SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
¨ 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
(Exact name of registrant as specified in its charter)
7020 Dorsey Road, Hanover, Maryland 21076
(Address of Principal Executive Office) (Zip Code)
(Registrant’s telephone number, including area code)
(Former name, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer ¨ 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 44,248,569 shares of Common Stock, par value $0.0001 per share (“Common Stock”) outstanding as of October 18, 2012.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet (Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations (Unaudited)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2012 and 2011
NOTE 1 – DESCRIPTION OF THE BUSINESS
Brekford Corp. (OTCBB; OTCQB: BFDI) headquartered in Hanover, Maryland is a technology services provider of mobile computer and video systems through its vehicle upfitting services to homeland security agencies and federal, state, and municipal law enforcement agencies and offers traffic safety solutions to municipalities, including automated photo speed enforcement and red light camera solutions. Brekford is an established company which, for more than a decade, has provided services to branches of the U.S. military, various federal entities and numerous security and public safety agencies throughout the United States. Brekford provides these departments and agencies with an end-to-end suite of rugged mobile information technology (IT), vehicle upfitting services, and automated traffic safety photo enforcement technology solutions.
Brekford is a one-stop shop with its unique 360° approach to vehicle upfitting installations, cutting edge rugged mobile technology, and automated traffic enforcement services for jurisdictions in the United States. We provide bumper-to-bumper vehicle modification and automated traffic enforcement products, road safety camera programs, including red light and speed photo enforcement systems, and back office processing services. The Brekford 360° approach provides our customers with a one-stop engineered solution. Our commitment to top quality services, along with the core values that our employees strongly uphold: integrity; accountability; respect; excellence; and teamwork; is why we believe Brekford is the premier all-around vehicle upfitter and automated traffic safety technology solutions provider.
Depending upon the context, the terms “BFDI,” “Brekford Corp.,” “Company,” “we,” “our,” and “us,” as used in these notes refer to Brekford Corp.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of 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
Preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Actual results could differ from those estimates.
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no impact on previously reported net income or retained earnings.
Concentration of Credit Risk
The Company maintains cash accounts with major financial institutions. From time to time, amounts deposited may exceed the FDIC insured limits.
Accounts receivable are carried at estimated net realizable value. The Company has a policy of reserving for uncollectable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company calculates the allowance based on a specific analysis of past due balances. Past due status for a particular customer is based on how recently payments have been received from that customer. Historically, the Company’s actual collection experience has not differed significantly from its estimates, due primarily to credit and collections practices and the financial strength of its customers.
The Company’s practice of reserving for uncollectable citations is based on its best estimate of the amount of probable losses. This estimate accounts for an initial loss in expected receivables from the existing population of uncollected receivables. The Company calculates allowances based on the historical information from similar programs in the industry. Past due status is based on varying client business rules for the extension of time allotted for payment. The Company manages both the issuance and the collection of unpaid fines based on the diverse criteria by each contract. Thus, calculating “outstanding” with respect to a normal 30/60/90 day collections timeline is not an exact science. To be conservative, the percentage of allowance is calculated from the first day of citation issuance, but this percentage may be decreased at a later date to include collections received. Historically, the Company’s actual collection experience has not differed significantly from its estimate due to its ability to leverage its relationship with state and local governments to secure collection of citations issued, as many states will not renew vehicle registrations with outstanding, unpaid citations.
Inventory principally consists of hardware and third-party packaged software that is modified to conform to customer specifications and held temporarily until the completion of a contract. These amounts are stated at the lower of first-in, first-out (“FIFO”) cost or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture, vehicles, computer equipment and software and phone equipment is calculated using the straight-line method over the estimated useful lives (two to ten years), and leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term (which is three to five years).
The Company recognizes revenue when all four basic criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery or installation has been completed; (iii) the customer accepts and verifies receipt; and (iv) collectability is reasonably assured. The Company considers delivery to its customers to have occurred at the time in which products are delivered and/or installation work is completed and the customer acknowledges its acceptance of the work.
The Company provides its customers with a warranty against defects in the installation of its vehicle upfitting solutions for one year from the date of installation. Warranty claims were $23,448 and $20,854 for the nine months ended September 30, 2012 and 2011, respectively. The Company also performs warranty repair services on behalf of the manufacturers of the equipment it sells. Effective January 2011, the Company offers separately priced extended warranty and product maintenance contracts to its customers on the equipment sold by the Company. Revenues from extended warranty services are apportioned over the period of the extended warranties service contracts and the warranty costs are expensed as incurred. Revenue from extended warranties for the nine months ended September 30, 2012 and 2011 amounted to $251,416 and $132,658, respectively.
