UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

☑· QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~March 3031, ~~2016~~2017

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

For the transition period from: _____________ to _____________

Commission File Number: 000-52719

———————

Brekford Corp.

(Exact name of registrant as specified in its charter)

———————

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

7020 Dorsey Road, Hanover, Maryland 21076

(Address of Principal Executive Office) (Zip Code)

(443) 557-0200

(Registrant’s telephone number, including area code)

N/A

(Former name, if changed since last report)

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

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

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

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒☑

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

~~Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.~~ The ~~issuer~~registrant had 49,311,264 shares of ~~Common~~common ~~Stock~~stock, par value $0.0001 ~~per~~ per share ~~(“Common Stock”) issued and~~ outstanding as of ~~November~~ 14May 12, ~~2016~~2017.

Brekford Corp.

Form 10-Q

Index

PART I – FINANCIAL INFORMATION		Page
Item 1	Financial Statements	3
Item 1 Financial Statements.		3
	Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 (unaudited)	3
Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016 (Unaudited)		3
	Condensed Consolidated Statements of Operations and Comprehensive loss for the Three and Nine Months Ended September 30, 2016 and 2015 (unaudited)	4
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2017 and 2016 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited)	5
Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited)		5
Notes to Unaudited Condensed Consolidated Financial Statements	~~Notes to Unaudited Condensed Consolidated Financial Statements~~	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 4.	Controls and Procedures	24
Item 4. Controls and Procedures		29
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1. Legal Proceedings		31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 5.	Other Information	25
Item 5. Other Information		31
Item 6.	Exhibits	25
Item 6. Exhibits		31
SIGNATURES		2632
EXHIBIT INDEX		27

PART I – FINANCIAL INFORMATION

ITEM 1. ~~FINANCIAL STATEMENTS~~

FINANCIAL STATEMENTS

Brekford Corp.

Condensed Consolidated Balance Sheets (~~unaudited~~Unaudited)

	September 30, 2016	December 31, 2015
	March 31, 2017	December 31, 2016
ASSETS
CURRENT ASSETS
Cash	$~~593~~2,~~806~~073,338	$~~580~~591,~~400~~618
Accounts receivable, net of allowance of $0 at September 30, 2016 and December 31, 2015	1,677,923	3,781,263
Accounts receivable, net of allowance $0 at March 31, 2017 and December 31, 2016, respectively	161,140	115,106
Unbilled receivables	~~762~~388,~~718~~544	~~304~~314,~~470~~262
Prepaid expenses	38,~~133~~143	7153,~~740~~211
Inventory	472,000	606,471
Note receivable - current, including accrued interest of $5,096 at March 31, 2017	230,096	—
Total current assets	3,544,580	5,344,344
Inventory	281,526	221,186
Property and equipment, net	269,104	223,347
Current assets - discontinued operations	—	1,069,511
Other non-current assets	81,402	179,208
Total current assets	3,172,787	2,364,894
TOTAL ASSETS	$3,895,086	$5,746,899
Property and equipment, net	129,905	208,310
Other non-current assets	—	9,877
Investment in GPS	354,372	—
Note receivable - non-current	1,775,000	—
Non-current assets - discontinued operations	—	40,387
TOTAL ASSETS	$5,432,064	$2,623,468
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses	$1941,~~741,872~~273	$2721,~~979,131~~880
Accrued payroll and related expenses	7453,~~773~~253	9817,~~000~~062
Line of credit, net of fees	836,813	1,402,380
Obligations under other notes payable – current portion	—	20,150
Term loan – current portion, net of fees	166,667	166,667
Derivative liability	17,472	24,360
Deferred revenue	72,080	95,233
Other liabilities	120,000	55,408
Customer deposits	31,863	36,070
Current liabilities - discontinued operations	—	971,466
Obligations under other notes payable – current portion	24,392	29,277
Total current liabilities	1,131,998	1,810,326
Derivative liability	18,228	99,036
Other liabilities	46,179	46,979
Total current liabilities	3,012,867	4,952,773
LONG - TERM LIABILITIES
Notes payable – stockholders	500,000	500,000
Deferred rent, net of current portion	—	6,520
Other notes payable - net of current portion, net of fees	4,409	21,660
Convertible promissory notes, net of debt discounts of $40,853 at December 31, 2016	—	299,147
Deferred rent, net of current portion	43,937	44,923
Long term liabilities - discontinued operations	—	989,520
Term notes payable, net of current portion	333,358
Total long-term liabilities	—	1,295,187
Convertible promissory notes, net of debt discounts and issuance costs of $90,207 and $418,731 at September 30, 2016 and December 31, 2015 , respectively	249,794	221,269
TOTAL LIABILITIES	1,131,998	3,105,513
Total long-term liabilities	1,131,498	787,852
TOTAL LIABILITIES	4,144,365	5,740,625
STOCKHOLDERS’ (DEFICIT) EQUITY
Preferred stock, par value $0.0001 per share; 20,000,000 shares authorized; none issued and outstanding	—	—
Common stock, par value $0.0001 per share; 150,000,000 shares authorized; 49,177,264 and 45,151,254 issued and outstanding, at September 30, 2016 and December 31, 2015, respectively	4,918	4,515
Common stock, par value $0.0001 per share; 150,000,000 shares authorized; 49,311,264 and 45,151,254 issued and outstanding, at December 31, 2016 and 2016, respectively	4,931	4,931
Additional paid-in capital	11,~~498~~518,~~570~~851	1011,~~951~~515,~~491~~472
Treasury Stock, at cost 10,600 shares at September 30, 2016 and December 31, 2015 respectively	(5,890)	(5,890)
Treasury Stock, at cost 10,600 shares at December 31, 2016 and 2016 respectively	(5,890)	(5,890)
Accumulated deficit	(117,~~746~~218,~~378~~051)	(1011,~~942~~996,~~380~~783)
Other comprehensive loss	(499)	(1,462)
Other comprehensive income	225	225
TOTAL STOCKHOLDERS’ (DEFICIT) EQUITY	(249,279)	6,274
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)	4,300,066	(482,045)
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY	$3,895,086	$5,746,899
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$5,432,064	$2,623,468

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

Brekford Corp.

Condensed Consolidated Statements of Operations and Comprehensive ~~loss~~Income (~~unaudited~~Loss)(Unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,
	Three Months Ended March 31
	2016	2015	2016	2015
	2017	2016
NET REVENUE	$3,035,153	5,776,862	10,748,006	14,586,453
Net Revenue	$748,168	$612,946
COST OF REVENUE	2,158,181	4,887,299	8,201,217	11,711,852
Cost of Revenue	295,187	184,130
GROSS PROFIT	876,972	889,563	2,546,789	2,874,601
Gross profit	452,981	428,816
OPERATING EXPENSES
Operating expenses:
Salaries and related expenses	~~484~~426,~~783~~963	~~485~~402,~~740~~180	~~1,489,311~~	~~1,482,003~~
Selling, general and administrative expenses	~~335~~352,~~666~~472	~~397~~301,~~473~~645	~~1,122,333~~	~~1,264,458~~
TOTAL OPERATING EXPENSES	820,449	883,213	2,611,644	2,746,461
Total operating expenses	779,435	703,825
INCOME (LOSS) FROM OPERATIONS	56,523	6,350	(64,855)	128,140
Loss from operations	(326,454)	(275,009)
OTHER (EXPENSE) INCOME
Other (expense) income:
Interest expense	(207,062)	(194,061)	(528,039)	(487,287)
Interest income	5,096	—
Change in fair value of derivative liability	10,500	(54,936)	80,808	(39,228)
Interest expense	(248,352)	(107,588)
Loss on extinguishment of debt	(130,517)	—	(291,912)	—
Change in fair value of derivative liability	6,888	(840)
TOTAL OTHER (EXPENSE) INCOME	(327,079 )	(248,997 )	(739,143 )	(526,515 )
Loss on extinguishment of debt	-	(122,472)
NET LOSS	$(270,556 )	(242,647 )	(803,998 )	(398,375 )
Total other (expense) income	(236,368 )	(230,900 )
OTHER COMPREHENSIVE LOSS – foreign currency translation	(499)	(4,383)	(499)	(4,383)
Loss before income taxes	(562,822)	(505,909)
COMPREHENSIVE LOSS	(271,055 )	(247,030 )	(804,497 )	(402,758 )
Income tax expense (benefit)	(2,068,132 )	—
LOSS PER SHARE – BASIC AND DILUTED	$(0.01)	(0.01)	(0.02)	(0.01)
Net income (loss) from continuing operations	1,505,310	(505,909)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – BASIC	48,360,299	44,632,569	46,710,189	44,630,151
Net income (loss) from discontinued operations	3,273,422	(48,376)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING – DILUTED	48,360,299	44,632,569	46,710,189	44,630,151
Net income (loss)	4,778,732	(554,285)
Other comprehensive income (loss) – foreign currency translation	-	(1,473)
Comprehensive income (loss)	$4,778,732	$(555,758 )
Net income (loss) per share from continuing operations – basic	$0.03	$(0.01)
Net income (loss) per share from discontinued operations – basic	$0.07	$0.00
Net income (loss) per share – basic	$0.10	$(0.01)
Net income (loss) per share from continuing operations – diluted	$0.03	$(0.01)
Net income (loss) per share from discontinued operations – diluted	$0.07	$0.00
Net income (loss) per share – diluted	$0.10	$(0.01)
Weighted average shares outstanding used in computing per share amounts:
Basic	49,311,264	44,625,236
Diluted	49,311,264	44,625,236

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

Brekford Corp.

