NOTES TO CONSOLIDATED
FINANCIAL
STATEMENTS
For the years ended December 31, 2016 and 2015
NOTE 1 – DESCRIPTION OF THE BUSINESS
Brekford Corp. (“the Company”) (OTCBB; OTCQB; BFDI),
headquartered in Hanover, Maryland, is a leading public safety
technology service provider of fully integrated automated traffic
safety enforcement (“ATSE”) solutions, including speed,
red light, and distracted driving camera systems. The
Company’s core values of integrity, accountability, respect,
and teamwork drive our employees to achieve excellence and deliver
industry leading technology and services, thereby enabling a
superior level of reliability to our clients.
Prior to March 1, 2017, part of Brekford’s business included
sales of products and services focusing on law enforcement
vehicles. These products and services included rugged information
technology solutions, mobile data, digital video, electronic
ticketing, and vehicle upfitting. Rugged information technology
solutions included both ruggedized laptops and in-car video
solutions, among other technology offerings, in addition to vehicle
mounting systems, docking stations, and custom-built packages.
Vehicle upfitting solutions included the turnkey installation of
various components including rugged technology, as well as sirens,
lights, radios, gun racks, and decals. Subsequent to the Closing on
February 28, 2017, Brekford will continue to retain a 19.9%
ownership interest in this business, which continues to operate
under the name Global Public Safety (See Subsequent Event Note
18).
As used in these notes, the terms “Brekford”,
“the Company”, “we”, “our”, and
“us” refer to Brekford Corp. and, unless the context
clearly indicates otherwise, its consolidated
subsidiary.
NOTE 2 – LIQUIDITY
For the year ended December 31, 2016 the Company incurred a net
loss of approximately $1,054,403, and provided $1,094,658 of cash
for operations. Additionally, at December 31, 2016 the
company has cash available of $591,618, a working capital surplus
of $554,568 and availability under the established credit
facility (see Note 5) of approximately $2.7 million.
On February 28, 2017, as presented elsewhere in this Annual Report,
the Company completed a transaction to sell substantially all
assets and certain liabilities related to its vehicle services
business. From the approximately $4.0 million in cash proceeds, all
outstanding debt of the Company was retired, including the Loan
Agreement, the Investor Note, and the two of its directors, Messrs.
C.B. Brechin and Scott Rutherford.
Management believes that the Company’s current level of cash
combined with cash that it expects to generate in its operations
during the next 12 months including anticipated new customer
contracts will be sufficient to sustain the Company’s
business initiatives through at least March 28, 2018, but there can
be no assurance that these measures will be successful or
adequate. In the event that the Company’s cash reserves
and cash flow from operations are not sufficient to fund the
Company’s future operations, it may need to obtain additional
capital.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICES
Principles of Consolidation and Basis of Presentation
The Company’s consolidated financial statements include the
accounts of Brekford Corp. and its wholly-owned subsidiary,
Municipal Recovery Agency, LLC. Intercompany transactions and
balances are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles
(“GAAP”)
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during
the reporting period. In the accompanying unaudited consolidated
financial statements, estimates are used for, but not limited to,
stock-based compensation, allowance for doubtful accounts, sales
returns, allowance for inventory obsolescence, fair value of
long-lived assets, deferred taxes and valuation allowance, and the
depreciable lives of fixed assets. Actual results could differ from
those estimates.
Reclassifications
Certain amounts in prior-year financial statements have been
reclassified for comparative purposes to conform to the
presentation in the current year financial statements.
Concentration of Credit Risk
The Company maintains cash accounts with major financial
institutions. From time to time, amounts deposited may exceed
the FDIC insured limits.
Accounts Receivable
Accounts receivable are carried at estimated net realizable value.
The Company has a policy of reserving for uncollectable accounts
based on its best estimate of the amount of probable credit losses
in its existing accounts receivable. The Company calculates the
allowance based on a specific analysis of past due balances. Past
due status for a particular customer is based on how recently
payments have been received from that customer. Historically, the
Company’s actual collection experience has not differed
significantly from its estimates, due primarily to credit and
collections practices and the financial strength of its
customers.
Inventory
Inventory principally consists of hardware and third-party packaged
software that is modified to conform to customer specifications and
held temporarily until the completion of a contract. Inventory is
valued at the lower of cost or market value. The cost is determined
by the lower of first-in, first-out (“FIFO”) method,
while market value is determined by replacement cost for raw
materials and parts and net realizable value for work-in-
process.
Property and Equipment
Property and equipment is stated at cost. Depreciation of
furniture, vehicles, computer equipment and software and phone
equipment is calculated using the straight-line method over the
estimated useful lives (two to ten years), and leasehold
improvements are amortized on a straight-line basis over the
shorter of their estimated useful lives or the lease term (which is
three to five years).
Management reviews property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of the
long-lived asset is measured by a comparison of the carrying amount
of the asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceeds the estimated
fair value of the assets.
Revenue Recognition
For automated traffic safety enforcement revenue, the Company
recognizes the revenue when the required collection efforts are
completed and the respective municipality is billed depending on
the terms of the respective contract. The Company records revenue
related to automated traffic violations for the Company’s
share of the violation amount.
Shipping and Handling Costs
All amounts billed to customers related to shipping and handling
are included in products revenues and all costs of shipping and
handling are included in cost of sales in the accompanying
consolidated statements of operations. The Company incurred
shipping and handling costs of $15,525 and $45,255 for continuing
operations for the years ended December 31, 2016 and 2015,
respectively. The Company incurred shipping and handling costs of
$59,094 and $58,120 for discontinued operations for the years ended
December 31, 2016 and 2015, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. These expenses
are included in selling, general and administrative expenses in the
accompanying statements of operations. Advertising expense were
insignificant for the years ended December 31, 2016 and 2015,
respectively.
Share-Based Compensation
The Company complies with the provisions of Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 718,
Compensation
-
Stock
Compensation
, in measuring and
disclosing stock based compensation cost. The measurement objective
in ASC Paragraph 718-10-30-6 requires public companies to measure
the cost of employee services received in exchange for an award of
equity instruments based on the grant date fair value of the award.
The cost is recognized in expense over the period in which an
employee is required to provide service in exchange for the award
(the vesting period). Performance-based awards are expensed ratably
from the date that the likelihood of meeting the performance
measures is probable through the end of the vesting
period.
Treasury Stock
The Company accounts for treasury stock using the cost method. As
of December 31, 2016, 10,600 shares of our common stock were held
in treasury at an aggregate cost of $5,890.
Income Taxes
The Company uses the liability method to account for income taxes.
Income tax expense includes income taxes currently payable and
deferred taxes arising from temporary differences between financial
reporting and income tax bases of assets and liabilities. Deferred
income taxes are measured using the enacted tax rates and laws that
are expected to be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized.
Income tax expense, if any, consists of the taxes payable for the
current period. Valuation allowances are established when the
realization of deferred tax assets are not considered more likely
than not. Due to the Company’s continued losses 100%
valuation allowance has been established on all deferred tax
assets.
The Company files income tax returns with the U.S. Internal Revenue
Service and with the revenue services of various states. The
Company’s policy is to recognize interest related to
unrecognized tax benefits as income tax expense. The Company
believes that it has appropriate support for the income tax
positions it takes and expects to take on its tax returns, and that
its accruals for tax liabilities are adequate for all open years
based on an assessment of many factors including past experience
and interpretations of tax law applied to the facts of each
matter.
In the years ended December 31, 2016 and 2015, we reported
financial results for both operations and discontinued operations.
ASC 740-20-45 sets down the general rule for allocating income tax
expense or benefit between operations and discontinued operations.
The general rule requires the computation of tax expense or benefit
by entity taking into consideration all items of income, expense,
and tax credits. Next, a computation is made taking into
consideration only those items related to continuing operations.
Any difference is allocated to items other than continuing
operations e.g. discontinued operations. Under these general rules,
no tax expense or benefit would be allocated to discontinued
operations.
