions	$	—		$	320,862
Cash paid for property and equipment acquisitions		—			(245,452	)
Property and equipment acquisitions financed	$	—		$	75,410

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

Brekford Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 2014

NOTE 1 – DESCRIPTION OF THE BUSINESS

Brekford Corp. (OTCBB; OTCQB: BFDI) headquartered in Hanover, Maryland is a leading public safety technology service provider of fully integrated traffic safety solutions, parking enforcement citation collections and integrator of mobile technology equipment for public safety vehicle services to State and Local municipalities, the U.S. Military and various Federal public safety agencies throughout the United States. Brekford’s combination of upfitting services, cutting edge technology, and automated traffic enforcement services offers a unique 360º solution for law enforcement agencies and municipalities. Our core values of integrity, accountability, respect, and teamwork drive our employees to achieve excellence and deliver industry leading technology and services, thereby enabling a superior level of safety solutions to our clients.

As used in these notes, the terms “Brekford”, “the Company”, “we”, “our”, and “us” refer to Brekford Corp. and, unless the context clearly indicates otherwise, its consolidated subsidiary.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In our opinion, the accompanying unaudited interim condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations and cash flows. The condensed consolidated balance sheet at December 31, 2013, has been derived from audited financial statements of that date. The interim condensed consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules and regulations prescribed by the United States Securities and Exchange Commission. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim condensed consolidated financial statements are read in conjunction with the audited financial statements and notes previously distributed in our annual report on Form 10-K for the year ended December 31, 2013. Certain prior period information has been reclassified to conform to the current period presentation.

The consolidated financial statements of Brekford include accounts of the Company and its wholly-owned subsidiary, Municipal Recovery Agency, LLC. Intercompany transactions and balances are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying unaudited condensed consolidated financial statements, estimates are used for, but not limited to, stock-based compensation, allowance for doubtful accounts, sales returns, allowance for inventory obsolescence, fair value of long-lived assets, deferred taxes and valuation allowance, and the depreciable lives of fixed assets. Actual results could differ from those estimates.

Concentration of Credit Risk

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

Accounts Receivable

Accounts receivable are carried at estimated net realizable value. The Company has a policy of reserving for uncollectable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company calculates the allowance based on a specific analysis of past due balances. Past due status for a particular customer is based on how recently payments have been received from that customer. Historically, the Company’s actual collection experience has not differed significantly from its estimates, due primarily to credit and collections practices and the financial strength of its customers.

Inventory

Inventory principally consists of hardware and third-party packaged software that is modified to conform to customer specifications and held temporarily until the completion of a contract. Inventory is valued at the lower of cost or market value. The cost is determined by the lower of first-in, first-out (“FIFO”) method, while market value is determined by replacement cost for raw materials and parts and net realizable value for work-in- process.

Property and Equipment

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

Management reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.

Revenue Recognition

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

The Company provides its customers with a warranty against defects in the installation of its vehicle upfitting solutions for one year from the date of installation. Warranty claims were $8,674 for the three months ended March 31, 2014 and insignificant for the three months ended March 31, 2013. The Company also performs warranty repair services on behalf of the manufacturers of the equipment it sells.

The Company also offers separately-priced extended warranty and product maintenance contracts to its customers on the equipment sold by the Company. Revenues from extended warranty services are apportioned over the period of the extended warranty service contracts and the warranty costs are expensed as incurred. Revenue from extended warranties for the three months ended March 31, 2014 and 2013 amounted to $112,904 and $61,792, respectively.

For automated traffic safety enforcement revenue, the Company recognizes the revenue when the required collection efforts are completed and the respective municipality is billed depending on the terms of the respective contract. The Company records revenue related to automated traffic violations for the Company’s share of the violation amount.

Share-Based Compensation

The Company complies with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718, Compensation-Stock Compensation, in measuring and disclosing stock based compensation cost. The measurement objective in ASC Paragraph 718-10-30-6 requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost is recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period). Performance-based awards are expensed ratably from the date that the likelihood of meeting the performance measures is probable through the end of the vesting period.

Treasury Stock

The Company accounts for treasury stock using the cost method. As of March 31, 2014, 10,600 shares of Brekford Corp. common stock were held in treasury at an aggregate cost of $5,890.

Income Taxes

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

The Company files income tax returns with the U.S. Internal Revenue Service and with the revenue services of various states. The Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years prior to 2010. The Company’s policy is to recognize interest related to unrecognized tax benefits as income tax expense. The Company believes that it has appropriate support for the income tax positions it takes and expects to take on its tax returns, and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

(Loss) Earnings per Share

Basic (loss) earnings per share is calculated by dividing net (loss) income available to common stockholders by the weighted-average number of common shares outstanding and does not include the effect of any potentially dilutive common stock equivalents. Diluted (loss) earnings per share is calculated by dividing net (loss) income by the weighted-average number of shares outstanding, adjusted for the effect of any potentially dilutive common stock equivalents. There is no dilutive effect on the loss per share during loss periods. See Note 10 for the calculation of basic and diluted (loss) earnings per share.