Condensed Consolidated Statements of Cash Flows (~~unaudited~~Unaudited)

	Nine Months Ended September 30,
	Three Months Ended March 31
	2016	2015
	2017	2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash flows from operating activities:
Net loss	$ (803,998)	(398,375)
Net income (loss)	$4,778,732	$(554,285)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization	9473,~~817~~633	~~150~~24,~~627~~648
Share based compensation	50,590	52,890
Share-based compensation	3,379	3,737
Deferred rent	(986)	44,131
Amortization of debt discount and warrant features	35,349	77,553
Amortization of debt discount	191,874	257,505
Amortization of financing cost	—	20,087
Amortization of finance cost	39,106	35,924
Change in fair value of derivative liability	(6,888)	840
Change in fair value of warrant liability	(80,808)	39,228
Loss on extinguishment of debt	—	122,472
Loss on extinguishment of debt	291,912	—
Gain on sale of Discontinued operations	(5,700,446)	—
Changes in operating assets and liabilities:
Changes in operating assets and liabilities including assets and liabilities held for sale:
Accounts receivable	2(46,~~103,340~~034)	(27,~~133,049)~~561
Unbilled receivables	(~~458~~74,~~248~~281)	(~~291~~81,~~921~~250)
Prepaid expenses and other non-current assets	~~131~~9,~~413~~972	3(28,~~489~~311)
Inventory	~~134~~(60,~~471~~340)	~~(488,886)~~—
Customer deposits	(4,207)	(511)
Accounts payable and accrued expenses	219,392	109,152
Accounts payable and accrued expenses	(1,215,316)	874,399
Accrued payroll and related expenses	36,191	25,944
Accrued payroll and related expenses	(23,227)	57,962
Customer deposits	—	10,071
Deferred revenue	(23,153)	(173,451)
Accrued tax liability	64,593	—
Other liabilities	(800)	(1,300)
Deferred rent	(6,520)	(7)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES	426,780	(1,971,248 )
Other liabilities	25,263	—
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in operating activities from continuing operations	(648,005 )	(261,788 )
Net cash provided by (used in) operating activities from discontinued operations	3,634,882	(26,065)
Net cash provided by (used in) operating activities	2,986,877	(287,853 )
Cash flows from investing activities including non-current assets held for sale:
Net cash used in investing activities from continuing operations	—	—
Net cash provided by (used in) investing activities from discontinued operations	4,772	(24,500)
Net cash provided by (used in) investing activities	4,772	(24,500)
Cash flows from financing activities:
Payments on other notes payable	(20,150)	(7,273)
Repayments on term notes	(334,496)	—
Net change in line of credit	—	13,989
Net cash (used in) provided by financing activities from continuing operations	(354,646 )	6,716
Net cash (used in) provided by discontinued operations financing activities	(1,155,283)	269,762
Net cash (used in) provided by financing activities	(1,509,929)	276,478
Effect of foreign currency translation	—	(11)
Net change in cash	1,481,720	(35,886)
Cash – beginning of year	591,618	580,400
Cash – end of year	$2,073,338	$544,514
Supplemental disclosures of cash flow information:
Cash paid for interest	$33,341	$52,162
Conversion of notes payable in exchange for common stock	$—	$100,000
Note receivable attained in sale of discontinued operations	$2,000,000	$—

Purchase of fixed assets	(140,574	—
NET CASH USED IN INVESTING ACTIVITIES	(140,574)	—
CASH FLOWS FROM FINANCING ACTIVITIES:

Net change in line of credit	(584,960)	1,441,126
Principal payments on capital lease obligations	—	(140,209)
Payments on other notes payable	(22,136)	(18,813)
Borrowings on term notes	500,000	650,000
Payments on term notes	(166,667)	(187,500)
Deferred financing cost	—	(85,444)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES	(273,763 )	1,659,160

Effect of foreign currency translation	963	(4,383)
NET CHANGE IN CASH	13,406	(316,471)
CASH – Beginning of period	580,400	1,112,881
CASH – End of period	$593,806	796,410
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$215,557	181,382
Cash paid for income taxes	800	1,300
SUPPLEMENTAL DISCLOSURES OF NON-CASH INFORMATION
Conversion of notes payable in exchange for common stock	$300,000	—
Discount on convertible debt	$7,104	41,590

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

Brekford Corp.

Notes to Unaudited Condensed Consolidated Financial Statements

For the Three ~~and Nine~~ Months Ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~ 2016

NOTE 1 – DESCRIPTION OF THE BUSINESS

~~Brekford~~ Brekford Corp. (“the Company”) (OTCQX:BFDI), headquartered in Hanover, Maryland, is a leading public safety technology service provider of fully integrated ~~traffic~~ safety solutions, parking enforcement citation management, and mobile technology equipment for public safety vehicle services to state and local municipalities, the U.S. Military and various federal public safety agencies throughout the United States and Mexico. Brekford’s combination of upfitting services, cutting edge technology, and automated traffic safety enforcement (“ATSE”) ~~services~~solutions, ~~offers~~including ~~a unique 360º solution~~speed, ~~for~~red ~~law~~light, ~~enforcement~~and ~~agencies~~distracted ~~and~~driving ~~municipalities~~camera systems. ~~Our~~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 ~~safety~~ ~~solutions~~reliability to our clients. Brekford has one wholly owned subsidiary, Municipal Recovery Agency, LLC, a Maryland limited liability company, formed in 2012 for the purpose of providing collection systems and services for unpaid citations and parking fines.

Prior to March 1, 2017, part of Brekford’s business included sales of products and services focusing on law enforcement vehicles. These products and services included rugged information technology solutions, mobile data, digital video, electronic ticketing, and vehicle upfitting. Rugged information technology solutions included both ruggedized laptops and in-car video solutions, among other technology offerings, in addition to vehicle mounting systems, docking stations, and custom-built packages. Vehicle upfitting solutions included the turnkey installation of various components including rugged technology, as well as sirens, lights, radios, gun racks, and decals.

On February 7, 2017, the Company entered into a Contribution and Unit Purchase Agreement (the “Agreement”) with LB&B Associates Inc. (the “Purchaser”) and Global Public Safety, LLC (“GPS”). The closing for the transaction set forth in the Agreement occurred on February 28, 2017 (the “Closing”) and on such date the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business (the “Business”) to GPS. On the Closing, GPS sold units representing 80.1% of the units of GPS to the Purchaser, and Brekford continues to own 19.9% of the units of GPS. (See Note 4).

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

NOTE 2 – LIQUIDITY

For the ~~nine~~ three months ended ~~September~~March 3031, ~~2016~~2017, the Company incurred a net ~~loss~~income of $~~803~~4,~~998~~778,732, ~~and~~used ~~provided~~ $~~426~~648,~~780~~005 of cash for continuing operations., and provided cash from discontinued operations of $3,634,882. Additionally, at ~~September~~March 3031, ~~2016~~2017 the ~~Company~~company had cash available of $~~593~~2,~~806~~073,338 and a working capital surplus of ~~$531,713~~ ~~and availability under the established credit facility (see Note 4) of~~ $2,~~163~~040,~~187~~789.

On ~~July 12~~February 28, ~~2016 (the “Closing Date”)~~2017, ~~the~~as ~~Company~~presented ~~entered~~elsewhere ~~into a~~in ~~loan~~this ~~and security agreement (the “Loan Agreement”)~~Quarterly ~~with~~Report, ~~Fundamental Funding LLC (~~the ~~“Lender”). The~~ ~~primary~~Company ~~purpose~~completed ~~of the new Loan Agreement is to pay off the prior loan with the lender, and provide additional working capital. The Loan Agreement provides for~~ a ~~multi-draw~~transaction ~~loan~~ to ~~the~~sell ~~Company for (i) the Company’s~~substantially ~~accounts~~all ~~receivable,~~assets ~~the lesser of (y) $2,500,000 or (z) 85% of the Company’s eligible accounts~~ and ~~(ii)~~certain ~~the Company’s~~liabilities ~~inventory~~related ~~advances,~~to ~~the~~its ~~lesser~~vehicle ~~of (y) $500,000 or~~services ~~(z) 50% of the eligible inventory (the “Revolving Loans”)~~business. ~~The~~From ~~maximum amount available to~~ the ~~Company~~approximately ~~under the Loan Agreement for the Revolving Loans is~~ $~~3,500,000 (the “Credit Limit”)~~4.0 Inmillion ~~addition, the Lender agreed to provide the Company with an accommodation loan~~ in ancash ~~amount not to exceed $500~~proceeds,~~000,~~ ~~which shall be repaid in thirty-six (36) equal~~all ~~monthly~~outstanding ~~installments~~debt of ~~principal and interest (~~the ~~“Accommodation~~ ~~Loan”~~Company ~~and~~was ~~together with the Revolving Loans~~retired, ~~the “Loans”). Management believes that the Company’s current level of cash combined with cash that it expects to generate in its operations during the next twelve months~~ including ~~anticipated new customer contracts and funds available from~~ the ~~credit facility (see Note 14) will be~~Loan ~~sufficient to sustain the Company’s business initiatives through at least September 30~~Agreement, ~~2017, but there can be no assurance that these measures will be successful or adequate. In~~ the ~~event~~ ~~that~~Investor ~~the Company’s cash reserves~~Note, ~~cash flow from operations~~ and ~~funds available under~~ the ~~Credit~~notes ~~Facility~~payable ~~(see Note 14) are not sufficient~~ to ~~fund~~two ~~the~~of ~~Company’s future~~its ~~operations~~directors, itMessrs. ~~may~~C.B. ~~need~~Brechin toand ~~obtain additional capital.~~Scott Rutherford.