An exception to these rules apply under ASC 740-20-45-7 where an
entity has 1) a loss from continuing operations and income related
to other items such as discontinued operations and 2) the entity
would not otherwise recognize a benefit for the loss from
continuing operations under the approach described in ASC
740-20-45. This fact pattern applies for the year ended December
31, 2016 and 2015. Application of this rule exception results in
the allocation of tax expense to discontinued operations with an
offsetting amount of tax benefit reported by the continuing
operations.
Overall, we allocated $230,900 and $385,600 of tax expense to net
income from discontinued operations and an offsetting tax benefit
to net loss from continuing operations in the years ended December
31, 2016 and 2015, respectively.
Loss per Share
Basic loss per share is calculated by dividing net loss available
to common stockholders by the weighted-average number of common
shares outstanding and does not include the effect of any
potentially dilutive common stock equivalents. Diluted
loss per share is calculated by dividing net loss by the
weighted-average number of shares outstanding, adjusted for the
effect of any potentially dilutive common stock
equivalents. There is no dilutive effect on the loss per
share during loss periods. See Note 11 for the calculation of basic
and diluted loss earnings per share.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash,
accounts receivable, accounts payable and accrued expenses
approximate their fair values based on the short-term maturity of
these instruments. The carrying amount of the Company’s
promissory note obligations approximate fair value, as the terms of
these notes are consistent with terms available in the market for
instruments with similar risk.
We account for our derivative financial instruments, consisting
solely of certain stock purchase warrants that contain non-standard
anti-dilutions provisions and/or cash settlement features, and
certain conversion options embedded in our convertible instruments,
at fair value using Level 3 inputs, which are discussed in Note 14
to these consolidated financial statements. We determine the fair
value of these derivative liabilities using the Black-Scholes
option-pricing model when appropriate, and in certain circumstances
using binomial lattice models or other accepted valuation
practices.
When determining the fair value of our financial assets and
liabilities using the Black-Scholes option-pricing model, we are
required to use various estimates and unobservable inputs,
including, among other things, contractual terms of the
instruments, expected volatility of our stock price, expected
dividends, and the risk-free interest rate. Changes in any of the
assumptions related to the unobservable inputs identified above may
change the fair value of the instrument. Increases in expected
term, anticipated volatility and expected dividends generally
result in increases in fair value, while decreases in the
unobservable inputs generally result in decreases in fair
value.
Foreign Currency Transactions
The Company has certain revenue and expense transactions with a
functional currency in Mexican pesos and the Company's reporting
currency is the U.S. dollar. Assets and liabilities are translated
from the functional currency to the reporting currency at the
exchange rate in effect at the balance sheet date and equity at the
historical exchange rates. Revenue and expenses are translated at
rates in effect at the time of the transactions. Resulting
translation gains and losses are accumulated in a separate
component of stockholders' equity - other comprehensive income
(loss). Realized foreign currency transaction gains and losses are
credited or charged directly to operations.
Segment Reporting
FASB ASC Topic 280,
Segment
Reporting
, requires that an
enterprise report selected information about operating segments in
its financial reports issued to its stockholders. Based on its
current analysis, management has determined that the Company has
only one operating segment, which is Traffic Safety
Solutions.
Recent Accounting Pronouncements
In May 2014 the FASB issued ASU 2014-09, Revenue from contracts
with Customers (Topic 606) (May 2014). The topic of Revenue
Recognition had become broad with several other regulatory agencies
issuing standards, which lacked cohesion. The new guidance
established a “comprehensive framework” and
“reduces the number of requirements to which an entity must
consider in recognizing revenue” and yet provides improved
disclosures to assist stakeholders reviewing financial statements.
The amendments in this Update are effective for annual reporting
periods beginning after December 15, 2017. Early adoption is not
permitted. The Company will adopt the methodologies prescribed by
this ASU by the date required. Adoption of the ASU is not expected
to have a significant effect on the Company’s consolidated
financial statements.
The FASB has issued ASU No. 2014-15, Presentation of Financial
Statements-Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern. ASU 2014-15 is intended to define management’s
responsibility to evaluate whether there is substantial doubt about
an organization’s ability to continue as a going concern and
to provide related footnote disclosures. Under Generally Accepted
Accounting Principles (GAAP), financial statements are prepared
under the presumption that the reporting organization will continue
to operate as a going concern, except in limited circumstances.
Financial reporting under this presumption is commonly referred to
as the going concern basis of accounting. The going concern basis
of accounting is critical to financial reporting because it
established the fundamental basis for measuring and classifying
assets and liabilities. Currently, GAAP lacks guidance about
management’s responsibility to evaluate whether there is
substantial doubt the organization’s ability to continue as a
going concern or to provide footnote disclosures. The ASU provides
guidance to an organization’s management, with principles and
definition that are intended to reduce diversity in the timing and
content of disclosures that are commonly provided by organizations
today in the financial statement footnotes. The amendments in this
update are effective for the annual period ending after December
31, 2016, and for annual periods and interim periods thereafter.
Early application is permitted. The Company has the adopted the
methodologies prescribed by this ASU by the date required and there
is no material impact on the Company’s consolidated financial
statements.
In April 2015, the FASB issued ASU No. 2015-03,
“Interest-Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of the Debt Issuance Cost.” To
simplify the presentation of the debt issuance costs, the
amendments in this ASU require that debt issuance costs related to
a recognized debt liability be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability,
consistent with debt discounts. The recognition and measurement
guidance for debt issuance costs are not affected by the amendments
in this ASU. The amendments in this ASU are effective for financial
statements issued for fiscal years beginning after December 15,
2015 and interim periods within those years. By adopting this
standard, we have reclassified certain of our assets and
liabilities.
In February 2016, FASB issued ASU-2016-02, "Leases (Topic 842)."
The guidance requires that a lessee recognize in the statement of
financial position a liability to make lease payments (the lease
liability) and a right of use asset representing its right to use
the underlying asset for the lease term. For finance leases: the
right-of-use asset and a lease liability will be initially measured
at the present value of the lease payments, in the statement of
financial position; interest on the lease liability will be
recognized separately from amortization of the right-of-use asset
in the statement of comprehensive income; and repayments of the
principal portion of the lease liability will be classified within
financing activities and payments of interest on the lease
liability and variable lease payments within operating activities
in the statement of cash flows. For operating leases: the
right-of-use asset and a lease liability will be initially measured
at the present value of the lease payments, in the statement of
financial position; a single lease cost will be recognized,
calculated so that the cost of the lease is allocated over the
lease term on a generally straight-line basis; and all cash
payments will be classified within operating activities in the
statement of cash flows. Under Topic 842 the accounting applied by
a lessor is largely unchanged from that applied under previous
GAAP. The amendments in Topic 842 are effective for the Company
beginning January 1, 2019, including interim periods within that
fiscal year. We are currently evaluating the impact of adopting the
new guidance of the consolidated financial statements.
In January 2016, the Financial Accounting Standards Board ("FASB"),
issued Accounting Standards Update ("ASU") 2016-01, "Financial
Instruments-Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities," which amends the
guidance in U.S. generally accepted accounting principles on the
classification and measurement of financial instruments. Changes to
the current guidance primarily affect the accounting for equity
investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial
instruments. In addition, the ASU clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets
resulting from unrealized losses on available-for-sale debt
securities. The new standard is effective for fiscal years and
interim periods beginning after December 15, 2017, and are to be
adopted by means of a cumulative-effect adjustment to the balance
sheet at the beginning of the first reporting period in which the
guidance is effective. Early adoption is not permitted except for
the provision to record fair value changes for financial
liabilities under the fair value option resulting from
instrument-specific credit risk in other comprehensive income. The
Company is currently evaluating the impact of adopting this
standard.
In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic
740): Balance Sheet Classification of Deferred Taxes," which
simplifies the presentation of deferred income taxes by requiring
that deferred tax liabilities and assets be classified as
noncurrent in a classified statement of financial position. This
ASU is effective for financial statements issued for annual periods
beginning after December 16, 2016, and interim periods within those
annual periods. The adoption of this standard will not have any
impact on the Company's financial position, results of operations
and disclosures.