Fair Value of Financial Instruments

The carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s note obligations approximate fair value, as the terms of these notes are consistent with terms available in the market for instruments with similar risk.

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.

Newly Issued Accounting Pronouncements

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

NOTE 3 – LINE OF CREDIT AND OTHER NOTES PAYABLE

On July 12, 2012, the Company closed on an aggregate $3.5 million credit facility (the “Credit Facility”) with PNC Bank, National Association (“PNC”) as lender consisting of $3.0 million in revolving loans (the "Revolving Facility") and $500,000 in a committed non-revolving line of credit loan for the purpose of financing up to 90% of the cost of certain equipment (the “Equipment Loan”). The terms and conditions of the Credit Facility are set forth in a Loan Agreement between the Company and PNC dated June 28, 2012 (the “Loan Agreement”), and the Revolving Facility is evidenced by a Committed Line of Credit Note issued by the Company to the order of PNC (the “Revolving Note”). As part of the financing transaction, each of C.B. Brechin and Scott Rutherford, who serve as directors of the Company and as Chief Executive Officer/Chief Financial Officer and as President of the Company, respectively, entered into a Subordination Agreement dated June 28, 2012 with PNC (each, a “Subordination Agreement”) pursuant to which they agreed that all indebtedness owed to them by the Company (the “Subordinated Debt”) is subordinate to the indebtedness owed to PNC by the Company. The Subordination Agreements permit the Company to make regular loan payments to Messrs. Brechin and Rutherford so long as the Company is not in default under its loan agreements with PNC. The terms of the Equipment Loan will be evidenced by a separate promissory note if the Company requests that loan.

The loan agreement was amended on July 18, 2013 to extend the loan’s maturity date to September 28, 2013. On July 18, 2013, the Company executed a Waiver and Second Amendment to Loan Documents with PNC which its maturity date was extended to September 28, 2013 and certain financial and other covenants were modified. On September 27, 2013, the Company executed a Second Amendment [sic] to Loan Documents, effective as of September 28, 2013 (the “Third Modification Agreement”), to extend the maturity date of the Credit Facility to March 31, 2014. The Third Modification Agreement also amended the Credit Facility as follows: (i) the Company is now required to submit financial statements to PNC on a monthly basis rather than on a quarterly basis; (ii) the maximum ratio of total indebtedness (excluding Subordinated Debt) to EBITDA that the Company may maintain, to be tested on a quarterly basis, was increased to 3.5 to 1.0 (from 3.0 to 1.0); and (iii) the minimum rolling four-quarter Debt Service Coverage Ratio that the Company is required to maintain as of the end of each fiscal quarter was reduced to 1.0 to 1.0 (from 1.30 to 1.00). In connection with the Third Modification Agreement, the Company and PNC also executed a Borrowing Base Rider, effective September 28, 2013, which limits the aggregate principal amount of indebtedness that may be outstanding under the Credit Facility at any one time to a Borrowing Base and conditions the Company’s request for an advance under the Credit Facility on the Company’s submission of a Borrowing Base Certificate to the Bank on or before the 15th day of each month. As defined in the Borrowing Base Rider, the “Borrowing Base” is defined as the lesser of (i) $3.0 million and (ii) the sum of (a) 80% of Qualified Accounts (as defined in the Borrowing Base Rider) and (b) 50% of Qualified Inventory (as defined in the Borrowing Base Rider), provided, however, that the total amount of advances allocable to Qualified Inventory may not exceed $500,000. In the event that the outstanding principal amount of indebtedness under the Credit Facility exceeds the Borrowing Base, the Company must immediately repay the amount of such excess. As of March 31, 2014, amounts outstanding under the line of credit were $1,026,955. The weighted average interest rate was 2.65% at March 31, 2014 and 2.66% at December 31, 2013.

On March 21, 2014, the Company executed a Fourth Amendment to Loan Documents with PNC pursuant to which (i) the revolving line of credit was reduced to $2.0 million, (ii) the maturity date of the Credit Facility was extended to August 31, 2014, (iii) the interest rate applicable to outstanding principal was changed to the daily LIBOR rate plus 3.0% (from the daily LIBOR rate plus 2.5%), (iv) the existing financial covenants were eliminated, (v) an Interest Coverage Ratio, defined as current quarter EBITDA to current quarter interest, was added and specified to be (a) 1.0 to 1.0 for the quarter ending March 31, 2014 and (b) 1.5 to 1.0 for the quarter ending June 30, 2014, and (vi) a waiver of covenants was granted for the quarter ending December 31, 2013. All other terms and conditions of the Credit Facility remain unchanged. As of March 31, 2014, we were out of compliance with a financial covenant contained in our credit facility with PNC as a result of the loss recorded for the first quarter of 2014. We have reported this non-compliance to PNC and believe that PNC will waive it..