~~There~~ ~~can~~Management bebelieves ~~no assurance, however,~~ that ~~such~~the ~~financing~~Company’s ~~will~~current belevel ~~available~~of cash ~~or,~~combined ifwith itcash ~~is available,~~ that weit ~~will~~expects beto ~~able~~generate toin ~~structure~~its ~~such~~operations ~~financing~~during onthe ~~terms~~next ~~acceptable~~12 tomonths usincluding ~~and~~anticipated ~~that~~new itcustomer contracts will be sufficient to ~~fund~~sustain ~~our~~the ~~cash~~Company’s business ~~requirements~~initiatives ~~until~~through weat ~~can~~least ~~reach~~May a2018, ~~level~~but ~~of sustained~~there ~~profitable~~can ~~operations~~be ~~and positive cash flows. If we are~~no ~~unable~~assurance tothat ~~obtain~~these ~~the~~measures ~~financing~~will ~~necessary to support our operations, we may~~ be ~~unable~~successful ~~to continue as a going concern~~or adequate. In Wethe ~~currently~~event ~~have no~~that ~~firm~~the ~~commitments~~Company’s ~~for~~cash ~~any additional capital. Further, if we~~reserves ~~issue~~and ~~additional~~cash ~~equity~~flow orfrom ~~debt~~operations ~~securities,~~are ~~stockholders~~not ~~may experience~~sufficient ~~additional~~to ~~dilution~~fund or the Company’s ~~new~~future ~~equity~~operations, ~~securities~~it may ~~have~~ ~~rights,~~need ~~preferences or privileges senior~~ to ~~those~~obtain ~~of existing~~additional ~~holders of our shares of common stock~~capital.

On February 10, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) to combine the businesses of Brekford and KeyStone Solutions, Inc. (“KeyStone”). Upon closing of the merger, Brekford will become a wholly-owned subsidiary of Novume Solutions, Inc., a Delaware corporation (“Novume”). For additional detail regarding this transaction, refer to Subsequent Events (Note 15).

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~~ Municipal Recovery Agency, LLC (“MRA”). Intercompany transactions and balances are eliminated in consolidation. MRA was dissolved in August 2016.

Use of Estimates

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

Reclassifications

Certain amounts in prior-year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements.

Concentration of Credit Risk

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

Accounts Receivable

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

Inventory

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

Property and Equipment

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

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

Revenue Recognition

~~The~~ ~~Company~~For ~~recognizes~~automated ~~revenue~~traffic ~~relating~~safety toenforcement ~~its~~revenue, ~~vehicle~~the ~~upfitting~~Company ~~solutions~~recognizes ~~when~~the ~~all~~revenue ofwhen the ~~following~~required ~~criteria~~collection ~~have~~efforts, ~~been~~from ~~satisfied: (i)~~citizens, ~~persuasive~~are ~~evidence of an arrangement exists; (ii) delivery or installation has been~~ completed; ~~(iii) the customer accepts~~ and ~~verifies~~posted ~~receipt;~~to ~~and~~the ~~(iv) collectability is~~municipality’s ~~reasonably assured~~account. The ~~Company~~respective ~~considers~~municipality ~~delivery~~is ~~to its~~then ~~customers~~billed todepending on ~~have~~the ~~occurred~~terms atof the ~~time~~respective atcontract, ~~which~~typically ~~products~~15 ~~are delivered~~days ~~and/or installation work is completed and~~ after the ~~customer acknowledges~~preceding ~~its~~month ~~acceptance~~while ofcollections ~~the work~~are reconciled.

~~The~~ ~~Company~~For ~~provides~~contracts ~~its~~where ~~customers~~the ~~with~~Company receives a ~~warranty~~percentage ~~against defects in the installation~~ of ~~its vehicle upfitting solutions for one year~~collected ~~from~~fines, ~~the~~revenue ~~date~~is ofcalculated ~~installation. Warranty~~based ~~claims were insignificant for~~upon the ~~three~~posted ~~months~~payments ~~and nine months~~from ~~ended~~citizens ~~September~~multiplied ~~30,~~by ~~2016~~the ~~and~~Company’s ~~September 30, 2015. The~~contractual ~~Company~~percentage. For ~~also~~contracts ~~performs~~where ~~warranty repair services on behalf of~~ the ~~manufacturers~~ ~~of the equipment it sells. The~~ Company ~~also~~receives ~~offers~~a ~~separately~~specific ~~priced~~fixed ~~extended~~monthly ~~warranty~~fee ~~and~~regardless ~~product~~of ~~maintenance contracts~~citations toissued ~~its~~or collected, ~~customers~~revenue onis ~~the~~recorded ~~equipment~~once ~~sold by~~ the ~~Company. Revenues~~amount ~~from~~collected ~~extended warranty services are apportioned over the~~from ~~period~~citizens ofexceeds the ~~extended~~monthly ~~warranty~~fee ~~service~~per ~~contracts~~camera. Our ~~and~~fixed ~~the warranty~~fee ~~costs~~contracts ~~are~~typically ~~expensed~~have asa ~~incurred.~~revenue ~~Revenue~~neutral ~~from~~provision ~~extended~~whereby ~~warranties~~the ~~amounted~~municipality’s payment to ~~$25,054 and $86,594 for~~ the ~~three~~Company ~~and~~cannot ~~nine~~exceed ~~months ended~~amounts ~~September~~collected ~~30,~~from ~~2016,~~citizens ~~respectively,~~within ~~compared~~a ~~to $39,166 and $211,100~~given ~~respectively, for the same periods in 2015~~month.

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

Share-Based Compensation

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

Treasury Stock

The Company accounts for treasury stock using the cost method. As of ~~September~~March 3031, ~~2016~~2017, 10,600 shares of our common stock were held in treasury at an aggregate cost of $5,890.

Income Taxes

~~The~~ 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~~ the realization of deferred tax assets are not considered more ~~likely~~ 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.

7 In the three months Ended March 31 2017 and 2016, we reported financial results for both operations and discontinued operations. ASC 740-20-45 sets down the general rule for allocating income tax expense or benefit between operations and discontinued operations. The general rule requires the computation of tax expense or benefit by entity taking into consideration all items of income, expense, and tax credits. Next, a computation is made taking into consideration only those items related to continuing operations. Any difference is allocated to items other than continuing operations e.g. discontinued operations. Under these general rules, no tax expense or benefit would be allocated to discontinued operations.

~~Earnings~~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) ~~per~~the ~~Share~~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 three months ended March 31, 2017 and 2016. Application of this rule exception results in the allocation of tax expense to discontinued operations with an offsetting amount of tax benefit reported by the continuing operations.

~~Basic~~ ~~earnings~~Overall, ~~(loss)~~we ~~per~~allocated ~~share~~$2,132,725 isand ~~calculated~~$0 byof ~~dividing~~tax ~~net~~expense ~~income (loss) available~~ to ~~common stockholders by the weighted-average~~net ~~number~~income offrom ~~common~~discontinued ~~shares~~operations ~~outstanding~~ and ~~does~~an ~~not~~offsetting ~~include~~tax ~~the effect~~benefit ofto ~~any potentially dilutive common stock equivalents. Diluted earnings (loss) per share is calculated by dividing~~ net ~~income (~~loss) byfrom ~~the~~continuing ~~weighted-average number~~operations ofin ~~shares outstanding, adjusted for~~ the ~~effect~~three ofmonths ~~any~~ended ~~potentially~~March ~~dilutive~~31 ~~common~~2017 ~~stock equivalents. There is no dilutive effect on the loss per share during loss periods. See Note 13 for the calculation of basic~~ and ~~diluted earnings~~2016, ~~(loss) per share~~respectively.

Income (Loss) per Share

Basic income (loss) per share is calculated by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding and does not include the effect of any potentially dilutive common stock equivalents. Diluted income (loss) per share is calculated by dividing net loss by the weighted-average number of shares outstanding, adjusted for the effect of any potentially dilutive common stock equivalents. There is no dilutive effect on the loss per share during loss periods. See Note 13 for the calculation of basic and diluted income (loss) earnings per share.

Fair Value of Financial Instruments

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

We account for our derivative financial instruments, consisting solely of certain stock purchase warrants that contain non-standard anti-dilutions provisions and/or cash settlement features, and certain conversion options embedded in our convertible instruments, at fair value using Level 3 inputs, which are discussed in Note 148 to these condensed consolidated financial statements. We determine the fair value of these derivative liabilities using the Black-Scholes option-pricing model when appropriate, and in certain circumstances using binomial lattice models or other accepted valuation practices.