In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement
of Inventory (“ASU 2015-11”), to simplify the guidance
on the subsequent measurement of inventory, excluding inventory
measured using last-in, first out or the retail inventory method.
Under the new standard, inventory should be at the lower of cost
and net realizable value. The new accounting guidance is effective
for interim and annual periods beginning after December 15,
2016 with early adoption permitted. The adoption of this standard
will not have any impact on the Company's financial position,
results of operations and disclosures.
In March 2016, the FASB issued ASU 2016-09,
Compensation—Stock Compensation: Improvements to Employee
Share-Based Payment Accounting (“ASU 2016-09”), which
simplifies several aspects of the accounting for employee
share-based payment transactions for both public and nonpublic
entities, including the accounting for income taxes, forfeitures,
and statutory tax withholding requirements, as well as
classification in the statement of cash flows. ASU 2016-09 is
effective for annual periods beginning after December 15,
2016, and interim periods within annual periods beginning after
December 15, 2018. Early adoption is permitted. The adoption
of this standard will not have any impact on the Company's
financial position, results of operations and
disclosures.
4. DISCONTINUED OPERATIONS
On February 6, 2017, the Company entered into a Contribution and
Unit Purchase Agreement (the “Agreement”) with LB&B
Associates Inc. (the “Purchaser”) and Global Public
Safety, LLC (“GPS”).
The closing for the transaction set forth in the Agreement occurred
on February 28, 2017 (the “Closing”) and on such date
the Company contributed substantially all of the assets and certain
liabilities related to its vehicle services business (the
“Business”) to GPS. After the Closing, the Company will
continue to own and run other business operations that are not
related to the Business.
On the Closing, GPS sold units representing 80.1% of the units of
GPS to the Purchaser for $6,048,394, after certain purchase price
adjustments of prepaid expenses and unbilled customer deposits.
$4,048,394 was paid in cash, including a $250,000 deposit that was
paid on February 6, 2017, and $2,000,000 was paid by Purchaser
issuing the Company a promissory note (the “Promissory
Note”). After the Closing, the Company continues to own 19.9%
of the units of GPS. (See Subsequent Event footnote – Note
17).
ASC 360-10-45-9 requires that a long-lived asset (disposal group)
to be sold shall be classified as held for sale in the period in
which a set of criteria have been met, including criteria that the
sale of the asset (disposal group) is probable and actions required
to complete the plan indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be
withdrawn. This criteria was achieved on December 21, 2016 as the
Company entered into a letter of intent with the purchaser.
Additionally, the discontinued operations are comprised of the
entirety of the vehicle services business, excluding corporate
services expenses. Lastly, for comparability purposes certain prior
period line items relating to the assets held for sale have been
reclassified and presented as discontinued operations for all
periods presented in the accompanying consolidated statements of
operations, consolidated statements of cash flows, and the
consolidated balance sheets.
In accordance with ASC 205-20-S99, "Allocation of Interest to
Discontinued Operations", the Company elected to not allocate
consolidated interest expense to discontinued operations where the
debt is not directly attributable to or related to discontinued
operations.
The following information presents the major classes of line item
of assets and liabilities included as part of discontinued
operations in the consolidated balance sheet:
|
|
|
|
|
|
|
|
|
Current
assets - discontinued operations:
|
|
|
|
Accounts
receivable
|
$
776,715
|
$
3,649,425
|
|
Inventory
|
272,679
|
289,696
|
|
Prepaid
expenses
|
20,117
|
21,829
|
|
Total
current assets - discontinued operations
|
$
1,069,511
|
$
3,960,950
|
|
|
|
|
|
Noncurrent
assets - discontinued operations:
|
|
|
|
Property
and equipment, net
|
$
27,362
|
$
47,047
|
|
Other
non-current assets
|
13,025
|
95,730
|
|
Total
noncurrent assets - discontinued operations
|
$
40,387
|
$
142,777
|
|
|
|
|
|
Current
liabilities - discontinued operations:
|
|
|
|
Accounts
payable and accrued liabilities
|
$
664,569
|
$
2,341,016
|
|
Accrued
payroll and related expenses
|
15,386
|
84,159
|
|
Customer
deposits
|
34,219
|
36,070
|
|
Deferred
revenue
|
54,581
|
95,233
|
|
Term
loan – current
|
—
|
166,667
|
|
Line
of credit
|
202,711
|
1,402,381
|
|
Total
current liabilities - discontinued operations:
|
$
971,466
|
$
4,125,526
|
|
|
|
|
|
Long
term liabilities - discontinued operations:
|
|
|
|
Note
payable - long term portion
|
$
452,572
|
$
—
|
|
Deferred
rent
|
36,948
|
38,184
|
|
Notes
payable - related parties, long term portion
|
500,000
|
500,000
|
|
Total
long term liabilities - discontinued operations
|
$
989,520
|
$
538,184
|
The following information presents the major classes of line items
constituting the after-tax loss from discontinued operations in the
consolidated statements of operations for the years ended December
31, 2016 and 2015:
|
|
|
|
|
|
|
|
Revenue
|
$
10,311,558
|
$
17,021,752
|
|
Cost
of goods sold
|
8,727,310
|
14,969,013
|
|
Gross
margin
|
1,584,248
|
2,052,739
|
|
|
|
|
|
Salaries
and related expenses
|
338,031
|
410,494
|
|
Selling,
general and administrative expenses
|
403,165
|
461,966
|
|
Total
operating expenses
|
741,196
|
872,460
|
|
|
|
|
|
Operating
income
|
843,052
|
1,180,279
|
|
|
|
|
|
Other
expense:
|
|
|
|
Interest
expense, net
|
268,667
|
221,020
|
|
Total
other expense
|
268,667
|
221,020
|
|
|
|
|
|
Income
from discontinued operations before tax
|
574,385
|
959,259
|
|
|
|
|
|
Income
tax expense
|
230,900
|
385,600
|
|
|
|
|
|
Income
from discontinued operations, net of tax
|
$
343,485
|
$
573,659
|
The following information presents the major classes of line items
constituting significant operating and investing cash flow
activities in the consolidated statements of cash flows relating to
discontinued operations:
|
|
|
|
|
|
|
|
Cash
flows from operating activities of discontinued
operations:
|
|
|
|
Adjustments
to reconcile net loss to net cash used in operating activities of
discontinued operations:
|
|
|
|
Depreciation
and amortization
|
$
26,685
|
$
40,382
|
|
Changes
in operating assets and liabilities including assets and
liabilities held for sale:
|
|
|
|
Accounts
receivable
|
2,872,709
|
(2,157,654
)
|
|
Prepaid
expenses and other non-current assets
|
84,417
|
(32,693
)
|
|
Inventory
|
17,017
|
141,406
|
|
Accounts
payable and accrued expenses
|
(1,676,445
)
|
1,244,430
|
|
Deferred
revenue
|
(40,652
)
|
(160,172
)
|
|
|
(71,860
)
|
140,449
|
|
Net
cash provided by (used in) operating activities from discontinued
operations
|
1,211,871
|
(783,852
)
|
|
|
|
|
|
Cash
flows from investing activities in discontinued
operations:
|
|
|
Purchases
of property and equipment
|
(7,000
)
|
—
|
|
Net
cash used in investing activities in discontinued
operations
|
(7,000
)
|
—
|
|
|
|
|
|
Cash
flows from financing activities in discontinued
operations:
|
|
|
|
Net
change in line of credit
|
(1,199,670
)
|
230,449
|
|
Payments
on other notes payable
|
—
|
(11,668
)
|
|
Borrowings
on term notes
|
452,571
|
—
|
|
Deferred
financing cost
|
—
|
(19,420
)
|
|
|
(166,667
)
|
(250,000
)
|
|
Net
cash used in financing activities in discontinued
operations
|
$
(913,766
)
|
$
(50,639
)
|
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
Leasehold
improvements
|
$
25,792
|
$
25,792
|
|
Computer
equipment and software
|
420,569
|
420,569
|
|
Vehicles
|
215,358
|
206,702
|
|
Furniture
|
22,965
|
22,965
|
|
Cameras
|
819,466
|
703,392
|
|
Phone
equipment
|
16,811
|
16,811
|
|
Handheld
ticketing system
|
30,293
|
30,293
|
|
|
1,551,254
|
1,426,524
|
|
Accumulated
depreciation and amortization
|
(1,342,944
)
|
(1,250,224
)
|
|
|
$
208,310
|
$
176,300
|
Depreciation and amortization of property and equipment from
continuing operations the years ended December 31, 2016 and 2015
was $101,564 and $149,231, respectively. Depreciation and
amortization of property and equipment for discontinued operations
the years ended December 31, 2016 and 2015 was $26,685 and $40,382,
respectively.