The Company financed certain vehicles and equipment under finance agreements. The agreements mature in September 2014, March 2017 and May 2017. The agreements require various monthly payments of principal and interest until maturity. As of March 31, 2014 and 2013, financed assets of $110,254 and $154,740, respectively, net of accumulated amortization of $58,709 and $38,266 respectively, are included in property and equipment on the balance sheets. The weighted average interest rate was 3.75% at March 31, 2014 and March 31, 2013.

NOTE 4 – CONVERTIBLE NOTES PAYABLE – STOCKHOLDERS

Brekford Corp. financed the repurchase of shares of its common stock and warrants from the proceeds of convertible promissory notes that were issued by Brekford Corp. on November 9, 2009 in favor of a lender group that included two of its directors, Messrs. C.B. Brechin and Scott Rutherford, in the principal amounts of $250,000 each (each, a “Promissory Note” and together, the “Promissory Notes”). Each Promissory Note bears interest at the rate of 12% per annum and at the time of issuance was to be convertible into shares of Brekford Corp. common stock, at the option of the holder, at an original conversion price of $.07 per share. At the time of issuance, Brekford agreed to pay the unpaid principal balance of the Promissory Notes and all accrued but unpaid interest on the date that was the earlier of (i) two years from the issuance date or (ii) 10 business days after the date on which Brekford Corp. closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000.

On April 1, 2010, Brekford Corp. and each member of the lender group executed a First Amendment to the Unsecured Promissory Note, which amended the Promissory Notes as follows:

●

Revise the conversion price in the provision that allows the holder of the Promissory Note to elect to convert any outstanding and unpaid principal portion of the Promissory Note and any accrued but unpaid interest into shares of the common stock at a price of fourteen cents ($0.14) per share, and

●

Each Promissory Note’s maturity date was extended to the earlier of (i) four years from the issuance date or (ii) 10 business days after the date on which Brekford closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000.

On November 8, 2013, Brekford Corp. and each member of the lender group agreed to further extend the maturity dates of the Promissory Notes to the earlier of (i) November 9, 2014 or (ii) 10 business days after the date on which Brekford Corp. closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000.

As of March 31, 2014 and December 31, 2013, the amounts outstanding under the Promissory Notes totaled $500,000.

NOTE 5 – LEASES

Capital Leases

The Company financed certain equipment under separate non-cancelable equipment loan and security agreements. The agreements mature in March 2015 and April 2015. The agreements require various monthly payments and are secured by the assets under lease. As of March 31, 2014 and 2013, capital lease assets of $752,074 and $1,470,759, respectively, net of accumulated amortization of $1,481,926 and $763,241, respectively, are included in property and equipment on the balance sheets. Our weighted average interest rate was 5.28% at March 31, 2014 and March 31, 2013.

Operating Leases

The Company records rent expense under a non-cancelable operating leases expiring January 2015. Rent expense under this lease amounted to $36,973 and $42,036 for the three months ended March 31, 2014 and 2013, respectively.

The Company leases approximately 2,500 square feet of office space from a related party under a non-cancelable operating leases expiring June 2015. Rent expense under this lease amounted to $11,700 and $10,733 for the three months ended March 31, 2014 and 2013, respectively.

NOTE 6 – MAJOR CUSTOMERS AND VENDORS

Major Customers

The Company has several contracts with government agencies, of which net revenue from two major customers during the three months ended March 31, 2014 represented 41% of the total net revenue for the period. Accounts receivable due from three customers at March 31, 2014 amounted to 62% of total accounts receivable.

For the quarter ended March 31, 2013, the Company had several contracts with government agencies, of which net revenue from one major customer represented 49% of the total net revenue for the period. Accounts receivable due from two customers at March 31, 2013 amounted to 74% of total accounts receivable. Accounts receivable due from customers at December 31, 2013 amounted to 25% of total accounts receivable at that date.

Major Vendors

The Company purchased substantially all hardware products that it resold during the periods presented from one major distributor. Revenues from hardware products amounted to 57% and 50% of total revenues for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014 and 2013, accounts payable due to this distributor amounted to 70% and 51% of total accounts payable, respectively. Accounts payable due to this distributor at December 31, 2013, amounted to 56% of total accounts payable at that date.

NOTE 7 - STOCKHOLDERS’ EQUITY

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

On September 7, 2010, Brekford Corp. issued a press release announcing that its board of directors authorized a stock repurchase program permitting the Company to repurchase up to $500,000 in outstanding shares of its common stock from time to time over a period of 12 months in open market transactions or in privately negotiated transactions at the Company's discretion. The stock repurchase program was subsequently extended for an additional 12 months until September 7, 2012. On September 28, 2012, the Company adopted a new stock repurchase program which permits the Company to repurchase the $363,280 in shares that remained available for repurchase under the old program, with the same terms and conditions except that the term of the new stock repurchase program is 24 months. No shares were repurchased during the first quarter of 2014.

NOTE 8 – SHARE-BASED COMPENSATION

The Company has issued shares of restricted common stock and warrants to purchase shares of common stock and has granted non-qualified stock options to certain employees and non-employees. On April 25, 2008, the Company’s stockholders approved the 2008 Stock Incentive Plan (the “2008 Incentive Plan”). During the first quarter, Brekford Corp. granted stock options under the 2008 Incentive Plan to its non-employee directors. These options have exercise prices equal to the fair market value of a share of common stock as of the date of grant and have terms of ten years.