For automatic traffic enforcement revenue, the Company recognizes the revenue on the date that the Company determines a valid violation has occurred. The Company records revenue related to automated traffic violations for the Company’s share of the violation amount.
The Company accounts for stock incentive plans by measurement and recognition of compensation expense for all share-based awards on estimated fair values, net of estimated and actual forfeitures, on a straight line basis over the period during which the employee is required to provide services in exchange for the award.
The Company accounts for treasury stock using the cost method. As of September 30, 2012, 10,600 shares of our Common Stock were held in treasury at an aggregate cost of $5,890.
The Company uses the liability method to account for income taxes. Income tax expense includes income taxes currently payable and deferred taxes arising from temporary differences between financial reporting and income tax bases of assets and liabilities. Deferred income taxes are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense, if any, consists of the taxes payable for the current period. Valuation allowances are established when the realization of deferred tax assets are not considered more likely than not.
The Company files income tax returns in the U.S. federal jurisdiction, and in various state jurisdictions. The Company is no longer subject to U.S. federal, state and local examinations by tax authorities for years prior to 2009. 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 is 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.
Earnings per Share
Basic earnings per share are computed by dividing net income available to holders of our Common Stock by the weighted average number of shares of Common Stock outstanding during the period. Diluted earnings per share are computed by adjusting the denominator of the basic earnings per share computation for the effect of potentially dilutive common shares outstanding during the period.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, accounts receivable, accounts payable and accrued expenses approximate their fair values based on the short-term maturity of these instruments. The carrying amount of the Company’s note obligations approximate fair value, as the terms of these notes are consistent with terms available in the market for instruments with similar risk.
Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, requires that an enterprise report selected information about operating segments in its financial reports issued to its shareholders. Based on the analysis performed by the Company, management has determined that the Company only has one operating segment, which is Traffic Safety Solutions. The chief operating decision-makers use combined results to make operating and strategic decisions, and, therefore, the Company believes that it is not required to disclose information for any additional segments.
Newly Issued Accounting Pronouncements
Management does not believe that any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on our financial statements.
NOTE 3 – LINE OF CREDIT AND NOTES PAYABLE - AUTO
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”). The terms of the Equipment Loan will be evidenced by a separate promissory note if the Company requests that loan. As of September 30, 2012 amounts outstanding under the line of credit were $0.
On November 4, 2010, the Company entered into a $500,000 revolving line of credit agreement with a bank. Under this agreement, the Company may repay principal amounts and re-borrow them during the term of the agreement. Interest is payable at the rate of the BBA LIBOR Daily Floating rate plus 4%. The line of credit is collateralized by all assets of the Company and is personally guaranteed by the two principal officers of the Company. The maturity date for the line of credit agreement has been extended to November 30, 2012. As of September 30, 2012 amounts outstanding under the line of credit were $0.
The Company financed certain vehicles and equipment under finance agreements. The agreements mature in June 2013, September 2014, March 2017 and May 2017. The agreements require various monthly payments under the finance agreements. As of September 30, 2012 and 2011, financed assets of $94,797 and $44,629, respectively, net of accumulated amortization of $22,799 and $6,461 respectively, are included in property and equipment on the balance sheets.
NOTE 4 – NOTES PAYABLE – STOCKHOLDERS
The Company financed the repurchase of shares of Common Stock and warrants from the proceeds of convertible promissory notes issued on November 9, 2009 by the Company in favor of a lender group that included two directors of the Company, Messrs. C.B. Brechin and Scott Rutherford, and a former director, Mr. Bruce Robinson, in the respective principal amounts of $250,000, $250,000 and $200,000 (each, a “Promissory Note, and together, the “Promissory Notes”). Each Promissory Note bears interest at the rate of 12% per annum and at the time of execution was to be convertible into shares of Common Stock, at the option of each holder, at an original conversion price of $.07 per share. At the time of the execution of the Promissory Notes, the Company agreed to pay the unpaid principal balance of the Promissory Notes and all accrued but unpaid interest on the date that was the earlier of (i) two (2) years from the issue date of the notes, or (ii) ten (10) business days from the date of closing by the Company of any equity financing generating gross proceeds in the aggregate amount of not less than Five Million Dollars ($5,000,000).