NOTE 6 – LINE OF CREDIT AND OTHER NOTES PAYABLE
Line of Credit
On July 12, 2016 (the “Closing Date”), the Company
entered into a loan and security agreement (the “Loan
Agreement”) with Fundamental Funding LLC (the
“Lender”). The Loan Agreement provides for a
multi-draw loan to the Company for (i) the Company’s accounts
receivable, the lesser of (y) $2,500,000 or (z) 85% of the
Company’s eligible accounts and (ii) the Company’s
inventory advances, the lesser of (y) $500,000 or (z) 50% of the
eligible inventory (the “Revolving Loans”). The maximum
amount available to the Company under the Loan Agreement for the
Revolving Loans is $3,500,000 (the “Credit Limit”). In
addition, the Lender agreed to provide the Company with an
accommodation loan in an amount not to exceed $500,000, which shall
be repaid in thirty-six (36) equal monthly installments of
principal and interest (the “Accommodation Loan” and
together with the Revolving Loans, the
“Loans”).
On the Closing Date, the Lender advanced the Company
$533,670. The amounts advanced under the Loan Agreement
are due and payable on the three (3) year anniversary of the
Closing Date (the “Maturity Date”), and thereafter, the
Maturity Date shall automatically be extended for successive
periods of one year unless the Company shall give lender written
notice of termination not less than ninety (90) days prior to the
end of such term or renewal term, as applicable. Lender may
terminate the Loan Agreement at any time in its sole discretion by
giving the Company ninety (90) days prior written notice, provided
that upon an Event of Default (as defined in the Loan Agreement),
Lender may terminate the Loan Agreement without notice to the
Company, effective immediately. Upon termination by the Lender, the
Company shall be required to pay certain termination fees based on
a percentage of the Credit Limit as set forth in the Loan
Agreement.
The outstanding principal balance under the Note for the Revolving
Loans shall bear interest at a rate per annum equal to the
“prime rate” published from time to time in
the
Wall Street
Journal
(the “Prime
Rate”), plus 1.75% per annum, accruing daily and payable
monthly. The outstanding principal balance under the Accommodation
Loan shall bear interest at a rate per annum equal to the Prime
Rate in effect from time to time, plus 12.75% per annum, accruing
daily and payable monthly. Notwithstanding
any other provision in the Loan Agreement, interest on Loans shall
be calculated on the higher of: (i) the actual average monthly
balance of all Loans from the prior month, or (ii) $1,350,000. In
addition the Company will be subject to certain monthly or annual
fees on the Loans as set forth in the Loan
Agreement.
The remaining portion of Credit Limit may be advanced to the
Company upon written notice provided to the Lender during the
period beginning from the Closing Date through the Maturity Date
provided no default has occurred under the Loan Agreement. The
Company may prepay any portion of the Accommodation Loan, in whole
or in part, to Lender on or prior to the Maturity
Date.
Initial borrowings under the Loan Agreement were subject to, among
other things, the substantially concurrent repayment by the Company
of all amounts due and owing under the Companyís credit
facility, dated May 24, 2014, with Rosenthal & Rosenthal, Inc.
and the satisfaction and termination of such borrowing and all
liens thereunder (collectively, the “Rosenthal
Loan”). All amounts owed under the Rosenthal Loan,
which were $2,253,617, were satisfied and terminated by the Company
on the Closing Date.
In addition, on the Closing Date, the Company entered into a
subordination agreement with each of C.B. Brechin and Scott
Rutherford, the Companyís chief executive officer and chief
strategy officer, respectively, as well as with the Investor
described in Note 8 pursuant to which each of the parties agreed to
subordinate all present and future indebtedness held by each of
them to the obligations of the Lender.
On the Closing Date, as part of the Loan Agreement and to
secure the payment and performance of all of the obligations owed
to Lender under the Loan Agreement when due, the Company granted to
Lender a security interest in all right, title and interest to all
assets of the Borrower, whether now owned or hereafter arising or
acquired and wherever located.
The Loan Agreement contains customary affirmative and negative
covenants for loan agreements of its type, including but not
limited to, limiting the Company’s ability to pay dividends
or make any distributions, incur additional indebtedness, grant
additional liens, engage in any other lime of business, make
investments, merge, consolidate or sell all or substantially all of
its assets and enter into transactions with related
parties. The Loan Agreement also contains certain
financial covenants, including, but not limited to, a debt service
coverage ratio.
The Loan Agreement includes customary events of default, including
but not limited to, failure to pay principal, interest or fees when
due, failure to comply with covenants, default under certain other
indebtedness, certain insolvency or bankruptcy events, the
occurrence of certain material judgments the institution of any
proceeding by a government agency or a change of control of the
Company.
All borrowings under the Loan Agreement are due upon a default
under the terms of the Loan Agreement. The Company’s
obligations under the Loan Agreement are guaranteed by C.B.
Brechin, the Company’s chief executive officer pursuant to
the terms of a surety agreement.
At December 31, 2016, the Company had $274,795 in outstanding
indebtedness under the Revolving Facility and $452,571 in
outstanding indebtedness under the Term Loan, and the Company could
have borrowed up to an additional $2,725,205 under the Revolving
Facility. As of December 31, 2016, we were out of compliance
with one of the financial covenants contained in the Credit
Facility as a result of the loss recorded for the year ended
December 31, 2016. The Company did not request a waiver for the
year ended December 31, 2016 and the Revolving Facility and Term
Loan were repaid in full on February 28, 2017.
Other Notes Payable
The Company financed certain vehicles and equipment under finance
agreements. The agreements mature at various dates through December
2017. Principal maturities in 2017 are $20,150. The agreements
require various monthly payments of principal and interest until
maturity. As of December 31, 2016 and 2015, financed assets of
$19,475 and $47,732, respectively, net of accumulated amortization
of $122,441 and $98,184, respectively, are included in property and
equipment on the balance sheets. The weighted average interest rate
was 3.75% at December 31, 2016 and December 31, 2015.
NOTE 7 – NOTES PAYABLE – STOCKHOLDERS
Brekford financed the repurchase of shares of its common stock and
warrants from the proceeds of convertible promissory notes that
were issued by Brekford on November 9, 2009 in favor
of a lender group that included two of
its directors, Messrs. C.B. Brechin and Scott Rutherford, in the
principal amounts of $250,000 each (each, a “Promissory
Note” and together, the “Promissory Notes”). Each
Promissory Note bears interest at the rate of 12% per annum and at
the time of issuance was to be convertible into shares of Brekford
common stock, at the option of the holder, at an original
conversion price of $.07 per share. At the time of issuance,
Brekford agreed to pay the unpaid principal balance of the
Promissory Notes and all accrued but unpaid interest on the date
that was the earlier of (i) two years from the issuance date or
(ii) 10 business days after the date on which Brekford closes an
equity financing that generates gross proceeds in the aggregate
amount of not less than $5,000,000.
On April 1, 2010, Brekford and each member of the lender group
executed a First Amendment to each Promissory Note, which amended
the respective Promissory Note as follows:
|
●
|
Revise the conversion price in the provision that allows the holder
of the Promissory Note to elect to convert any outstanding and
unpaid principal portion of the Promissory Note and any accrued but
unpaid interest into shares of the common stock at a price of
fourteen cents ($0.14) per share, and
|
|
●
|
Each Promissory Note’s maturity date was extended to the
earlier of (i) four years from the issuance date or (ii) 10
business days after the date on which Brekford closes an equity
financing that generates gross proceeds in the aggregate amount of
not less than $5,000,000.
|
On November 8, 2013, Brekford and each member of the lender group
agreed to extend the maturity dates of the Promissory Notes to the
earlier of (i) November 9, 2014 or (ii) 10 business days after the
date on which Brekford closes an equity financing that generates
gross proceeds in the aggregate amount of not less than
$5,000,000.