Stock Options

Option grants during the three months ended March 31, 2014 were primarily made to non-employee directors who elected to receive options during the annual equity grant period in the first quarter of each fiscal year. The options had a grant date fair value of $0.10 per share and will vest and become exercisable with respect to option shares over a three year period commencing from the date of grant at a rate of 33.33% per year. The Company recorded $623 in stock option compensation expense during in the period ending March 31, 2014 related to the stock option grants. The assumptions used to value option grants during the three months ended March 31, 2014 were as follows:

	Three Months Ended March 31, 2014
Expected life (in years)		3.5
Volatility		70.81
Risk free interest rate		0.72
Expected Dividend Rate		0

Summary of the option activity for three months ended March 31, 2014 is as follows:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at January 1, 2014		—	$	0.00	—	$	0.00
Granted		225,000		0.20	—		0.00
Forfeited or expired		—		—	—		0.00
Exercised		—		—	—
Outstanding at March 31, 2014		225,000		0.20	4.9		0.00
Exercisable at March 31, 2014		—		0.00	—		0.00
Vested and expected to vest		225,000		0.20	4.9		0.00

The unrecognized compensation cost for unvested stock option awards outstanding at March 31, 2014 was approximately $21,814 to be recognized over approximately 2.90 years.

Restricted Stock Grants

For the three months ended March 31, 2014, the Company granted an aggregate of 50,000 shares of restricted stock to the directors as part of the agreement and in consideration of services rendered. The weighted average value of the shares amounted to $0.27 per share based upon the closing price of shares of common stock on the date of the grant. These shares were fully vested on the date of the grant. The Company recorded $13,500 in share-based compensation expense during the period ending March 31, 2014 related to restricted stock grants. For the three months ended March 31, 2013, the Company recorded $17,750, in share-based compensation expense related to restricted stock grants.

	Restricted Stock Shares	Weighted Average Value

Nonvested restricted stock at January 1, 2014	—	$	—
Granted	50,000		0.27
Vested	(50,000)		0.27
Forfeited or expired	—		—
Nonvested restricted stock at March 31, 2014	—	$	—

NOTE 9 – INVENTORY

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

	March 31, 2014		December 31, 2013
Raw Materials	$	506,603	$	1,250,141
Work in Process		—		13,958
Total Inventory	$	506,603	$	1,264,099

NOTE 10 – (LOSS) EARNINGS PER SHARE

The following table provides information relating to the calculation of (loss) earnings per common share.

	Three Months Ended March 31
Basic (loss) earnings per share	2014			2013
Net (loss) income	$	(571,613	)	$	75,599
Weighted average common shares outstanding		44,496,680			44,257,180
Basic (loss) earnings per share	$	(0.01	)	$	0.00

Diluted (loss) earnings per share :
Net (loss) income	$	(571,613	)	$	75,599
Weighted average common shares outstanding		44,496,680			44,257,180
Potential dilutive securities		—			3,007,953
Weighted average common shares outstanding – diluted		44,496,680			47,265,133
Diluted (loss) earnings per share	$	(0.01	)	$	0.00
Common stock equivalents excluded due to anti-dilutive effect		3,796,429			—

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents a review of the condensed operating results of Brekford Corp. for the three months ended March 31, 2014 and 2013 and the financial condition of Brekford Corp. at March 31, 2014. The discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes included herein, as well as Brekford Corp.’s audited financial statements for the year ended December 31, 2013 filed with its Annual Report on Form 10-K on March 27, 2014.

Forward-Looking Statements

This Annual Report on Form 10-Q (“Quarterly Report”) may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “anticipate”, “estimate”, “should”, “will”, “expect”, “believe”, “intend”, and similar expressions, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this Annual Report; general economic, market, or business conditions and their effects; industry competition, conditions, performance and consolidation; changes in applicable laws or regulations; changes in the budgets and/or public safety priorities of our customers; economic or operational repercussions from terrorist activities, war or other armed conflicts; the availability of debt and equity financing; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations.

Forward-looking statements speak only as of the date the statements are made. Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise. If we update one or more forward-looking statements, then no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.

As used in this Annual Report, the terms “Brekford”, “the Company”, “we”, “our”, and “us” refer to Brekford Corp. and, unless the context clearly indicates otherwise, its consolidated subsidiary.

Overview

Brekford Corp. (OTCBB; OTCQB: BFDI) headquartered in Hanover, Maryland is a leading public safety technology service provider of fully integrated traffic safety solutions, parking enforcement citation collections and integrator of mobile technology equipment for public safety vehicle services to State and Local municipalities, the U.S. Military and various Federal public safety agencies throughout the United States. Our core values of integrity, accountability, respect, and teamwork drive our employees to achieve excellence and deliver industry leading technology and services, thereby enabling a superior level of safety solutions to our clients. Brekford has one wholly-owned subsidiary, Municipal Recovery Agency, LLC, a Maryland limited liability company, that was formed in 2012 for the purpose of providing collection systems and services for unpaid citations and parking fines.