When determining the fair value of our financial assets and liabilities using the Black-Scholes option-pricing model, we are required to use various estimates and unobservable inputs, including, among other things, contractual terms of the instruments, expected volatility of our stock price, expected dividends, and the risk-free interest rate. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value of the instrument. Increases in expected term, anticipated volatility and expected dividends generally result in increases in fair value, while decreases in the unobservable inputs generally result in decreases in fair value.

Foreign Currency Transactions

The Company has certain revenue and expense transactions with a functional currency in Mexican pesos and the Company's reporting currency is the U.S. dollar. Assets and liabilities are translated from the functional currency to the reporting currency at the exchange rate in effect at the balance sheet date and equity at the historical exchange rates. Revenue and expenses are translated at rates in effect at the time of the transactions. Resulting translation gains and losses are accumulated in a separate component of stockholders' equity - other comprehensive income (loss). Realized foreign currency transaction gains and losses are credited or charged directly to operations.

Segment Reporting

FASB ASC Topic 280, Segment Reporting, requires that an enterprise report selected information about operating segments in its financial reports issued to its stockholders. Based on its current analysis, management has determined that the Company has only one operating segment, which is Traffic Safety Solutions. The chief operating decision-makers use combined results to make operating and strategic decisions, and, therefore, the Company believes its entire operation is covered under a single segment.

Recent Accounting Pronouncements

In May 2014 the FASB issued ASU 2014-09, Revenue from contracts ~~with~~ with Customers (Topic 606) (May 2014). The topic of Revenue ~~Recognition~~ Recognition had become broad with several other regulatory agencies ~~issuing~~ 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 ~~permitted for annual reporting~~not ~~periods beginning after December 31, 2016~~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~~ 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 ~~will~~has ~~adopt~~the adopted the methodologies prescribed by this ASU by the date required. ~~Adoption of~~and ~~the ASU~~ there is ~~not~~no ~~expected~~material toimpact ~~have a significant effect~~ 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 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 isare 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.

NOTE 4 – LINE OF CREDIT AND OTHER NOTES PAYABLE

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 an amount equal to $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 Company’s credit facility, dated May 24, 2014, with Rosenthal & Rosenthal, Inc. and the satisfaction and termination of such borrowing and all liens thereunder (collectively, the “Rosenthal Loan”). All amounts owed under the Rosenthal Loan, which was approximately an aggregate of $2,253,617, was 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 Company’s chief executive officer and chief strategy officer, respectively, as well as with the Investor described in Note 6 pursuant to which each of the parties agreed to subordinate all present and future indebtedness held by each of them to the obligations of the Lender.

In November 2015, the FASB issued ASU 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes," which simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This ASU is effective for financial statements issued for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The adoption of this standard did not have any material impact on the Company's financial position, results of operations and disclosures.

In July 2015, FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (“ASU 2015-11”), to simplify the guidance on the subsequent measurement of inventory, excluding inventory measured using last-in, first out or the retail inventory method. Under the new standard, inventory should be at the lower of cost and net realizable value. The new accounting guidance is effective for interim and annual periods beginning after December 15, 2016 with early adoption permitted. The adoption of this standard did not have any material impact on the Company's financial position, results of operations and disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The adoption of this standard will not have any impact on the Company's financial position, results of operations and disclosures.

NOTE 4 - DISCONTINUED OPERATIONS

On February 6, 2017, the Company entered into a Contribution and Unit Purchase Agreement (the “Agreement”) with LB&B Associates Inc. (the “Purchaser”) and Global Public Safety, LLC (“GPS”).

The closing for the transaction set forth in the Agreement occurred on February 28, 2017 (the “Closing”) and on such date the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business (the “Business”) to GPS. After the Closing, the Company 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.

The Promissory Note is subordinated to the Purchaser’s senior lender and accrues interest at a rate of 3% per annum. The maturity date of the Promissory Note is March 31, 2022. The Promissory Note is to be repaid as follows: (a) $75,000 plus all accrued interest on each of September 30, 2017; December 31, 2017; March 31, 2018, June 30, 2018 and September 30, 2018 (or, in the event any such date is not a business day, the first business day after such date), (b) $100,000 plus all accrued interest on each of December 31, 2018; March 31, 2019; June 30, 2019 and September 30, 2019 (or, in the event any such date is not a business day, the first business day after such date) (c) $125,000 plus all accrued interest on each of December 31, 2019; March 31, 2020; June 30, 2020; September 30, 2020, December 31, 2020; March 31, 2021, June 31, 2021; September 30, 2021; and December 31, 2021 (or, in the event any such date is not a business day, the first business day after such date), and (d) $100,000 on March 31, 2022.

ASC 360-10-45-9 requires that a long-lived asset (disposal group) to be sold shall be classified as held for sale in the period in which a set of criteria have been met, including criteria that the sale of the asset (disposal group) is probable and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. This criteria was achieved on December 21, 2016 as the Company entered into a letter of intent with the purchaser. Additionally, the discontinued operations are comprised of the entirety of the vehicle services business, excluding corporate services expenses. Lastly, for comparability purposes certain prior period line items relating to the assets held for sale have been reclassified and presented as discontinued operations for all periods presented in the accompanying consolidated statements of operations, consolidated statements of cash flows, and the consolidated balance sheets.

In accordance with ASC 205-20-S99, "Allocation of Interest to Discontinued Operations", the Company elected to not allocate consolidated interest expense to discontinued operations where the debt is not directly attributable to or related to discontinued operations.

The following information presents the major classes of line item of assets and liabilities included as part of discontinued operations in the consolidated balance sheet:

	December 31,
	2016
Current assets - discontinued operations:
Accounts receivable	$776,715
Inventory	272,679
Other current assets	20,117
Total current assets - discontinued operations	$1,069,511

Noncurrent assets - discontinued operations:
Property and equipment, net	$27,362
Other non-current assets	13,025
Total noncurrent assets - discontinued operations	$40,387

Current liabilities - discontinued operations:
Accounts payable and accrued liabilities	$664,569
Accrued Payroll	15,386
Customer Deposits	34,219
Deferred revenue	54,581
Line of Credit	202,711
Total current liabilities - discontinued operations:	$971,466

Long term liabilities - discontinued operations:
Note payable - long term portion	$452,572
Deferred rent	36,948
Notes payable - related parties, long term portion	500,000
Total long term liabilities - discontinued operations	$989,520

The following information presents the major classes of line items constituting the after-tax loss from discontinued operations in the consolidated statements of operations for the three months ended March 31, 2017 and 2016:

	Three Months Ended March 31,
	2017	2016
Revenue	$425,269	$2,468,180
Cost of goods sold	535,376	2,284,742
Gross margin	(110,107)	183,439

Salaries and related expenses	86,327	77,680
Selling, general and administrative expenses	73,077	109,695
Total operating expenses	159,404	187,375

Operating loss	(269,511)	(3,936)

Other income (expense):
Gain on sale of discontinued operations	5,700,446	—
Interest expense, net	(24,788)	(44,440)
Total other income (expense)	5,675,658	(44,440)

Income from discontinued operations before tax	5,406,147	(48,376)

Income tax expense	2,132,725	-

Income from discontinued operations, net of tax	$3,273,422	$(48,376)

The following information presents the major classes of line items constituting significant operating and investing cash flow activities in the unaudited consolidated statements of cash flows relating to discontinued operations:

	Three Months Ended March 31
	2017	2016
Cash flows from operating activities of discontinued operations:
Adjustments to reconcile net loss to net cash used in operating activities of discontinued operations:
Gain on sale of discontinued operations, net of fees	$5,700,446	$—
Note receivable	(2,000,000)
Depreciation and amortization	36,447	134
Changes in operating assets and liabilities including assets and liabilities held for sale:
Accounts receivable	369,210	1,224,880
Prepaid expenses and other non-current assets	(1,580)	87,953
Inventory	(131,017)	52,225
Accounts payable and accrued expenses	(352,556)	(1,387,121)
Deferred revenue	(54,581)	31,975
Other liabilities	68,513	(36,111)
Net cash provided by (used in) operating activities from discontinued operations	3,634,882	(26,065)

Cash flows from investing activities in discontinued operations:
Purchases of property and equipment	4,772	(24,500)
Net cash provided by (used in) investing activities in discontinued operations	4,772	(24,500)

Cash flows from financing activities in discontinued operations:
Net change in line of credit	(202,712)	365,670
Repayment of related party notes	(500,000)	—
Borrowings (repayments) on term notes	(452,571)	84,282
Deferred financing cost	—	(13,523)
Payments on term notes	—	(166,667)
Net cash provided by (used in) financing activities in discontinued operations	$(1,155,283)	$269,762

NOTE 5 – LINE OF CREDIT AND OTHER NOTES PAYABLE

Line of Credit

On July 12, 2016 (the “Closing Date”), the Company entered into a loan and security agreement (the “Loan Agreement”) with Fundamental Funding LLC (the “Lender”). The Loan Agreement provided for a multi-draw loan to the Company for (i) the Company’s accounts receivable, the lesser of (y) $2,500,000 or (z) 85% of the Company’s eligible accounts and (ii) the Company’s inventory advances, the lesser of (y) $500,000 or (z) 50% of the eligible inventory (the “Revolving Loans”). The maximum amount available to the Company under the Loan Agreement for the Revolving Loans was $3,500,000 (the “Credit Limit”). In addition, the Lender agreed to provide the Company with an accommodation loan in an amount not to exceed $500,000, which was to be repaid in thirty-six (36) equal monthly installments of principal and interest (the “Accommodation Loan” and together with the Revolving Loans, the “Loans”).