On April 1, 2010, the Company and each member of the lender group executed a First Amendment to the Unsecured Promissory Note. Each Promissory Note was amended as described below to:
On December 12, 2011, the Promissory Note issued to Mr. Bruce Robinson was repaid in full by converting the outstanding balance into 1,428,572 shares of Common Stock. As of September 30, 2012 and December 31, 2011, the amounts outstanding under the Promissory Notes totaled $500,000.
NOTE 5 – 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 September 30, 2012 and 2011, capital lease assets of $1,835,683 and $932,637, respectively, net of accumulated amortization of $454,889 and $97,935, respectively, were included in property and equipment on the balance sheets.
The Company rents office space under separate non-cancelable operating leases expiring in June 2013 and January 2015.
The Company records rent expense over the term of the lease on a straight-line basis. Rent expense amounted to $146,164 and $143,676 for the nine months ended September 30, 2012 and 2011, respectively.
The Company leases approximately 2,500 square feet of office space from a related party. Rent expense amounted to $31,732 and $32,297 for the nine months ended September 30, 2012 and 2011, respectively.
NOTE 6 – MAJOR CUSTOMERS AND VENDORS
The Company has several contracts with government agencies, of which net revenue to one major customer during the nine months ended September 30, 2012 represented 12% of the total net revenue for such nine month period. Accounts receivable due from three customers at September 30, 2012 amounted to 46% of total accounts receivable at that date.
The Company has several contracts with government agencies, of which net revenue three major customers during the nine months ended September 30, 2011 represented 59% of the total net revenue for such nine month period. Accounts receivable due from four customers at September 30, 2011 amounted to 51 % of total accounts receivable at that date.
The Company purchased substantially all rugged IT products that it resold during the periods presented from a single distributor. Revenues from rugged IT products amounted to 59% and 46% of total revenues for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012 and 2011, accounts payable due to this distributor amounted to 53% and 66% of total accounts payable, respectively.
NOTE 7 - STOCKHOLDERS’ EQUITY
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On September 7, 2010, the Company issued a press release announcing that its board of directors authorized a stock repurchase program permitting the Company to repurchase up to $500,000 in shares of its outstanding Common Stock 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 third quarter of 2012.
The Company repurchased the following Common Stock in open market transactions during the nine months ended September 30, 2012 under this program:
NOTE 8 – SHARE-BASED COMPENSATION
The Company has issued restricted stock and warrants to purchase shares of Common Stock (“Common Stock Purchase Warrants”) and has granted non-qualified stock options to certain employees and non-employees at the discretion of the board of directors. On April 25, 2008, the Company’s shareholders approved the 2008 Stock Incentive Plan (the “Plan”). To date, there have been no stock option grants under the Plan. All stock options granted to employees were granted under previous arrangements, have exercise prices that are less or equal to the fair value of the underlying common stock at the date of grant and have terms of ten years.
Common Stock Purchase Warrants
For the nine months ended September 30, 2012 and 2011, there was no share-based compensation expense for Common Stock Purchase Warrants. As of September 30, 2012, there are no unvested Common Stock Purchase Warrants.
A summary of warrant activity is as follows for nine months ended September 30, 2012:
Restricted Stock Grants
For the nine months ending September 30, 2012, the Company granted an aggregate of 25,000 shares of restricted stock to a consultant as part of its service agreement. The weighted average value of the shares amounted to $0.42 per share based upon the closing price of shares of the Company’s Common Stock on the date of the grant. These shares were fully vested on the date of the grant. The Company recorded $10,500 in share-based compensation expense during period ending September 30, 2012 related to restricted stock grants. For the nine months ending September 30, 2012 and 2011, the Company recorded $10,500 and $134,100, respectively, in share-based compensation expense related to restricted stock grants.
NOTE 9 – INVENTORY
As of September 30, 2012 and December 31, 2011, inventory consisted of the following:
NOTE 10 – NET INCOME PER SHARE
Basic net income per share is computed by dividing net income available to holders of our Common Stock by the weighted average number of shares of Common Stock outstanding during the period. Diluted net income per share is computed by adjusting the denominator of the basic income per share computation for the effect of all dilutive potential shares of Common Stock outstanding during the period.
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 and nine months ended September 30, 2012 and 2011 and the financial condition of Brekford Corp. at September 30, 2012. The discussion and analysis should be read in conjunction with the condensed financial statements and accompanying notes included herein, as well as Brekford Corp.’s audited financial statements for the year ended December 31, 2011 filed with its Annual Report on Form 10-K on March 9, 2012.