On November 4, 2014, Brekford and each member of the lender group
agreed to further extend the maturity dates of the Promissory Notes
to the earlier of (i) November 9, 2015 or (ii) 10 business days
after the date on which Brekford closes an equity financing that
generates gross proceeds in the aggregate amount of not less than
$5,000,000.
On November 9, 2015, the maturity dates of the Promissory Notes
were extended to the earlier of (i) November 9, 2016 or
(ii) 10 business days from the date on which Brekford closes
an equity financing that generates gross proceeds in the aggregate
amount of not less than $5,000,000.
On November 4, 2016, the maturity dates of the Promissory Notes
were extended to the earlier of (i) November 9, 2017 or
(ii) 10 business days from the date on which Brekford closes
an equity financing that generates gross proceeds in the aggregate
amount of not less than $5,000,000. Mr. Brechin and Mr. Rutherford
have indicated that they will not exercise their right of repayment
prior to September 30, 2017.
The Company anticipates the maturity date of the Promissory Notes
will continue to be extended for the foreseeable future; thus, they
are classified as long-term liabilities in Discontinued Operations
– Long Term Liabilities (Note 4). As of December 31, 2016 and
2015, the amounts outstanding under the Promissory Notes totaled
$500,000.
NOTE 8 – CONVERTIBLE PROMISSORY NOTES PAYABLE -
INVESTOR
On March 17, 2015, the Company entered into a note and warrant
purchase agreement (the “Agreement”) with an accredited
investor (the “Investor”) pursuant to which the
Investor purchased an aggregate principal amount of $715,000 of a
6% convertible promissory note issued by the Company for an
aggregate purchase price of $650,000 (the “Investor
Note”). The Investor Note bears interest at a rate of 6% per
annum and the principal amount is due on March 17, 2017. The note
and accrued interest was repaid on February 28, 2017. Any interest
that accrues under the Investor Note is payable either upon
maturity or upon any principal being converted on any voluntary
conversion date (as to that principal amount then being converted).
The Investor Note is convertible at the option of the Investor at
any time into shares of Common Stock at a conversion price equal to
the lesser of (i) $0.25 per share and (ii) 70% of the average of
the lowest three volume weighted average prices for the twelve (12)
trading days prior to such conversion (the “Conversion
Price”). In no event can the Conversion Price be less than
$0.10; provided, however, that if on or after the date of the
Agreement the Company sells any Common Stock or Common Stock
Equivalents (as defined in the Agreement) at an effective price per
share that is less than $0.10 per share, then the Conversion Price
shall be equal to the par value of the Common Stock then in effect.
In connection with the Agreement, the Investor received a warrant
to purchase 780,000 shares of Common Stock (the
“Warrant”). The Warrant is exercisable for a period of
five years from the date of issuance at an exercise price of $0.50
per share, subject to adjustment (the “Exercise
Price”).
On October 23, 2015, the Investor converted $25,000 of principal
and $904 of accrued interest due under the Investor Note into
169,530 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $19,861.
On December 2, 2015, the Investor converted $50,000 of principal
and $2,129 of accrued interest due under the Investor Note into
349,155 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $35,160.
On February 26, 2016 the Investor converted $50,000 of principal
and $2,844 of accrued interest due under the Investor Note into
476,500 shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $49,525.
On March 31, 2016 the Investor converted $50,000 of principal and
$3,123 of accrued interest due under the Investor Note into 510,310
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $72,947.
On May 31, 2016 the Investor converted $50,000 of principal and
$3,625 of accrued interest due under the Investor Note into 605,928
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $38,923.
On July 1, 2016 the Investor converted $50,000 of principal and
$3,880 of accrued interest due under the Investor Note into 699,733
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $40,875.
On July 27, 2016 the Investor converted $50,000 of principal and
$4,093 of accrued interest due under the Investor Note into 758,670
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $45,024.
On August 31, 2016 the Investor converted $50,000 of principal and
$4,381 of accrued interest due under the Investor Note into 776,869
shares of Common Stock and the Company recognized a loss on
extinguishment of debt of $44,617.
The following table provides information relating to the Investor
Note at December 31, 2016 and :
|
|
|
|
|
Convertible
promissory note payable
|
$
340,000
|
$
640,000
|
|
Original
issuance discount, net of amortization of the $61,786 and $23,002
as of December 31, 2016 and 2015
|
(3,214
)
|
(35,180
)
|
|
Beneficial
conversion feature, net of amortization of $530,338 and $197,437 as
of December 31, 2016 and 2015
|
(27,583
)
|
(301,959
)
|
|
Warrant
feature, net of amortization of the $87,527 and $32,585 as of
December 31, 2016 and 2015
|
(4,552
)
|
(49,835
|
|
Original
issuance cost, net of amortization of $46,996 and $20,744 as of
December 31, 2016 and 2015
|
(5,504
)
|
(31,756
)
|
|
Convertible
promissory note payable, net
|
$
299,147
|
$
221,269
|
We evaluated the financing transactions in accordance with ASC
Topic 470,
Debt
with Conversion and Other Options
, and determined that
the conversion feature of the Investor Note was afforded the
exemption for conventional convertible instruments due to its fixed
conversion rate. The Investor Note has an explicit limit on the
number of shares issuable so it did meet the conditions set forth
in current accounting standards for equity classification. The debt
was issued with non-detachable conversion options that are
beneficial to the investors at inception, because the conversion
option has an effective strike price that is less than the market
price of the underlying stock at the commitment date. The
accounting for the beneficial conversion feature requires that the
beneficial conversion feature be recognized by allocating the
intrinsic value of the conversion option to additional
paid-in-capital, resulting in a discount on the convertible notes,
which will be amortized and recognized as interest
expense.
Accordingly, a portion of the proceeds was allocated to the Warrant
based on its relative fair value, which totaled $92,079 using the
Black Scholes option-pricing model. Further, the Company attributed
a beneficial conversion feature of $557,921 to the shares of
Common Stock issuable under the Investor Note based upon the
difference between the effective Conversion Price and the closing
price of the Common Stock on the date on which the Investor Note
was issued. The assumptions used in the Black-Scholes model are as
follows: (i) dividend yield of 0%;
(ii) expected volatility of 80.5%, (iii) weighted
average risk-free interest rate of 1.56%, (iv) expected
life of five years, and (v) estimated fair value of the Common
Stock of $0.26 per share. The expected term of the Warrant
represents the estimated period of time until exercise and is based
on historical experience of similar awards giving consideration to
the contractual terms. The Company recorded amortization of the
beneficial conversion feature and warrant feature of the Investor
Note in other expense in the amount of $274,377 and $45,284 during
the year ended December 31, 2016 and $255,961 and $42,243, during
the year ended December 31, 2015 which also includes the
unamortized beneficial conversion feature and warrant feature
attributable to the $375,000 principal converted to
equity.
The Company recorded an original issue discount of $65,000 to be
amortized over the term of the Agreement as interest expense. The
Company recognized $31,966 and $29,820 of interest expense as a
result of the amortization during the nine months ended December
31, 2016 and the year ended December 31, 2015 respectively, which
also includes the unamortized original issue discount attributable
to the $375,000 principal converted to equity.
NOTE 9 – WARRANT DERIVATIVE LIABILITY
On March 17, 2015, in conjunction with the issuance of the Investor
Note (see Note 7), the Company issued the Warrant, which permits
the Investor to purchase 840,000 shares of Common Stock, including
60,000 related to the financing costs, with an exercise price of
$0.50 per share and a life of five years.
The Exercise Price is subject to anti-dilution adjustments that
allow for its reduction in the event the Company subsequently
issues equity securities, including shares of Common Stock or any
security convertible or exchangeable for shares of Common Stock,
for no consideration or for consideration less than $0.50 a share.