On the Closing Date, the Lender advanced the Company $533,670. The amounts advanced under the Loan Agreement were due and payable on the three (3) year anniversary of the Closing Date (the “Maturity Date”), and thereafter, the Maturity Date was to be automatically extended for successive periods of one year unless the Company shall give lender written notice of termination not less than ninety (90) days prior to the end of such term or renewal term, as applicable. Lender could have terminated the Loan Agreement at any time in its sole discretion by giving the Company ninety (90) days prior written notice, provided that upon an Event of Default (as defined in the Loan Agreement), Lender could terminate the Loan Agreement without notice to the Company, effective immediately. Upon termination by the Lender, the Company would have been required to pay certain termination fees based on a percentage of the Credit Limit as set forth in the Loan Agreement.

The outstanding principal balance under the Note for the Revolving Loans bore interest at a rate per annum equal to the “prime rate” published from time to time in the Wall Street Journal (the “Prime Rate”), plus 1.75% per annum, accruing daily and payable monthly. The outstanding principal balance under the Accommodation Loan bore interest at a rate per annum equal to the Prime Rate in effect from time to time, plus 12.75% per annum, accruing daily and payable monthly. Notwithstanding any other provision in the Loan Agreement, interest on Loans was calculated on the higher of: (i) the actual average monthly balance of all Loans from the prior month, or (ii) $1,350,000. In addition the Company was subject to certain monthly or annual fees on the Loans as set forth in the Loan Agreement.

The remaining portion of the Credit Limit could be advanced to the Company upon written notice provided to the Lender during the period beginning from the Closing Date through the Maturity Date provided no default had occurred under the Loan Agreement. The Company could prepay any portion of the Accommodation Loan, in whole or in part, to Lender on or prior to the Maturity Date.

Initial borrowings under the Loan Agreement were subject to, among other things, the substantially concurrent repayment by the Company of all amounts due and owing under the Company’s credit facility, dated May 24, 2014, with Rosenthal & Rosenthal, Inc. and the satisfaction and termination of such borrowing and all liens thereunder (collectively, the “Rosenthal Loan”). All amounts owed under the Rosenthal Loan, which were $2,253,617, were satisfied and terminated by the Company on the Closing Date.

In addition, on the Closing Date, the Company entered into a subordination agreement with each of C.B. Brechin and Scott Rutherford, each a Company director, as well as with the Investor described in Note 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~~ The Loan Agreement ~~contains~~contained customary affirmative and negative covenants for loan agreements of its type, including but not limited to, limiting the Company’s ability to pay dividends or make any distributions, incur additional indebtedness, grant additional liens, engage in any other lime of business, make investments, merge, consolidate or sell all or substantially all of its assets and enter into transactions with related parties. The Loan Agreement also ~~contains~~contained certain financial covenants, including, but not limited to, a debt service coverage ratio.

~~The~~ The Loan Agreement ~~includes~~included customary events of default, including ~~but~~ 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~~ All borrowings under the Loan Agreement ~~are~~were due upon a default ~~under~~ under the terms of the Loan Agreement. The Company’s ~~obligations~~ obligations under the Loan Agreement ~~are~~were guaranteed by C.B. Brechin, ~~the~~ a Company’s ~~chief~~director, ~~executive officer~~ pursuant to the terms of a ~~surety~~ surety agreement.

At ~~September~~At 30December 31, 2016, the Company had $~~836~~274,~~813~~795 in outstanding indebtedness under the Revolving Facility and $~~500~~452,~~000~~571 in outstanding indebtedness under the Term Loan, and the Company could have borrowed up to an additional $2,~~163~~725,~~187~~205 under the Revolving Facility. As of ~~September~~December 3031, 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 ~~nine~~year ~~months~~ ended ~~September~~December 3031, 2016. We ~~reported~~The ~~this~~Company ~~non-compliance~~did ~~to Fundamental,~~not ~~and~~request ~~requested~~ a waiver for the year ~~nine~~ended ~~months~~December ~~ended~~31, 2016 and the Revolving Facility and Term ~~September~~Loan 30were repaid in full on February 28, ~~2016~~2017.

~~The~~ ~~Company~~Other ~~financed~~Notes certain vehicles and equipment under finance agreements. The agreements mature at various dates through December 2017. The agreements require various monthly payments of principal and interest until maturity. At September 30, 2016 and December 31, 2015, financed assets of $26,539 and $47,732, respectively, net of accumulated amortization of $115,377 and $98,184, respectively, were included in property and equipment on the balance sheets. The weighted average interest rate was 3.75% at September 30, 2016 and December 31, 2015. Payable

~~NOTE~~The 5Company –financed ~~CONVERTIBLE~~certain ~~NOTES~~vehicles ~~PAYABLE~~and –equipment under finance ~~STOCKHOLDERS~~agreements. The agreements matured at various dates through December 2017. Principal maturities in 2017 were $20,150. The agreements required various monthly payments of principal and interest until maturity. As of March 31, 2017 and December 31, 2016, financed assets of $0 and $19,475, respectively, net of accumulated amortization of $0 and $122,441, respectively, are included in property and equipment on the balance sheets. The weighted average interest rate was 3.75% at March 31, 2017 and December 31, 2016. All notes were repaid in full on February 28, 2017.

~~Brekford~~NOTE ~~financed~~6 ~~the~~– ~~repurchase~~CONVERTIBLE ofNOTES ~~shares~~PAYABLE ~~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.STOCKHOLDERS

On ~~April~~Brekford 1,financed ~~2010,~~the ~~Brekford~~repurchase of shares of its common stock and warrants ~~each~~from ~~member~~the proceeds of ~~the~~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. ~~executed~~Brechin aand ~~First~~Scott ~~Amendment~~Rutherford, toin the principal amounts of $250,000 each (each, a “Promissory Note” and together, ~~which~~the “Promissory ~~amended~~Notes”). Each Promissory Note bore interest at the ~~respective~~rate of 12% per annum and at the time of issuance was to be convertible into shares of Brekford Corp. common stock, at the option of the holder, at an original conversion price of $.07 per share. At the time of issuance, Brekford agreed to pay the unpaid principal balance of the Promissory ~~Note~~Notes asand ~~follows:~~all accrued but unpaid interest on the date that was the earlier of (i) two years from the issuance date or (ii) 10 business days after the date on which Brekford Corp. closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000.

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

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

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

On November 8, 2013, Brekford Corp. and each member of the lender ~~group~~ 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 Corp. closes an equity financing that generates gross proceeds in the aggregate amount of not less ~~than~~ than $5,000,000.

On November 94, ~~2015~~2014, Brekford Corp. and each member of the lender group agreed to further extend the maturity dates of the Promissory ~~Notes~~ ~~were~~Notes ~~extended~~ to the earlier of (i) November 9, ~~2016~~2015 or (ii) 10 business days ~~from~~after the date on which Brekford Corp. closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000.

On November 9, 2015, the maturity dates of the Stockholder Notes were extended to the earlier of (i) November 9, 2016 or (ii) 10 business days from the date on which Brekford Corp. closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000. Mr. Brechin and Mr. Rutherford indicated that they would not exercise their right of repayment prior to March 31, 2017.

On November 4, 2016, the maturity dates of the Promissory Notes were extended to the earlier of (i) November 9, 2017 or (ii) 10 business days from the date on which Brekford closes an equity financing that generates gross proceeds in the aggregate amount of not less than $5,000,000. Mr. Brechin and Mr. Rutherford have indicated that they will not exercise their right of repayment prior to September 30, 2017.

The Company ~~anticipates~~anticipated that the maturity date of the ~~Promissory~~Stockholder Notes ~~will~~would continue to be extended for the foreseeable future; thus, ~~they~~ ~~are~~they were classified as long-term liabilities. As of ~~September 30, 2016 and~~ December 31, ~~2015~~ 2016, the amounts outstanding under the ~~Promissory~~ Stockholder Notes totaled $500,000. On March 1, 2017, the balance was repaid in full.

10 NOTE 7 – CONVERTIBLE PROMISSORY NOTES PAYABLE - INVESTOR

~~NOTE~~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 ~~CONVERTIBLE~~promissory ~~PROMISSORY~~note ~~NOTES~~issued ~~PAYABLE~~by -the Company for an ~~INVESTOR~~aggregate purchase price of $650,000 (the “Investor Note”). The Investor Note bore interest at a rate of 6% per annum and the principal amount is due on March 17, 2017. Any interest that accrued under the Investor Note was payable either upon maturity or upon any principal being converted on any voluntary conversion date (as to that principal amount then being converted). The Investor Note was convertible at the option of the Investor at any time into shares of Common Stock at a conversion price equal to the lesser of (i) $0.25 per share and (ii) 70% of the average of the lowest three volume weighted average prices for the twelve (12) trading days prior to such conversion (the “Conversion Price”). In no event could the Conversion Price have been less than $0.10; provided, however, that if on or after the date of the Agreement the Company sold any Common Stock or Common Stock Equivalents (as defined in the Agreement) at an effective price per share that was less than $0.10 per share, then the Conversion Price would be equal to the par value of the Common Stock then in effect. In connection with the Agreement, the Investor received a warrant to purchase 780,000 shares of Common Stock (the “Warrant”). The Warrant is exercisable for a period of five years from the date of issuance at an exercise price of $0.50 per share, subject to adjustment (the “Exercise Price”).