Unless the context clearly requires otherwise, the use of the terms “Brekford”, “the Company”, “we”, “us” and our” in this report are references to Brekford Corp.
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Readers of this report should be aware of the speculative nature of “forward-looking statements.” Statements that are not historical in nature, including those that include the words “anticipate”, “estimate”, “should”, “expect”, “believe”, “intend”, and similar expressions, are based on current expectations, estimates and projections about, among other things, the industry and the markets in which we operate, and they are not guarantees of future performance. Whether actual results will conform to expectations and predictions is subject to known and unknown risks and uncertainties, including risks and uncertainties discussed in this report; general economic, market, or business conditions and their effects; industry competition, conditions, performance and consolidation; changes in applicable laws or regulations; changes in the budgets and/or public safety priorities of our customers; economic or operational repercussions from terrorist activities, war or other armed conflicts; the availability of debt and equity financing; and other circumstances beyond our control. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements, and there can be no assurance that the actual results anticipated will be realized, or if substantially realized, will have the expected consequences on our business or operations.
Forward-looking statements speak only as of the date the statements are made. Except as required by applicable laws, we do not intend to publish updates or revisions of any forward-looking statements we make to reflect new information, future events or otherwise. If we update one or more forward-looking statements, then no inference should be drawn that we will make additional updates with respect thereto or with respect to other forward-looking statements.
Brekford is a leading public safety technology service provider of fully integrated automated traffic safety solutions, rugged mobile information technology (IT) and vehicle up-fitting services to federal, state, and municipal law enforcement agencies. The automated traffic safety solutions to municipalities, includes automated photo speed enforcement and red light camera solutions. Brekford’s combination of vehicle upfitting services, cutting edge mobile and video technology, and automated traffic enforcement services offers a unique 360-degree solution for any organization, including homeland security, branches of the U.S. military, various federal and public safety agencies throughout the United States .
Brekford is a one-stop shop with its unique 360-degree approach to vehicle upfitting installations, cutting edge rugged mobile technology, and automated traffic enforcement services for jurisdictions and municipalities. We provide bumper-to-bumper vehicle modification, automated traffic enforcement products, road safety camera programs, including red light and speed photo enforcement systems, and back office processing services. The Brekford 360-degree approach provides our customers with a one-stop engineered solution. Our commitment to top quality services, along with the core values that our employees strongly uphold: integrity; accountability; respect; excellence; and teamwork; is why we believe Brekford is the premier all-around vehicle upfitting and automated traffic safety technology solutions provider.
Products and Services
Public safety is a major concern for most communities – especially as populations grow, public safety budgets are reduced. One way to help make streets safer while reducing workload is a well-run photo red light or speed enforcement program. The objective of photo enforcement is to help reduce the incidences of aggressive driving through voluntary compliance. Revenue generated from fines routinely goes directly back into supporting other public safety initiatives.
A 1999 study using a sample of 4,526 police reports relating to motor vehicle crashes on public roads in four urban areas showed that 22% of these crashes were caused by the driver disobeying a traffic control device. (Synthesis and Evaluation of Red-Light Running Automated Enforcement Programs in the United States. FHWA-IF-00-004, Sep. 1999). The study also showed that motorists are more likely to be injured in crashes involving a failure to obey a traffic control device than in other types of crashes. Forty-five percent of these crashes cause injuries, compared to 30% for other types of crashes.
Speeding and failure to obey traffic control devices are estimated to cause more than 180,000 crashes every year, resulting in approximately 1,000 deaths and 90,000 injuries a year. Although opposition to red light cameras cite the increase in rear end collisions as cause for disapproval of cameras, a recent study conducted by the Insurance Institute for Highway Safety (Feb. 2008) reported that red-light cameras reduce front-into-side collisions and overall injury crashes. Because the types of crashes prevented by red light cameras tend to be far more severe than rear-end crashes, research has shown there is a positive aggregate benefit. Photo Enforcement solutions can reduce collisions, injuries and deaths by providing a useful tool for municipalities and law enforcement agencies – without unduly taxing drivers who do not break the law. Today, nearly 400 communities across the US operate red light or speed camera enforcement programs.
Brekford’s automated traffic safety enforcement products offer intersection safety (red light), photo speed, work zone and school bus enforcement options by way of a complete suite of solution-based products. By assembling a team of industry professionals with the most experience in this field, we have developed equipment and a full turn-key solution that we believe will ensure the success of any program. Having the advantage of a team with experience, we have created and implemented some of the most cutting-edge features into our design – while constructing end-to-end systems specifically with our clients’ needs in mind.