Products and Services

Public safety is a major concern for most communities – especially as populations grow, public safety budgets are reduced. One way to help make streets safer while reducing workload is a well-run photo red light or speed enforcement program. The objective of photo enforcement is to help curtail aggressive driving through voluntary compliance. Revenue generated from fines routinely goes directly back into supporting other public safety initiatives.

Although opponents of red light cameras cite the increase in rear end collisions as cause for disapproval of cameras, a study conducted in February 2011 by the Insurance Institute for Highway Safety (the “IIHS”) reported that red-light cameras reduced fatal red light running crashes by 24% in 14 large U.S. cities with populations over 200,000. IIHS concluded that if red light cameras had been operating in all 99 U.S. cities with populations over 200,000 during this study period (five years), a total of 815 deaths could have been avoided. Because the types of crashes prevented by red light cameras tend to be far more severe than rear-end crashes, research has shown there is a positive aggregate benefit. Photo Enforcement solutions can reduce collisions, injuries and deaths by providing a useful tool for municipalities and law enforcement agencies, without unduly taxing drivers who do not break the law. Today, more than 600 communities across the U.S. operate red light or speed camera enforcement programs.

Regardless of the increased safety effects and prevention of fatalities, there is still a common misconception that automated traffic safety enforcement systems are not supported by the general public. An IIHS survey conducted in November, 2012 found that a large majority of people living in Washington, D.C., one of the largest combined red light and speed enforcement programs in the U.S., favor camera enforcement. Of those surveyed, 87% support red light cameras and 76% support speed cameras. Even the majority of violators (59%) agreed that they deserved their most recent citation.

Brekford’s automated traffic safety enforcement (“ATSE”) products offer intersection safety (red light), photo speed, work zone and school bus enforcement options by way of a complete suite of solution-based products. By assembling a team of industry professionals with the most experience in this field, we have developed equipment and a full turn-key solution that we believe will ensure the success of any program. Having the advantage of a team with experience, we have created and implemented some of the most cutting-edge features into our design – while constructing end-to-end systems specifically with our clients’ needs in mind.

Automated Traffic Safety Enforcement - Photo Speed & Red Light Enforcement

ATSE systems are one of a wide range of measures that are effective at reducing vehicle speeds and crashes. The automated speed enforcement (“ASE”) system is an enforcement technique with one or more motor vehicle sensors producing recorded images of motor vehicles traveling at speeds above a defined threshold. Images captured by the ASE system are processed and reviewed in an office environment and violation notices are mailed to the registered owner of the identified vehicle. ASE is a technology available to law enforcement as a supplement and not a replacement for traditional enforcement operations. Evaluations of ASE, both internationally and in the United States have identified some advantages over traditional speed enforcement methods. These include:

●	High rate of violation detection. ASE units can detect and record multiple violations per minute. This can provide a strong deterrent effect by increasing drivers’ perceived likelihood of being cited for speeding.

●

Physical safety of ASE operators and motorists. ASE can operate at locations where roadside traffic stops are dangerous or infeasible, and where traffic conditions are unsafe for police vehicles to enter the traffic stream and stop suspected violators. With ASE there is normally no vehicle pursuit or confrontation with motorists. ASE might also reduce the occurrence of traffic congestion due to driver distraction caused by traffic stops on the roadside.

●	Fairness of operation. Violations are recorded for all vehicles traveling in excess of the enforcement speed threshold. Efficient use of resources. ASE can act as a “force multiplier,” enhancing the influence of limited traffic enforcement staff and resources.

Beyond traditional tax collection on income or property, state agencies and local municipalities rely heavily on fine and fee revenue generated from a multitude of violator funded sources. For example, jurisdictions generate sizable revenues from court fees, traffic and parking violations, ordinance infractions, and library and utility arrearages. Each of these revenue sources funds public safety and community development initiatives and without the income the services are curtailed. Brekford offers client-specific solutions to these agencies and municipalities to assist them with collecting unpaid fines, including:

●	Notification Continuance

●	Mail House and Printing Service

●	Data Purification and Verification Service

●	Back Office Support Service

- Call Center Response (Inbound & Out Bound)

- Lock-Box & Treasury Services

- Payment Processing

Electronic Ticketing System - Slick-Ticket ™

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

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

Rugged Information Technology Solutions – Mobile Data & Digital Video

Law enforcement agency, fire department and EMS personnel have unique requirements for fleet vehicle upfitting and IT equipment to include characteristics such as ruggedness and reliability. The equipment must be able to work in extreme environments that include high levels of vibration and shock, wide temperature ranges, varying humidity, electromagnetic interference as well as voltage and current transients. Our rugged and non-rugged IT products and mobile data communication systems provide public safety workers with the unique functionalities necessary to enable effective response to emergency situations.