The Company accounted for the conversion option of the Warrant in
accordance with ASC Topic 815. Accordingly, the conversion option
is not considered to be solely indexed to the Company’s own
stock and, as such, is recorded as a liability. The derivative
liability associated with the Warrant has been measured at fair
value at March 17, 2015 and December 31, 2016 using the Black
Scholes option-pricing model. The assumptions used in the
Black-Scholes model are as follows: (i) dividend yield of
0%; (ii) expected volatility of 80.5% - 105.1%;
(iii) weighted average risk-free interest rate
of 1.14-1.93%; (iv) expected life of five years; and (v)
estimated fair value of the Common Stock of $0.10-$0.26 per
share.
At December
31, 2016 and 2015, the outstanding fair value of the derivative
liability was $24,360 and $99,036,
respectively.
NOTE 10 – LEASES
Operating Leases
The Company rents office space under separate non-cancelable
operating leases expiring in April 2020. Rent expense under our
main headquarters lease, expiring on April 30, 2020 amounted to
$171,243 and $169,297 for the years ended December 31, 2016 and
2015, respectively.
Future minimum lease payments under these lease agreements,
exclusive of the Company’s share of operating costs at
December 31, 2016 and 2015 are as follows:
|
2017
|
$
177,878
|
|
2018
|
183,214
|
|
2019
|
188,711
|
|
2020
|
64,475
|
|
Total
|
614,278
|
|
|
522,136
|
|
Total
minimum lease payment under continuing operations
|
$
92,142
|
The Company also leases approximately 2,500 square feet of office
space from a related party under a non-cancelable operating lease
expiring on June 30, 2017. Rent expense under this lease amounted
to $49,200 for the years ended December 31, 2016 and 2015,
respectively.
Future minimum lease payments under these lease agreements,
exclusive of the Company’s share of operating costs at
December 31, 2016 are $24,600 during 2017.
NOTE 11 – INVENTORY
As of December 31, 2016 and December 31, 2015 inventory consisted
entirely of raw materials of $221,816 and $316,775,
respectively.
NOTE 12 – LOSS PER SHARE
The following table provides information relating to the
calculation of loss earnings per common share for continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
loss earnings per share
|
|
|
|
Net
loss from continuing operations
|
$
(1,397,888
)
|
$
(944,830
)
|
|
Weighted
average common shares outstanding - basic
|
47,357,787
|
44,690,550
|
|
Basic
loss per share
|
$
(0.03
)
|
$
(0.02
)
|
|
|
|
|
|
Diluted
loss per share
|
|
|
|
Net
loss from continuing operations
|
$
(1,397,888
)
|
$
(944,830
)
|
|
Weighted
average common shares outstanding
|
47,357,787
|
44,690,550
|
|
Potential
dilutive securities
|
—
|
—
|
|
Weighted
average common shares outstanding – diluted
|
44,357,787
|
44,499,610
|
|
Diluted
loss per share
|
$
(0.03
)
|
$
(0.02
)
|
|
Common
stock equivalents excluded due to anti-dilutive effect
|
6,961,429
|
8,576,134
|
The following table provides information relating to the
calculation of net income per common share for discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
|
|
Net
income from discontinued operations
|
$
343,485
|
$
573,659
|
|
Weighted
average common shares outstanding - basic
|
47,357,787
|
44,690,550
|
|
Basic
loss per share
|
$
0.01
|
$
0.01
|
|
|
|
|
|
Diluted
net income per share
|
|
|
|
Net
income from discontinued operations
|
$
343,485
|
$
573,659
|
|
Weighted
average common shares outstanding
|
47,357,787
|
44,690,550
|
|
Potential
dilutive securities
|
5,796,429
|
7,511,134
|
|
Weighted
average common shares outstanding – diluted
|
53,154,216
|
52,201,684
|
|
Diluted
loss per share
|
$
0.01
|
$
0.01
|
|
Common
stock equivalents excluded due to anti-dilutive effect
|
1,165,000
|
1,065,000
|
NOTE 13 - STOCKHOLDERS’ EQUITY
At December 31, 2016 and 2015, the Company’s authorized stock
consists of 20,000,000 shares of $.0001 par value preferred stock
and 150,000,000 shares of $.0001 par value common
stock.
The following common stock transactions occurred during the
period:
During the period ended December 31, 2016 the
Company granted an aggregate of 332,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.16 per share based upon the closing price of shares
of Common Stock on the date of the grant. These shares were
fully vested on the date of the grant. The Company recorded $53,000
in share-based compensation expense related to restricted stock
grants.
During the period ended December 31, 2016 the Company issued
3,828,010 shares at an average valued of $0.13 per share to convert
$300,000 of principal and $21,945 of accrued interest due under the
Convertible Note Agreement and recognized a loss on extinguishment
of debt of $291,911.
During the period ended December 31, 2015 the
Company granted an aggregate of 132,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.34 per share based upon the closing price of shares
of Common Stock on the date of the grant. These shares
were fully vested on the date of the grant. The Company recorded
$44,880 in share-based compensation expense related to restricted
stock grants.
During the period ended December 31, 2015 the Company issued
518,685 shares at an average valued of $0.26 per share to convert
$75,000 of principal and $3,033 of accrued interest due under the
Convertible Note Agreement and recognized a loss on extinguishment
of debt of $55,021.
Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
On September 7, 2010, Brekford Corp. issued a press release
announcing that its board of directors authorized a stock
repurchase program permitting the Company to repurchase up to
$500,000 in outstanding shares of the Common Stock from time to
time over a period of 12 months in open market transactions or in
privately negotiated transactions at the Company's
discretion. The stock repurchase program was
subsequently extended for an additional 12 months until September
7, 2012. On September 28, 2012, the Company adopted a
new stock repurchase program which permits the Company to
repurchase the $363,280 in shares that remained available for
repurchase under the old program, with the same terms and
conditions except that the term of the new stock repurchase program
was 24 months. The repurchase plan expired in September
2014.
Warrants
The assumptions used to value warrant grants during the year ended
December 31, 2015, which consisted solely of the Warrant, were as
follows:
|
|
Year ended
December 31, 2015
|
|
Expected
life (in years)
|
5.00
|
|
Volatility
|
80.50
%
|
|
Risk
free interest rate
|
1.56
%
|
|
Expected
Dividend Rate
|
0
%
|
Summary of the warrant activity for year ended December 31, 2016 is
as follows:
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining
Contractual Life (Years)
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2015
|
—
|
$
—
|
—
|
$
0.00
|
|
Granted
|
840,000
|
0.50
|
4.21
|
0.00
|
|
Forfeited
or expired
|
—
|
—
|
—
|
0.00
|
|
Exercised
|
—
|
—
|
—
|
0.00
|
|
Outstanding
at December 31, 2015
|
840,000
|
0.50
|
4.21
|
0.00
|
|
Granted
|
—
|
—
|
—
|
0.00
|
|
Forfeited
or expired
|
—
|
—
|
—
|
0.00
|
|
Exercised
|
—
|
—
|
—
|
|
|
Outstanding
at December 31, 2016
|
840,000
|
0.50
|
3.21
|
0.00
|
|
Exercisable
at December 31, 2016
|
840,000
|
0.50
|
3.21
|
0.00
|
The weighted average remaining contractual life of warrants
outstanding as of December 31, 2016 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.50
|
840,000
|
840,000
|
3.21
|
|
|
|
|
|
|
|
840,000
|
840,000
|
3.21
|
NOTE 14 – SHARE-BASED COMPENSATION
The Company has issued shares of restricted common stock and
warrants to purchase shares of common stock and has granted
non-qualified stock options to certain employees and non-employees.
On April 25, 2008, the Company’s stockholders approved the
2008 Stock Incentive Plan (the “2008 Incentive Plan”).
During the year ended December 31, 2016, Brekford Corp. granted
stock options under the 2008 Incentive Plan to its non-employee
directors. These options have exercise prices equal to
the fair market value of a share of Common Stock as of the date of
grant and have terms of ten years.