On 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. 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 $19,869.

On December 2, 2015, the Investor converted $50,000 of principal and $2,129 of accrued interest due under the Investor Note into 349,155 shares of Common Stock and the Company recognized a loss on extinguishment of debt of $35,160.

On February 26, 2016 the Investor converted $50,000 of principal and $2,844 of accrued interest due under the Investor Note into 476,500 shares of Common Stock and the Company recognized a loss on extinguishment of debt of $49,525.

On March 31, 2016 the Investor converted $50,000 of principal and $3,123 of accrued interest due under the Investor Note into 510,310 shares of Common Stock and the Company recognized a loss on extinguishment of debt of $72,947.

On May 31, 2016 the Investor converted $50,000 of principal and $3,625 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 $38,923.14

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,~~618~~617.

The following table provides information relating to the Investor Note at ~~September~~March 3031, 2017 and December 31, 2016:

	September 30, 2016	December 31, 2015
	March 31, 2017	December 31, 2016
Convertible promissory note payable	$~~340,000~~—	$~~640~~340,000
Original issuance discount, net of amortization of the $57,896 and $29,820 as of September 30, 2016 and December 31, 2015	(7,104)	(35,180)
Original issuance discount, net of amortization of the $65,000 and $61,786 as of March 31, 2017 and December 31, 2016	—	(3,214)
Beneficial conversion feature, net of amortization of $496,948 and $255,960 as of September 30, 2016 and December 31, 2015	(60,973)	(301,960)
Beneficial conversion feature, net of amortization of $557,921 and $530,338 as of March 31, 2017 and December 31, 2016	—	(27,583)
Warrant feature, net of amortization of the $82,015 and $42,243 as of September 30, 2016 and December 31, 2015	(10,063)	(49,835)
Warrant feature, net of amortization of the $92,079 and $87,527 as of March 31, 2017 and December 31, 2016	—	(4,552)
Original issuance cost, net of amortization of $40,433 and $20,744 as of September 30, 2016 and December 31, 2015	(12,066)	(31,756)
Original issuance cost, net of amortization of $52,500 and $46,996 as of March 31, 2017 and December 31, 2016	—	(5,504)
Convertible promissory note payable, net	$~~249,794~~—	$~~221~~299,~~269~~147

We evaluated the financing transactions in accordance with ASC Topic 470, Debt with Conversion and Other Options, and determined that the conversion feature of the Investor Note was afforded the exemption for conventional convertible instruments due to its fixed conversion rate. The Investor Note ~~has~~had an explicit limit on the number of shares issuable so it did meet the conditions set forth in current accounting standards for equity classification. The debt was issued with non-detachable conversion options that ~~are~~were beneficial to the investors at inception, because the conversion option ~~has~~had an effective strike price that iswas 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~~would be amortized and recognized as interest expense.

11 Accordingly, a portion of the proceeds was allocated to the Warrant based on its relative fair value, which totaled $92,079 using the Black Scholes option-pricing model. Further, the Company attributed a beneficial conversion feature of $557,921 to the shares of Common Stock issuable under the Investor Note based upon the difference between the effective Conversion Price and the closing price of the Common Stock on the date on which the Investor Note was issued. The assumptions used in the Black-Scholes model are as follows: (i) dividend yield of 0%; (ii) expected volatility of 80.5%, (iii) weighted average risk-free interest rate of 1.56%, (iv) expected life of five years, and (v) estimated fair value of the Common Stock of $0.26 per share. The expected term of the Warrant represents the estimated period of time until exercise and is based on historical experience of similar awards giving consideration to the contractual terms. The Company recorded amortization of the beneficial conversion feature and warrant feature of the Investor Note in other expense in the amount of $27,583 and $4,552 during the three months ended March 31, 2017 and $60,514 and $9,987, during the three months ended March 31, 2016, respectively.

~~Accordingly,~~The aCompany ~~portion~~recorded ofan ~~the~~original ~~proceeds~~issue ~~was~~discount ~~allocated~~of ~~to the Warrant based on its relative fair value, which totaled~~ $9265,~~079~~000 ~~using the Black Scholes option-pricing model. Further, the Company attributed a beneficial conversion feature of $557,921~~ to ~~the shares of~~be ~~Common~~amortized ~~Stock~~over ~~issuable under~~ the ~~Investor~~term ~~Note based upon the difference between the effective Conversion Price and the closing price~~ of the ~~Common~~Agreement ~~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~~expense.~~56%,~~ ~~(iv) expected~~The ~~life~~Company ofrecognized ~~five years~~$3,214 and ~~(v) estimated fair value of the Common Stock of~~ $~~0.26~~11,608 ~~per share. The expected term~~ of ~~the~~interest ~~Warrant represents~~expense ~~the~~as ~~estimated period of time until exercise and is based~~a onresult ~~historical experience~~ of ~~similar awards giving consideration to~~ the ~~contractual terms. The Company recorded~~ amortization ofduring the ~~beneficial~~ ~~conversion~~three ~~feature and warrant feature of the Investor Note in other expense in the amount of $240,988 and $39,773 during the nine~~ months ended ~~September~~March 3031, 2017 ~~2016~~ and ~~$255,960~~2016 ~~and $42~~respectively,~~243, during~~ ~~the year ended December 31, 2015~~ which also includes the unamortized original ~~beneficial~~issue ~~conversion~~discount ~~feature and warrant feature~~ attributable to the $~~375~~100,000 principal converted to equity in the three months ended March 31, 2016.

~~The~~On ~~Company~~February ~~recorded an original issue discount of $65,000 to be amortized over the term of the Agreement as interest expense. The Company recognized $~~28,~~076~~ ~~and $29~~2017,~~820~~ ~~of interest expense as a result of~~ the ~~amortization~~Company ~~during~~repaid the ~~nine~~remaining ~~months~~balance ~~ended September~~in ~~30,~~full ~~2016~~ and ~~the~~retired ~~year ended December 31, 2015 respectively, which also includes~~ the ~~unamortized original issue discount attributable to the $375,000 principal converted to equity~~note.

NOTE 78 – WARRANT DERIVATIVE LIABILITY

On March 17, 2015, in conjunction with the issuance of the Investor Note (see Note 67), 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~~ The Exercise Price is subject to anti-dilution adjustments that ~~allow~~ allow for its reduction in the event the Company subsequently ~~issues~~ issues equity securities, including shares of Common Stock or any ~~security~~ security convertible or exchangeable for shares of Common Stock, for no consideration or for consideration less than $0.50 a share. ~~The~~ 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 1731, ~~2015~~2017 and ~~September~~December 3031, 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 8180.675% -80 105.501%; (iii) weighted average risk-free interest rate of 1.14% - 1.5693%; (iv) expected life of five years; and (v) estimated fair value of the Common Stock of $0.10-$0.26 per share.

~~At September 30, 2016, the outstanding fair value of the derivative liability was $18,228.~~ 15

At ~~NOTE~~March 831, –2017 ~~LEASES~~and December 31, 2016, the outstanding fair value of the derivative liability was $17,472 and $24,360, respectively. There were no warrants issued during the three months ended March 31, 2017.

~~Capital~~NOTE ~~Leases~~9 – LEASES

At ~~September~~The Company rents office space under separate non-cancelable operating leases. Rent expense under our main headquarters lease, that was due to expire on April 30, ~~2016~~2020, amounted to $32,040 and ~~December~~$42,810 for the three months ended March 31, ~~2015~~2017 and 2016, norespectively. ~~capital~~On February 28, 2017 the headquarters lease was ~~included~~assumed inby ~~property~~Global ~~and~~Public ~~equipment~~Safety, onand the ~~consolidated~~Company ~~balance~~signed a ~~sheets~~month-to-month sub-lease with Global Public Safety payable at 15% of the original lease.

~~Operating~~The ~~Leases~~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 $12,300 for the three months ended March 31, 2017 and 2016, respectively.

~~The~~ ~~Company~~NOTE ~~rents~~10 ~~office~~– ~~space~~MAJOR ~~under separate~~CUSTOMERS ~~non-cancelable operating~~AND ~~leases. Rent expense under our main headquarters lease, expiring on April 30, 2020 amounted to $128,432 and $126,486 for the nine months ended September 30, 2016 and 2015, respectively.~~VENDORS

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 $36,900 for the nine months ended September 30, 2016 and 2015, respectively.