For more than a decade, Brekford has been a distributor for most major brands in the mobile technology arena. We handle everything from Panasonic Toughbooks® and Arbitrator® digital video systems to emergency lighting systems and wireless technology. We believe that we have all of the high-end products our customers need to handle their day-to-day operations and protect the public they serve. Every product we sell is tested by highly trained technicians and guaranteed to work in even the most extreme conditions. We specialize in seamlessly incorporating custom built solutions within existing networks. We deliver our end-to-end solutions with service programs that work for agencies large and small, from turn-key drop shipping to municipal leases. Our commitment is to design and deliver solutions that meet or exceed industry standards for safety, ergonomics, reliability, serviceability and uniformity.

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

Toughbook Arbitrator is a rugged revolution in law enforcement video capture. The fully integrated system offers unparalleled video capture (up to 360 degrees), storage and transfer, and is designed to work with back-end software for seamless video management, including archiving and retrieving. Brekford augments this solution with an Automatic License Plate Reader (ALPR / LPR), an image-processing technology used to identify vehicles by their license plates. License Plate Readers (LPRs) can record plates at about one per second at speeds of up to 70 MPH and they often utilize infrared cameras for clarity and to facilitate reading at any time of day or night. The data collected can either be processed in real-time, at the site of the read, or it can be transmitted to remote centers and processed at a later time.

360° Vehicle Solution - Upfitting

The Brekford 360-degree vehicle solution provides complete vehicle upfitting, mobile data and video solutions including municipal financing and leasing services for agencies. The 360-degree vehicle solutions approach provides customers with a one-stop upfitting, cutting edge technology and installation service. The 360-degree approach is the only stop our customers need to purchase law enforcement vehicles (GM, Ford, Dodge), have them upfitted with lights, sirens, radio communication and rugged IT technology, and then have them “ready to roll”. Our mission is to provide and install equipment that ensures safe and efficient mission critical vehicles while incorporating the latest technological advances. We adhere to strict quality control procedures and provide comprehensive services. The Brekford certified installation team provides our customers the highest level of expertise and service from inception to completion, including maintenance and upgrades.

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

Results of Operations

Results of Operations for the Three Months Ended March 31, 2014 and 2013

The following tables summarize selected items from the consolidated statement of operations for the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

	Three Months Ended March 31,						(Decrease) / Increase
	2014			2013			$			%
Net Revenues	$	4,662,287		$	4,394,839		$	267,448		6.09	%

Cost of Revenues		4,074,128			3,131,486			942,642		30.10	%

Gross Profit	$	588,159		$	1,263,353		$	(675,194	)	(53.44)	%

Gross Profit Percentage of Revenue		12.62	%		28.75	%

Revenues

Revenues for the three months ended March 31, 2014 amounted to $4,662,287 as compared to revenues of $4,394,839 for the three months ended March 31, 2013, representing an increase of $267,448 or 6.09%. The change was driven by increased sales of rugged IT products, electronic ticketing, and vehicle upfitting services.

Cost of Revenues

Cost of revenues for the three months ended March 31, 2014 amounted to $4,074,128 as compared to $3,131,486 for the three months ended March 31, 2013, an increase of $942,642 or 30.10%. The change was primarily due to an increase in cost for rugged IT products, electronic ticketing, and vehicle upfitting services.

Gross Profit

Gross profit for the three months ended March 31, 2014 amounted to $588,159 as compared to $1,263,353 for the three months ended March 31, 2013, a decrease of $675,194 or 53.44%. The decrease was primarily due to lower profit margins from rugged IT products.

Expenses

	Three Months Ended March 31,				Increase / (Decrease)
	2014		2013		$			%
OPERATING EXPENSES
Salaries and related expenses	$	487,629	$	448,088	$	39,541		8.82	%
Selling, general and administrative expenses		636,284		702,464		(66,180	)	(9.42)	%
Total operating expenses	$	1,123,913	$	1,150,552	$	(26,639	)	(2.32)	%

Salaries and Related Expenses

Salaries and related expenses for the three months ended March 31, 2014 amounted to $487,629 as compared to $448,088 for the three months ended March 31, 2013, an increase of $39,541 or 8.82%. The increase was due to staffing for ATSE, engineering, and information technology for certain ATSE programs. The Company has reduced overall labor costs, specifically with respect to direct labor categorized as cost of goods; however, management believes that certain infrastructure costs associated with sales and marketing efforts are a key to renewed growth. As such, the Company intends to continue focusing on these efforts through a coordinated national strategy in regaining sustained profitability.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended March 31, 2014 amounted to $636,284 as compared to $702,464 for the three months ended March 31, 2013, a decrease of $66,180 or 9.42%. This decrease was due to lower corporate development expenses, travel and related costs, corporate insurance and depreciation and amortization costs during the first quarter of 2014 when compared to the same period of 2013

Net Income (Loss)

The Company recorded a net loss of $571,613 for the three months ended March 31, 2014, compared to net income of $75,599 for the three months ended March 31, 2013. The resulting $647,212 or 856.11% reduction in earnings was primarily due to lower profit margins from rugged IT products during the first quarter of 2014 when compared to the same period of last year.