Stock Options
Option grants during the year ended December 31, 2016 were made to
non-employee directors who elected to receive options during the
annual equity grant period in the first quarter of each fiscal
year. The options had a grant date fair value of $0.12 per share
and will vest and become exercisable with respect to option shares
over a three year period commencing from the date of grant at a
rate of 33.33% per year.
Option grants during the year ended December 31, 2015 were made to
non-employee directors who elected to receive options during the
annual equity grant period in the first quarter of each fiscal
year. The options had a grant date fair value of $0.24 per share
and will vest and become exercisable with respect to option shares
over a three year period commencing from the date of grant at a
rate of 33.33% per year.
The Company recorded $14,504 and $11,214 in stock option
compensation expense during the period ended December 31, 2016 and
2015, respectively, related to the stock option
grants.
The Company uses the Black-Scholes option pricing model to
determine the fair value of stock options granted to employees and
recognizes the compensation cost of employee share-based awards in
its statement of operations using the straight-line method over the
vesting period of the award, net of estimated
forfeitures.
The use of the Black-Scholes option pricing model to estimate the
fair value of share-based awards requires that the Company make
certain assumptions and estimates for required inputs to the model,
including (1) the fair value of the Company’s common stock at
each grant date, (ii) the expected volatility of the
Company’s common stock value based on industry comparisons,
(iii) the expected life of the share-based award, (iv) the
risk-free interest rate, and (v) the dividend
yield.
The following are the assumptions made in computing the fair value
of share-based awards granted in the years ended December 31, 2016
and 2015:
|
|
Year ended
December 31, 2016
|
Year ended
December 31, 2015
|
|
Expected
life (in years)
|
3.50
|
3.50
|
|
Volatility
|
78.8
%
|
80.5
%
|
|
Risk
free interest rate
|
0.88
%
|
0.95
%
|
|
Expected
Dividend Rate
|
0
|
0
|
Summary of the option activity for the period ended December 31,
2016 is as follows:
|
|
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2015
|
225,000
|
$
0.00
|
—
|
$
0.00
|
|
Granted
|
225,000
|
0.20
|
—
|
0.00
|
|
Forfeited
or expired
|
(50,000
)
|
—
|
—
|
0.00
|
|
Exercised
|
—
|
—
|
—
|
|
|
Outstanding
at January 1, 2016
|
400,000
|
$
0.20
|
3.25
|
$
0.00
|
|
Granted
|
225,000
|
0.12
|
3.50
|
0.00
|
|
Forfeited
or expired
|
(75,000
)
|
0.22
|
2.00
|
0.00
|
|
Exercised
|
—
|
—
|
—
|
|
|
Outstanding
at December 31, 2016
|
550,000
|
$
0.20
|
3.00
|
0.00
|
|
Exercisable
at December 31, 2016
|
225,000
|
$
0.20
|
—
|
0.00
|
|
Vested
and expected to vest
|
325,000
|
$
0.20
|
3.00
|
0.00
|
The unrecognized compensation cost for unvested stock option awards
outstanding at December 31, 2016 was approximately $21,032 to be
recognized over approximately 3years.
Restricted Stock Grants
During the period ended December 31, 2016 the
Company granted an aggregate of 332,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.16 per share based upon the closing price of shares
of Common Stock on the date of the grant. These shares were
fully vested on the date of the grant. The Company recorded $53,000
in share-based compensation expense related to restricted stock
grants.
During the period ended December 31, 2015 the
Company granted an aggregate of 132,000 shares of
restricted Common Stock to the key employees in consideration of
services rendered. The weighted average fair value of the shares
amounted to $0.34 per share based upon the closing price of shares
of Common Stock on the date of the grant. These shares
were fully vested on the date of the grant. The Company recorded
$44,880 in share-based compensation expense related to restricted
stock grants.
|
|
|
|
|
Nonvested
restricted stock at January 1, 2015
|
—
|
$
—
|
|
Granted
|
132,000
|
0.34
|
|
Vested
|
(132,000
)
|
0.34
|
|
|
—
|
—
|
|
Nonvested
restricted stock at December 31, 2015
|
—
|
$
—
|
|
Granted
|
332,000
|
0.16
|
|
Vested
|
(332,000
)
|
0.16
|
|
|
—
|
—
|
|
Nonvested
restricted stock at December 31, 2016
|
—
|
$
—
|
2008 Stock Incentive Plan
The 2008 Incentive Plan is designed to provide an additional
incentive to executives, employees, directors and key consultants,
aligning the long term interests of participants in the 2008
Incentive Plan with those of the Company and the Company’s
stockholders. The 2008 Incentive Plan provides that up to 8 million
shares of the Company’s common stock may be issued pursuant
to awards granted under the 2008 Incentive Plan. As of December 31,
2016, 5,339,000 shares of common stock remained available for
future issuance under the 2008 Incentive Plan.
2008 Employee Stock Purchase Plan
On February 19, 2008, the Board of Directors authorized the
adoption of the 2008 Employee Stock Purchase Plan (the
“Purchase Plan”), subsequently approved by the
stockholders on April 25, 2008, which is designed to encourage
and enable eligible employees to acquire a proprietary interest in
the Company’s common stock. The Purchase Plan provides that
up to 2 million shares of the Company’s common stock may
be issued under the Plan. No shares have been issued under the
Plan.
NOTE 15 – EMPLOYEE BENEFIT PLANS
The Company has a defined contribution savings plan under Section
401(k) of the Internal Revenue Code. The 401(k) Plan is a defined
contribution plan, which covers substantially all U.S.-based
employees of the Company and its wholly-owned subsidiaries who have
completed three months of service. The 401(k) Plan provides that
the Company will match 50% of the participant salary deferrals up
to 3% of a participant’s compensation for all participants.
The Company contributed $13,352 and $8,718 during the years ended
December 31, 2016 and, 2015, respectively.
NOTE 16 – MAJOR CUSTOMERS AND VENDORS
Major Customers
The Company has several ATSE contracts with government agencies, of
which net revenue from four customers during the year ended
December 31, 2016 represented 63% of the total net revenue. Four
customers accounted for 88% of total accounts receivable as of
December 31, 2016, which was subsequently collected in
2017.
Net revenue from five customers during the year ended December 31,
2015 represented 80% of the total net revenue. Accounts receivable
due from three customers at December 31, 2015 amounted to 91% of
total accounts receivable at that date.
Major Vendors
The Company purchased products and services for fulfillment of ATSE
contracts from several vendors. As of December 31, 2016 and 2015,
accounts payable due to these vendors amounted to 47% and 38% of
total accounts payable, respectively.
NOTE 17 – INCOME TAXES
As of December 31, 2016, the Company has approximately $7.55
million of federal and state net operating loss carryforwards
available to offset future taxable income, if any, through 2034.
These net operating losses begin to expire in 2028. If,
however, there is an ownership change in the Company,
some of
the Company’s tax attributes may limit
the Company’s ability to utilize loss
carryforwards. Therefore, these operating loss carryforwards could
become limited in future years if ownership changes were to occur
as defined in the Internal Revenue Code and similar state income
tax provisions. The Company files income tax returns with the U.S.
Internal Revenue Service and with the revenue services of various
states.
The Companyís deferred tax assets and liabilities at December
31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
$
3,112,000
|
$
2,780,000
|
|
Property
and Equipment
|
(490,000
)
|
(500,000
)
|
|
Other
|
—
|
—
|
|
|
2,622,000
|
2,280,000
|
|
Valuation
allowance
|
(2,622,000
)
|
(2,280,000
)
|
|
Net
deferred tax asset
|
$
—
|
$
—
|
The Company’s recorded income tax, net of the change in the
valuation allowance for each of the periods presented, is as
follows:
|
|
|
|
|
|
|
|
Current
|
|
|
|
Federal
|
$
—
|
$
—
|
|
State
|
—
|
—
|
|
|
—
|
—
|
|
|
|
|
|
Deferred
|
|
|
|
Federal
|
(369,000
)
|
(130,000
)
|
|
State
|
(55,000
)
|
(20,000
)
|
|
|
(424000
)
|
(150,000
)
|
|
Change
in valuation allowance
|
424,000
|
150,000
|
|
Income
tax expense
|
$
—
|
$
—
|
Management has evaluated the recoverability of the deferred income
tax assets and the level of the valuation allowance required with
respect to such deferred income tax assets. After considering all
available facts, the Company fully reserved for its deferred tax
assets because management believes that it is more likely than not
that their benefits will not be realized in future periods. The
Company will continue to evaluate its deferred tax assets to
determine whether any changes in circumstances could affect the
realization of their future benefit. If it is determined in future
periods that portions of the Company’s deferred income tax
assets satisfies the realization standard, the valuation allowance
will be reduced accordingly.