NOTE 9 – MAJOR CUSTOMERS AND VENDORS

Major Customers

The Company has several ATSE contracts with government agencies, of which net revenue from ~~one~~four ~~major~~customers ~~customer~~ during the ~~nine~~three months ended March ~~September 30~~31, ~~2016~~2017 represented 1454% of the total net revenue. Four ~~for~~customers ~~the~~accounted ~~period.~~for ~~Accounts~~91% ~~receivable~~of ~~due~~total ~~from~~accounts ~~three~~receivable ~~customers~~as atof ~~September~~March 3031, ~~2016~~2017, ~~amounted~~which towas ~~43%~~subsequently ~~of total accounts receivable~~collected.

Net ~~For~~revenue ~~the~~from ~~period~~five ~~ended~~customers ~~September~~during ~~30, 2015,~~ the ~~Company~~three ~~has~~months ~~several contracts~~ended ~~with~~March ~~government agencies~~31, ~~of which net revenue from one~~ ~~major~~2016 ~~customer~~ represented 2363% of the total net revenue ~~for the period~~. Accounts receivable due from ~~three~~four customers at ~~September 30~~December 31, ~~2015~~2016 amounted to 6088% of total accounts receivable at that date.

Accounts receivable due from these customers at December 31, 2015 amounted to 53% of total accounts receivable at that date.

Major Vendors

The Company purchased ~~substantially all hardware~~ products ~~that it resold during the periods presented from two major distributors. Revenues from hardware products amounted to 51%~~ and ~~47%~~services ~~of total revenues~~ for ~~the~~fulfillment ~~nine~~of ~~months ended September 30,~~ATSE ~~2016~~contracts ~~and 2015,~~from ~~respectively~~several vendors. As of ~~September~~March 3031, ~~2016~~2017 and December ~~2015~~31, 2016, accounts payable due to these ~~distributors~~vendors amounted to 6238% ~~and~~ 43and 47% of total accounts payable, respectively.

Accounts payable due to these distributors at December 31, 2015, amounted to 72% of total accounts payable at that date.

NOTE 10 - STOCKHOLDERS’ EQUITY

Warrants

The assumptions used to value warrant grants during the nine months ended September 30, 2016, which consisted solely of the Warrant, were as follows:

	Nine months ended September 30, 2016
Expected life (in years)	5.00
Volatility	81.67%
Risk free interest rate	1.14%
Expected Dividend Rate	0

Summary of the warrant activity for the nine months ended September 30, 2016 is as follows:

	Number of Warrants	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016	840,000	$0.50	4.21	$0.00
Granted	—	—	—	0.00
Forfeited or expired	—	—	—	0.00
Exercised	—	—	—	—
Outstanding at September 30, 2016	840,000	0.50	3.46	0.00
Exercisable at September 30, 2016	840,000	0.50	3.46	0.00

The weighted average remaining contractual life of warrants outstanding as of September 30, 2016 was as follows:

			Weighted
			Average
	Stock	Stock	Remaining
Exercisable	Warrants	Warrants	Contractual
Prices	Outstanding	Exercisable	Life (years)
$0.50	840,000	840,000	3.46
Total	840,000	840,000	3.46

NOTE 11 – SHARE-BASED COMPENSATION

The Company has issued shares of restricted common stock and warrants to purchase shares of common stock and has granted non-qualified stock options to certain employees and non-employees. On April 25, 2008, the Company’s stockholders approved the 2008 Stock Incentive Plan (the “2008 Incentive Plan”).

Stock Options

~~Option grants during the nine months ended September 30, 2016 were primarily made to non-employee directors who elected to receive options for their Board service.~~ The ~~options had a grant date fair~~ ~~value~~Company ofrecorded $~~0.07~~3,379 ~~per share~~ and ~~will~~$3,737 ~~vest~~in ~~and~~stock ~~become~~option ~~exercisable with~~compensation ~~respect~~expense toduring ~~option~~in ~~shares~~the ~~over a three year~~ period ~~commencing~~ending ~~from the~~March ~~date~~31, of2017 ~~grant~~and ~~at a rate of 33.33% per year. The~~2016, ~~Company recorded $3~~respectively,~~515~~ ~~and~~related ~~$10,988~~to ~~and~~the ~~$4,360~~stock ~~and~~option ~~$8,100~~grants. inThere ~~stock~~were no ~~option~~options ~~compensation~~granted ~~expense~~during ~~for~~ the three ~~and nine~~ months ended ~~September~~ ~~30,~~March ~~2016 and 2015~~31, ~~respectively, related to the stock~~ ~~option grants~~2017.

1316

Summary of the option activity for ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 is as as follows:

	Number of Options	Weighted Average ~~Remaining~~Exercise ~~Contractual Life (Years)~~Price	Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016	400,000	$0.20	3.25	$0.00
Outstanding at January 1, 2017	550,000	$0.20	3.00	$0.00
Granted	~~225,000~~—	~~0.12~~—	~~3.50~~—	~~0.00~~—
Forfeited or expired	(75,000)	0.2212	~~2.00~~—	0.00
Exercised	—	—	—	—
Outstanding at September 30, 2016	550,000	0.20	3.25	0.00
Outstanding at March 31, 2017	475,000	0.19	2.75	0.00
Exercisable at September 30, 2016	225,000	—	—	0.00
Exercisable at March 31, 2017	475,000	0.19	—	0.00
Vested and expected to vest	~~325~~475,000	0.2019	32.2575	0.00

The unrecognized compensation cost for unvested stock option awards outstanding at September 30, 2016 was approximately $24,547 to be recognized over approximately 3.25 years.

Restricted Stock Grants

There During the nine months ended September 30, 2016, the Company granted an aggregate of 198,000 shares of Common Stock to key employees in consideration of services rendered and part of employment agreement. The weighted average value of the shares amounted to $0.20 per share based upon the closing price of shares of Common Stock on the date of the grant. These shares were ~~fully~~no ~~vested on the date of the grant. The Company recorded $0 and $39,600 in share-based compensation expense for the three and nine months ended September 30, 2016 related to~~ stock grants. ~~For~~during the three ~~and nine~~ months ended ~~September~~March 3031, ~~2015, the Company recorded $0 and~~2017 ~~$44,880~~and ~~in share-based compensation expense related to stock grants~~2016.

NOTE 12 – INVENTORY

As of ~~September~~ 30March 31, ~~2016~~2017 and December 31, ~~2015,~~2016 inventory consisted entirely of ~~the~~ ~~following:~~raw materials of $281,526 and $221,186, respectively.

	September 30, 2016	December 31, 2015
Raw Materials	$472,000	$573,769
Work in Process	—	32,702
Total Inventory	$472,000	$606,471

NOTE 13 –INCOME (LOSS) PER SHARE

14 The following table provides information relating to the calculation of loss earnings per common share for continuing operations:

NOTE 13 –LOSS PER SHARE

	Three Months Ended March 31
	2017	2016

Basic income (loss) earnings per share
Net income (loss) from continuing operations	$1,505,310	$(505,909 )
Weighted average common shares outstanding - basic	49,311,264	44,625,236
Basic income (loss) per share	$0.03	$(0.01)

Diluted loss per share
Net income (loss) from continuing operations	$1,505,310	$(505,909 )
Weighted average common shares outstanding	49,311,264	44,625,236
Potential dilutive securities	—	—
Weighted average common shares outstanding – diluted	49,311,264	44,625,236
Diluted income (loss) per share	$0.03	$(0.01)
Common stock equivalents excluded due to anti-dilutive effect	840,000	7,987,899

~~The following table provides information relating to the calculation of loss per common share.~~17

	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Basic net income (loss) per share :
Net income (loss)	$(270,556)	$(242,647)	$(803,998)	$(398,375)
Weighted average common shares outstanding	48,360,299	44,632,569	46,710,189	44,630,151
Basic net income (loss) per share	$(0.01)	$(0.01)	$(0.02)	$(0.01)
Diluted net income (loss) per share :
Net income (loss)	$(270,556)	$(242,647)	$(803,998)	$(398,375)
Weighted average common shares outstanding	48,360,299	44,632,569	46,710,189	44,630,151
Potential dilutive securities	—	—	—	—
Weighted average common shares outstanding – diluted	48,360,299	44,632,569	46,710,189	44,630,151
Diluted earnings per share	$(0.01)	$(0.01)	$(0.02)	$(0.01)
Common stock equivalents excluded due to anti-dilutive effect	6,961,429	9,067,311	6,961,429	9,067,311

The following table provides information relating to the calculation of net income per common share for discontinued operations:

	Three Months Ended March 31
	2017	2016

Basic net income per share
Net income from discontinued operations	$3,273,422	$(48,376)
Weighted average common shares outstanding - basic	49,311,264	44,625,236
Basic income (loss) per share	$0.07	$(0.00)

Diluted net income per share
Net income from discontinued operations	$3,273,422	$(48,376)
Weighted average common shares outstanding	49,311,264	44,625,236
Potential dilutive securities	—	—
Weighted average common shares outstanding – diluted	49,311,264	44,625,236
Diluted income (loss) per share	$0.07	$(0.00)
Common stock equivalents excluded due to anti-dilutive effect	840,000	7,987,899

NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of ~~September~~ 30March 31, ~~2016~~2017, the amounts reported for cash, accrued interest and other expenses, notes payables, and derivative liability ~~approximate~~ approximate their fair values because of their short maturities.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

	●	Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
	●	Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
	●	Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at ~~September~~March 3031, ~~2016~~2017:

	Total	(Level 1)	(Level 2)	(Level 3)
Liabilities
Derivative liability	~~18,228~~—	—	—	1817,~~228~~472
Total liabilities measured at fair value	$~~18,228~~—	$—	$—	$1817,~~228~~472

The following is a reconciliation of the derivative liability for which Level 3 inputs were used in determining the approximate fair value:

Beginning balance as of December 31, 2015	$99,036
Beginning balance as of December 31, 2016	$24,360
Fair value of derivative liabilities issued	—
Gain on change in derivative liability	(806,~~808~~888)
Ending balance as of September 30, 2016	$18,228
Ending balance as of March 31, 2017	$17,472

NOTE 15 – MERGER SUMMARY

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 1/15th 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.