Financial Condition, Liquidity and Capital Resources

At March 31, 2014, we had total current assets of $5.3 million and total current liabilities of $5.5 million resulting in a working capital deficit of $0.2 million. Inventory totaled $0.5 million at March 31, 2014 and primarily consisted of raw materials related to future product sales. The Company’s accumulated deficit increased to $9,640,175 at March 31, 2014 compared to $9,068,562 at December 31, 2013, as result of the net loss recorded for the first quarter of 2014. Cash flows used in operations for the three months ended March 31, 2014 were $246,184.

At March 31, 2014, we had approximately $1.2 million of cash on hand. Our operations are subject to certain risks and uncertainties including, among others, current and potential competitors with greater resources, dependence on significant customers, lack of operating history and uncertainty of future profitability and possible fluctuations in financial results.

The Company intends to continue its efforts to expand sales of ATSE products, and such expansion may significantly increase the Company’s working capital needs. Management believes that the Company’s current level of cash combined with cash that it expects to generate in its operations during the next 12 months and funds available from its $2,000,000 line of credit facility with PNC will be sufficient to sustain the Company’s business initiatives through at least March 31, 2015. Management has taken certain measures to conserve the Company’s capital resources and maintain liquidity that it believes will permit the Company to meet its future capital requirements, but there can be no assurance that these measures will be successful or adequate. In addition, the Company relied on its line of credit facility with PNC during 2013 to fund operations. As of March 31, 2014, the Company had $1.03 million in outstanding indebtedness under its line of credit. The loan agreement was amended on July 18, 2013 to extend the loan’s maturity date to September 28, 2013. On July 18, 2013, the Company executed a Waiver and Second Amendment to Loan Documents with PNC which its maturity date was extended to September 28, 2013 and certain financial and other covenants were modified. On September 27, 2013, the Company and PNC executed a Second [sic] Amendment to Loan Documents, effective as of September 28, 2013 (the “Third Modification Agreement”), relating to the Company’s line of credit pursuant to which its maturity date was extended to March 31, 2014 and certain financial and other covenants were modified. On March 21, 2014, the Company executed a Fourth Amendment to Loan Documents with PNC pursuant to which, among other things, (i) the revolving line of credit was reduced to $2.0 million and (ii) the maturity date of the Credit Facility was extended to August 31, 2014 , (iii) the interest rate applicable to outstanding principal was changed to the daily LIBOR rate plus 3.0% (from the daily LIBOR rate plus 2.5%), (iv) the existing financial covenants were eliminated, (v) an Interest Coverage Ratio, defined as current quarter EBITDA to current quarter interest, was added and specified to be (a) 1.0 to 1.0 for the quarter ending March 31, 2014 and (b) 1.5 to 1.0 for the quarter ending June 30, 2014, and (vi) a waiver of covenant was granted for the quarter ending December 31, 2013. As of March 31, 2014, we were out of compliance with a financial covenant contained in our credit facility with PNC as a result of the loss recorded for the first quarter of 2014. We have reported this non-compliance to PNC and believe that PNC will waive it.

A discussion of the foregoing PNC loan documents is contained in Note 3 to the condensed consolidated financial statements presented elsewhere in this Quarterly Report. Although management intends, as circumstances dictate, to preserve this line of credit by seeking extensions and/or renewals, there can be no assurance that this line of credit will be extended or renewed or, if it is not extended or renewed, that the Company will be able to secure a replacement credit facility or other sources of working capital.

As discussed in Note 4 to the condensed consolidated financial statements presented elsewhere in this Quarterly Report, the Company is indebted to C.B. Brechin and Scott Rutherford under unsecured promissory notes in the aggregate balance of $500,000 as of March 31, 2014. Unless their maturity dates are extended, these notes will mature on the earlier of (i) November 9, 2014 or (ii) ten business days from the date on which Brekford closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000.

In the event that the Company’s cash reserves, cash flow from operations and funds available under its credit facilities are not sufficient to fund the Company’s future operations, it may need to obtain additional capital. No assurance can be given that the Company will be able to obtain additional capital in the future or that such capital will be available to the Company on acceptable terms. The Company’s ability to obtain additional capital will be subject to a number of factors, including market conditions, the Company’s operating performance and investor sentiment, which may make it difficult for the Company to consummate a transaction at the time, in the amount and/or upon the terms and conditions that the Company desires. If the Company is unable to raise additional capital at the times, in the amounts, or upon the terms and conditions that it desires, then it might have to delay, scale back or abandon its expansion efforts. Even with such changes, the Company’s operations could consume available capital resources and liquidity.

Cash Flows used in Operating Activities

Changes in cash flows used in operating activities were primarily a result of decrease in profit margins in the first quarter of 2014 as compared to the comparable period in 2013 and the timing of cash receipts and payments in the fourth quarter of 2013.