A reconciliation of the expected Federal statutory rate of 35% to
the Company’s actual rate as reported for each of the periods
presented is as follows:
|
|
|
|
|
|
|
|
Expected
statutory rate
|
(35.0
)%
|
(35.0
)%
|
|
State
income tax rate, net of Federal benefit
|
(5.2
)%
|
(5.2
)%
|
|
Permanent
differences
|
|
|
|
Other
|
—
%
|
—
%
|
|
|
40.2
|
40.2
%
|
|
Valuation
allowance
|
(40.2
)%
|
(40.2
)%
|
|
|
—
%
|
—
%
|
NOTE 18 – SUBSEQUENT EVENTS
Merger Agreement
On February 10, 2017, the Company entered into an Agreement
and Plan of Merger (the “Merger Agreement”) to combine
the businesses of Brekford and KeyStone Solutions, Inc., a Delaware
corporation (“KeyStone”). The Merger Agreement provides
that Brekford and KeyStone will each engage in merger transactions
(the “Mergers”) with separate wholly-owned subsidiaries
of a newly-formed company, Novume Solutions, Inc., a Delaware
corporation (“Novume”). Under one merger transaction
(the “Brekford Merger”), one wholly-owned subsidiary of
Novume will merge with and into Brekford, leaving Brekford as a
wholly-owned subsidiary of Novume. Under a separate merger
transaction (the “KeyStone Merger”), KeyStone will
merge with and into another wholly-owned subsidiary of Novume
(“KeyStone Merger Sub”), with KeyStone Merger Sub
surviving such merger.
The time at which the
Mergers are completed in accordance with the Merger Agreement is
referred to as the “Effective Time”. As soon as
practicable after the Effective Time, Brekford will change its name
to “Brekford Traffic Safety, Inc.” and KeyStone Merger
Sub will change its name to “KeyStone Solutions,
Inc.”
Merger Consideration
As consideration for the Mergers, each outstanding share of the
common stock, par value $0.0001 per share, of Brekford
(“Brekford Common Stock”) immediately prior to the
Effective Time will become convertible into and exchangeable for
1/15
th
of a share of common stock, par value
$0.0001 per share, of Novume (“Novume Common Stock” and
such ratio, the “Brekford Exchange Ratio”). Each
outstanding share of the common stock, par value $0.0001 per share,
of KeyStone (“KeyStone Common Stock”) immediately prior
to the Effective Time, will become convertible into and
exchangeable for 1.9975 shares of Novume Common Stock, and each
outstanding share of the Series A Cumulative Convertible Redeemable
Preferred Stock, par value $0.0001 per share, of KeyStone
(“KeyStone Preferred Stock”) will become convertible
into and exchangeable for 1.9975 shares of the Series A Cumulative
Convertible Redeemable Preferred Stock of Novume (“Novume
Preferred Stock” and such ratio, the “KeyStone Exchange
Ratio”). The outstanding warrants and options to purchase
shares of Brekford Common Stock and KeyStone Common Stock, as
applicable, shall be exchanged for warrants and options to purchase
Novume Common Stock at the Brekford Exchange Ratio or the KeyStone
Exchange Ratio, as applicable. Collectively, the forgoing is
referred to herein as the “Merger
Consideration”.
The Merger Consideration, and each of the Brekford Exchange Ratio
and the KeyStone Exchange Ratio, were determined so that,
immediately after the Effective Time, the pre-merger stockholders
of Brekford will own such portion of the capital stock of Novume as
shall be equal to approximately 20% of the issued and outstanding
Novume
Common
Stock
, on a fully-diluted
basis, and the pre-merger stockholders of KeyStone will own that
portion of the capital stock of Novume as is equal to approximately
80% of the issued and outstanding Novume Common Stock, on a
fully-diluted basis.
Contribution and Unit Purchase Agreement
On February 6, 2017, the Company entered into a Contribution and
Unit Purchase Agreement (the “ LB&B Agreement”)
with LB&B Associates Inc. (the “Purchaser”) and
Global Public Safety, LLC (“GPS”).
The closing for the transaction set forth in the Agreement occurred
on February 28, 2017 (the “LB&B Closing”) and on
such date the Company contributed substantially all of the assets
and certain liabilities related to its vehicle services business
(the “Business”) to GPS. After the LB&B Closing,
the Company will continue to own and run other business operations
that are not related to the Business.
On the LB&B Closing, GPS sold units representing 80.1% of the
units of GPS to the Purchaser for $6,048,394, after certain
purchase price adjustments of prepaid expenses and unbilled
customer deposits. $4,048,394 was paid in cash, including a
$250,000 deposit that was paid on February 6, 2017, and $2,000,000
was paid by Purchaser issuing the Company a promissory note (the
“Promissory Note”). After the LB&B Closing, the
Company continues to own 19.9% of the units of GPS.
The Promissory Note is subordinated to the Purchaser’s senior
lender and accrues interest at a rate of 3% per annum. The maturity
date of the Promissory Note is March 31, 2022. The Promissory Note
is to be repaid as follows: (a) $75,000 plus all accrued interest
on each of September 30, 2017; December 31, 2017; March 31, 2018,
June 30, 2018 and September 30, 2018 (or, in the event any such
date is not a business day, the first business day after such
date), (b) $100,000 plus all accrued interest on each of December
31, 2018; March 31, 2019; June 30, 2019 and September 30, 2019 (or,
in the event any such date is not a business day, the first
business day after such date) (c) $125,000 plus all accrued
interest on each of December 31, 2019; March 31, 2020; June 30,
2020; September 30, 2020, December 31, 2020; March 31, 2021, June
31, 2021; September 30, 2021; and December 31, 2021 (or, in the
event any such date is not a business day, the first business day
after such date), and (d) $100,000 on March 31, 2022.
The Promissory Note is secured pursuant to the terms of a Pledge
Agreement (the “Pledge Agreement”) between the Company
and Purchaser. Pursuant to the Pledge Agreement the Purchaser
granted the Company a continuing second priority lien and security
interest in the Purchaser’s units of GPS subject to liens of
the Purchaser’s senior lender.
Pursuant to the Agreement, the Company and GPS executed a
Transition Services Agreement (the “Transition Services
Agreement”). Pursuant to the Transition Services Agreement,
the Company will perform certain support services to promote the
efficient transition of the Business for the fees set forth in the
Agreement.
In connection with the Agreement the Company entered into an
Amended and Restated Limited Liability Company Agreement of Global
Public Safety, LLC (the “LLC Agreement”). The LLC
Agreement provides for the operations of GPS and provides that all
limited liability company powers of the Company shall be exercised
by and under the authority of the Board of Representatives except
as otherwise provided by the LLC Agreement or applicable law. The
initial number of representatives constituting the Board of
Representatives is three, of which the Company appointed one member
and if the number of Board of Representatives is increased the
Company shall be able to appoint the number of members required to
maintain 1/3 of the seats on the Board of
Representatives.
Pursuant to a month-to-month sublease agreement between GPS and the
Company, the Company will continue to occupy 3,362 square feet of
office space, located at 7020 Dorsey Road, Suite C, Hanover,
Maryland 21076.
The Company also entered into a Pre-Novation Agreement with GPS
pursuant to which performance under certain contracts being
assigned to GPS will be made while these contracts are being
assigned to GPS. The Company will also enter into a Novation
Agreement pursuant to which the government contracts being assigned
to GPS will be transferred.
Director Resignation
On February 18, 2017, Edward Parker notified Brekford Corporation
(the “Company”) that he was resigning from the
Company’s board of directors effective
immediately.