Automatic Traffic Safety Enforcement - Photo Speed & Red light Enforcement
Automatic traffic enforcement systems are one of a wide range of measures that are effective at reducing vehicle speeds and crashes. The automated speed enforcement (ASE) system is an enforcement technique with one or more motor vehicle sensors producing recorded images of motor vehicles traveling at speeds above a defined threshold. Images captured by the ASE system are processed and reviewed in an office environment and violation notices are mailed to the registered owner of the identified vehicle. ASE, if used, is one technology available to law enforcement as a supplement and not a replacement for traditional enforcement operations. Evaluations of ASE, both internationally and in the United States have identified some advantages over traditional speed enforcement methods. These include:
Financial Services- Revenue Reclamation Services
Beyond traditional tax collection on income or property - both subject to levies and encumbrances enforcement - 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. Through its wholly-owned subsidiary, 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
● Credit Reporting
● Income Interception & Garnishment Services
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 Nine Months Ended September 30, 2012 and 2011
The following tables summarize selected items from the statement of operations for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.
Revenues for the nine months ended September 30, 2012 amounted to $12,169,891 as compared to revenues of $11,457,425 for the nine months ended September 30, 2011, representing an increase of $712,466 or 6.22%. The change was due to an increase in revenue from electronic ticketing systems and automatic traffic enforcement program, offset by a decrease in sales of Rugged IT Products and delay in the execution of Company’s major contracts.
Cost of Revenues
Cost of revenue for the nine months ended September 30, 2012 amounted to $9,228,905 as compared to $8,390,924 for the nine months ended September 30, 2011, an increase of $837,981 or 9.99% primarily due to increase in cost for electronic ticketing systems, automatic traffic enforcement program.
Gross profit for the nine months ended September 30, 2012 amounted to $2,940,986 as compared to $3,066,501 for the nine months ended September 30, 2011, a decrease of $125,515 or 4.09% primarily due to lower profit margins from electronic ticketing systems and automated traffic revenue.
Salaries and Related Expenses
Salaries and related expenses for the nine months ended September 30, 2012 amounted to $1,159,193 as compared to $878,678 for the nine months ended September 30, 2011, an increase of $280,515 or 31.92% due to additional personnel needed for automated traffic enforcement program, marketing, information technology and the related employee benefits for the employees.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 2012 amounted to $1,472,885 as compared to $1,154,945 for the nine months ended September 30, 2011, an increase of $317,940 or 29.43% due to marketing expense, stock-based compensation expense; corporate development expenses and professional fees related to legal, audit and regulatory compliance, travel and related costs, corporate insurance and depreciation and amortization costs.
Net income for the nine months ended September 30, 2012 amounted to $198,895 as compared to $938,960 for the nine months ended September 30, 2011, a decrease of $740,065 or 78.82% primarily due to a lower gross profit margins, increase in operating expenses and delay execution of Company’s major contracts. We believe the above mentioned operating expenses were necessary for the continued expansion of the Company’s business.
Results of Operations for the Three Months Ended September 30, 2012 and 2011
The following table summarizes selected items from the statement of operations for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.
Revenues for the three months ended September 30, 2012 amounted to $3,933,528 as compared to revenues of $3,988,802 for the three months ended September 30, 2011, a slight decrease of $55,274 or 1.39%. The change is due to a decrease in sales of rugged IT products and delay in the execution of Company’s major contracts.
Cost of Revenues
Cost of revenue for the three months ended September 30, 2012 amounted to $3,147,527 as compared to $ 2,722,119 for the three months ended September 30, 2011, an increase of $425,408 or 15.63% primarily due to an increase in costs for electronic ticketing systems, vehicle upfitting product and services, rugged IT products and automatic traffic enforcement program.
Gross profit for the three months ended September 30, 2012 amounted to $786,001 as compared to $1,266,683 for the three months ended September 30, 2011, a decrease of $480,682 or 37.95% primarily due to lower profit margins from electronic ticketing systems, automated traffic revenue and rugged IT products.