Cash Flows Used in Investing Activities

Capital expenditures were none in the first quarter of 2014 as compared to the same period in 2013 were primarily related to infrastructure to support our growth and to improve efficiencies.

Cash Flows Used in Financing Activities Changes in cash flows used in financing activities were primarily as a result of principal payments on the capital equipment and line of credit in the first quarter of 2014 as compared to the comparable period in 2013.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 discusses those critical accounting policies and estimates that management uses to prepare our consolidated financial statements, which include those relating to accounts receivables allowances, revenue recognition and income taxes. We have reviewed those polices and believe that they remain our most critical accounting policies for the three months ended March 31, 2014, and that no material changes therein have occurred.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in those rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive officer who also serves as the principal accounting officer (“CEO”), to allow for timely decisions regarding required disclosure. In designing and evaluating these disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated can provide only reasonable, but not absolute, assurance that the objectives of the disclosure controls and procedures are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain judgments and assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls and procedures as of March 31, 2014 was carried out under the supervision and with the participation of the Company’s management, including the CEO. Based on that evaluation, the Company’s management, including the CEO, has concluded that the Company’s disclosure controls and procedures were not effective due to the material weakness in our internal control over financial reporting discussed below. A material weakness is a control deficiency (within the meaning of Public Company Accounting Oversight Board Auditing Standard No. 5) or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

As discussed in Brekford Corp.’s Annual Report on Form 10-K for the year ended December 31, 2013, management identified, through its annual evaluation as of December 31, 2013, a material weakness in the Company’s internal control over financial reporting, in that the Company does not employ a sufficient number of qualified accounting personnel to ensure proper and timely evaluation of complex accounting, tax, and disclosure issues that may arise during the course of the Company’s business. Management has concluded that this material weakness likewise existed as of March 31, 2014. The Company intends to address this material weakness by reviewing the Company’s accounting and finance processes to identify any improvements thereto that might enhance the Company’s internal control over financial reporting and determine the feasibility of implementing such improvements and by seeking qualified employees and/or outside consultants who possess the knowledge needed to eliminate this weakness. The Company’s ability to remediate this weakness may, however, be delayed or limited by resource constraints, a lack of qualified persons in the Company’s market area and/or competition from other employers. As of March 31, 2014, the Company engaged an outside consultant to assist us with our remediation of this weakness.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2014, other than the engagement of the consultant described above, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company was not a party to pending legal proceedings during the period ended March 31, 2014 that are material to the Company or its assets.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

During the period ended March 31, 2014, Brekford Corp. granted an aggregate of 50,000 shares of restricted common stock to its directors under the 2008 Incentive Plan in consideration of Board services rendered to the Company. Based on a per share price of $0.27 on the date of grant, these shares represent $13,500 in services rendered by the directors. The shares were issued in reliance upon the exemption from registration provided by Rule 701 under the Securities Act of 1933, as amended (the “Securities Act”), for securities issued in compensatory circumstances. Accordingly, the shares may not be offered or sold in the United States absent registration under the Securities Act and applicable state securities laws or an applicable exemption from those registration requirements.

Issuer Repurchases of Equity Securities

Neither Brekford Corp. nor any of its affiliated purchasers (as defined by Rule 10b-18 under the Exchange Act) purchased any shares of its common stock during the quarter ended March 31, 2014.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

As of March 31, 2014, Brekford had borrowings totaling $1,026,955 under its $2.0 million Committed Line of Credit Note issued to PNC Bank, National Association, which was issued pursuant to that certain Loan Agreement, dated as of June 28, 2012, as amended, between Brekford and PNC (the “Loan Agreement”). The Loan Agreement requires Brekford to, among other things, satisfy certain financial covenants as of the end of each fiscal quarter. A failure to satisfy any covenant constitutes an event of default under the Loan Agreement. As of March 31, 2014, Brekford was not in compliance with the foregoing covenants due to loss recorded for the first quarter of 2014. Brekford has notified PNC of its non-compliance and believes that PNC will waive such non-compliance.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

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

SIGNATURES

Pursuant to the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Brekford Corp.


Date: May 15, 2014	By:	/s/ C.B. Brechin
		Chandra (C.B.) Brechin
		Chief Executive Officer, Chief Financial Officer, Treasurer and Director
		(Principal Executive Officer and Principal Financial Officer)

EXHIBIT INDEX

Exhibit Number		Description
10.1		Fourth Amendment to Loan Documents, dated March 21, 2014, by and between Brekford Corp. and PNC Bank, National Assoicaton (filed herewith).
31.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS		XBRL Instance Document (furnished herewith).
101.SCH		XBRL Taxonomy Extension Schema (furnished herewith).
101.CAL		XBRL Taxonomy Extension Calculation Linkbase (furnished herewith).
101.DEF		XBRL Taxonomy Extension Definition Linkbase (furnished herewith).
101.LAB		XBRL Taxonomy Extension Label Linkbase (furnished herewith).
101.PRE		XBRL Taxonomy Extension Presentation Linkbase (furnished herewith).

Attached files

Brekford Traffic Safety, Inc. Reports

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