Salaries and related expenses
Salaries and related expenses for the three months ended September 30, 2012 amounted to $375,864 as compared to $282,616 for the three months ended September 30, 2011, an increase of $93,248 or 32.99% due to increased staff for the automated traffic enforcement program, marketing and information technology and the related benefit programs for the employees.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2012 amounted to $425,415 as compared to $451,616 for the three months ended September 30, 2011, a de crease of $26,201 or 5.80% due to decreases in bad debt expense and legal expenses which is offset by increase in expenses related investor relations, marketing and business development activities, corporate insurance and depreciation and amortization costs.
Net Loss / Net Income
Net loss for the three months ended September 30, 2012 amounted to $50,948 as compared to net income of $493,924 for the three months ended September 30, 2011, a decrease of $544,872 or 110.31% primarily due to a lower gross profit margins, increase in operating expenses and delay in execution of Company’s major contracts. We believe the above mentioned expenses were necessary for the continued expansion of the Company’s business.
Financial Condition, Liquidity and Capital Resources
At September 30, 2012, we had total current assets of $6.1 million and current liabilities of $3.4 million resulting in a working capital surplus of $2.7 million.
The Company reported net income of $198,895 for the nine months ended September 30, 2012 and its accumulated deficit was reduced to $6,183,410 at September 30, 2012. Cash flows provided by operations for the nine months ended September 30, 2012 were $1,407,140.
Management believes that the Company’s current level of working capital combined with funds that it expects to generate in its operations during the next 12 months and available from its $3,500,000 line of credit facility will be sufficient to sustain the business through at least October 1, 2013. While the Company has taken certain measures to conserve its capital and maintain its liquidity as it continues the effort to pursue its business initiatives, there can be no assurance that the Company will be successful in its efforts to expand its operations or that the expansion of its operations will improve its operating results. The Company also cannot provide any assurance that unforeseen circumstances, such as the continuation, or further deterioration, of the current weak economy, will not have a material adverse effect on the business that could require it to raise additional capital or take other measures to sustain operations in the event that outside sources of capital are not available. Although the Company has no specific indication that its business will be affected by the current weakened economic conditions or at a level beyond management’s ability to manage this risk, this matter is an uncertainty that is under continuous review by management. The weakened economy could also have an effect on the Company’s ability to obtain external funding if needed. If the Company encounters unforeseen circumstances, then it may need to curtail certain of its operations. Although management believes the Company has access to adequate capital resources, it has not secured any commitments for new financing at this time nor can it provide any assurance that new capital will be available to it on acceptable terms, if at all.
Management expects to incur a significant increase in working capital requirement for the Company’s continued expansion in the automated traffic enforcement business but expects to cover the requirements of this expansion with funds it anticipates to generate in its operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
In our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, our most critical accounting policies and estimates upon which our fiscal status depends were identified as those relating to accounts receivables allowances, revenue recognition, warrants and other derivative financial instruments and income taxes. We have reviewed our polices and believe that those policies remain our most critical accounting policies for the nine months ended September 30, 2012, and that no material changes therein have occurred.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company is required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified by or pursuant to the Exchange Act, and that such information is accumulated and communicated to our management, including our principal executive officer and principal accounting officer (collectively, the “CEO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
An evaluation of the effectiveness of the Company’s disclosure controls as of September 30, 2012 was carried out under the supervision and with the participation of management, including the CEO. Based on that evaluation, management, including the CEO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2012, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not a party to pending legal proceedings during the period ended September 30, 2012.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
During the period ended September 30, 2012, the Company issued an aggregate of 25,000 shares of restricted Common Stock to a consultant as equity compensation for future services to be rendered to the Company. Based on a per share price of $0.42 on the date of grant, these shares represent $10,500 in services to be rendered by the consultant. The shares were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), as a transaction by an issuer not involving a public offering. 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
In September 7, 2010, the Company’s board of directors adopted a stock repurchase program which permitted the Company to purchase up to $500,000 in shares of Common Stock from time to time over a 12-month period in open market transactions or privately-negotiated transactions at the Company’s discretion. On September 7, 2011, the board of directors extended the program for an additional 12 months, until September 7, 2012. On September 28, 2012, the board of directors approved a new stock repurchase program which authorizes the Company to repurchase the $363,280 in shares of Common Stock that were not repurchased under the prior program. The new program’s terms and conditions are the same as under the prior program, except that the period during which shares may be repurchased is 24 months. The Company publicly disclosed the adoption of each of these plans. Neither the Company nor any of its affiliated purchasers (as defined by Rule 10b-18 under the Exchange Act) purchased any shares of Common Stock during the quarter ended September 30, 2012.
ITEM 5. OTHER INFORMATION
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.
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.