The original terms of the Merger Agreement authorized each of the Company and KeyStone to terminate the Merger Agreement if closing of the transactions contemplated under the Merger Agreement did not occur by June 1, 2017 (the “Termination Date”). On May 9, 2017, the Company, KeyStone, Novume and KeyStone entered into a First Amendment to the merger Agreement pursuant to which the Termination Date was extended until July 31, 2017.

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

The following discussion and analysis presents a review of the condensed operating results of Brekford ~~for~~Corp. (“Brekford” or the ~~three~~“Company”) ~~and~~for ~~nine~~the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016 and the financial condition of Brekford Corp. at ~~September~~March 3031, ~~2016~~2017. The discussion and ~~analysis~~ analysis should be read in conjunction with the condensed ~~consolidated~~ consolidated financial statements and accompanying notes included herein, as well as the Company’s audited financial statements for the year ended December 31, ~~2015~~2016 filed with its Annual Report on on Form 10-K on March 24 28, ~~2016~~2017.

Forward-Looking Statements

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

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

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

Our History

The Company (formerly California Cyber Design, Inc. (“CCDI”)) was incorporated in Delaware on May 27, 1998 and changed its name to American Financial Holdings, Inc. (“AFHI”) on August 11, 2004. AFHI, a publicly-traded corporation with no operations, announced the completion of its share exchange transaction with Pelican Mobile Computers, Inc., a Maryland corporation (“Pelican Mobile”), on January 6, 2006. Pelican Mobile exchanged each issued and outstanding share of Pelican Mobile Computers (1,000 shares issued and outstanding at the time of the share exchange) for 25,000 shares of AFHI on a post-split basis (the “Share Exchange”) with an aggregate of 25,000,000 shares of common stock of AFHI issued to the former stockholders of Pelican Mobile. At the time of the Share Exchange, the existing stockholders of AFHI retained 5,512,103 shares of AFHI’s outstanding common stock after the cancellation of approximately 2,549,000 shares of common stock. As a result, the former stockholders of Pelican Mobile became the majority stockholders of AFHI. Under the terms of the Share Exchange, the Company changed its name to Tactical Solution Partners, Inc. On April 25, 2008, the Company’s stockholders approved a proposal to change its name from Tactical Solution Partners, Inc. to Brekford International Corp. to better reflect our business strategy. Subsequently, on July 9, 2010, the Company’s stockholders approved a proposal to change our name from Brekford International Corp. to Brekford Corp. On October 27, 2010, the Company’s Board of Directors approved the merger of Pelican Mobile with Brekford Corp. pursuant to Section 253 of the General Corporation Law of the State of Delaware, with Brekford Corp. as the surviving corporation. The merger became effective upon the filing of a Certificate of Ownership and Merger with the State of Delaware (and the appropriate Articles of Merger with the State of Maryland), pursuant to the terms of an Agreement and Plan of Merger. The merger documents were filed with the States of Delaware and Maryland on October 28, 2010. Effective upon the completion of the merger, the Company’s corporate name of the Company remained as Brekford Corp. The operations of Pelican Mobile were continued by the Company without interruption following the merger.

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”). Upon closing of the merger, Brekford will become a wholly-owned subsidiary of Novume Solutions, Inc., a Delaware corporation (“Novume”). For additional detail regarding this transaction, refer to the Subsequent Event footnote - Note 15 (Notes to Consolidated Financial Statements) elsewhere in this Quarterly Report.

Overview

~~The~~ The Company, headquartered in Hanover, Maryland, is a leading ~~public~~ public safety technology service provider of fully integrated ~~traffic~~ safety solutions, parking enforcement citation management, and mobile technology equipment for public safety vehicle services to state and local municipalities, the U.S. Military and various federal public safety agencies throughout the United States and Mexico. Brekford’s combination of upfitting services, cutting edge technology, and automated traffic safety enforcement (“ATSE”) solutions, ~~services~~including ~~offers~~speed, ared ~~unique~~light, ~~360º~~and ~~solution~~distracted driving ~~for~~camera ~~law enforcement agencies and municipalities~~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 ~~safety~~reliability ~~solutions~~ to our clients. Brekford has one wholly owned subsidiary, Municipal Recovery Agency, LLC, a Maryland limited liability company, formed in 2012 for the purpose of providing collection systems and services for unpaid citations and parking fines.

Products and Services

~~Automated~~ Automated Traffic Safety Enforcement ~~(“ATSE”)~~ – Red Light and Speed Camera Systems

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

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

Despite the increased safety effects and prevention of fatalities, there is still a common misconception that automated traffic safety enforcement systems are not supported by the general public. An IIHS survey conducted in November 2012 found that a large majority of people living in Washington, D.C., one of the largest combined red light and speed enforcement programs in the U.S., favor camera enforcement. Of those surveyed, 87% support red light cameras and 76% support speed cameras. Even the majority of violators (59%) agreed that they deserved their most recent citation. In 2012, IIHS reported that 633 people were killed and an estimated 133,000 were injured in crashes that involved red light running. Speeding was a factor in 31% of motor vehicle crash deaths in 2012.

Brekford’s ATSE products offer intersection safety (red light), speed, and cell phone enforcement options by way of a complete suite of solution-based products. Our team of industry professionals has extensive experience in this field, we have developed equipment and a full turnkey solution that we believe will ensure the success of any program. We have created and implemented some of the most cutting-edge features into our design while constructing end-to-end systems specifically with our clients’ needs in mind.

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

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

~~High rate~~● Physical safety of ~~violation~~ATSE ~~detection~~operators and motorists. ATSE ~~units~~ can ~~detect~~operate at locations where roadside traffic stops are dangerous or infeasible, and ~~record multiple~~where ~~violations~~traffic ~~per~~conditions ~~minute~~are unsafe for police vehicles to enter the traffic stream and stop suspected violators. ~~This~~With ~~can~~ATSE ~~provide~~there ais ~~strong~~normally ~~deterrent effect~~no byvehicle ~~increasing~~pursuit ~~drivers’~~or ~~perceived~~confrontation ~~likelihood~~with motorists. ATSE might also reduce the occurrence of ~~being cited~~traffic ~~for~~congestion ~~speeding~~due to driver distraction caused by traffic stops on the roadside.

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

Physical safety of ATSE operators and motorists. ATSE can operate at locations where roadside traffic stops are dangerous or infeasible, and where traffic conditions are unsafe for police vehicles to enter the traffic stream and stop suspected violators. With ATSE there is normally no vehicle pursuit or confrontation with motorists. ATSE might also reduce the occurrence of traffic congestion due to driver distraction caused by traffic stops on the roadside.22

●

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

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

● Notification continuance ● Mail house and printing ● Data purification and verification ● Back office support ● Call center response (inbound & out bound) ● Lock-box & treasury ● Payment processing

~~Notification~~ ~~continuance~~Sale of Assets and Investment in Global Public Safety

● Vehicle Services

~~Mail~~ ~~house~~Prior to March 1, 2017, part of Brekford’s business included sales of products and ~~printing~~services focusing on law enforcement vehicles. These products and services included rugged information technology solutions, mobile data, digital video, electronic ticketing, and vehicle upfitting. Rugged information technology solutions included both ruggedized laptops and in-car video solutions, among other technology offerings, in addition to vehicle mounting systems, docking stations, and custom-built packages. Vehicle upfitting solutions included the turnkey installation of various components including rugged technology, as well as sirens, lights, radios, gun racks, and decals.

● As previously reported on a Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2017, on February 6, 2017, the Company entered into a Contribution and Unit Purchase Agreement (the “Agreement”) with LB&B Associates Inc. (the “Purchaser”) and Global Public Safety, LLC (“GPS”).

~~Data~~ ~~purification~~The closing for the transaction set forth in the Agreement occurred on February 28, 2017 (the “Closing”) and ~~verification~~on such date the Company contributed substantially all of the assets and certain liabilities related to its vehicle services business (the “Business”) to GPS. After the Closing, Brekford will continue to own and run other business operations that are not related to the Business.

● On the Closing, GPS sold units representing 80.1% of the units of GPS to the Purchaser for $6,048,394, after certain purchase price adjustments of prepaid expenses and unbilled customer deposits. $4,048,394 was paid in cash, including a $250,000 deposit that was paid on February 6, 2017, and $2,000,000 was paid by Purchaser issuing the Company a promissory note (the “Promissory Note”). After the Closing, Brekford continues to own 19.9% of the units of GPS.

~~Back~~ ~~office~~The ~~support~~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.

~~Call~~ ~~center~~Pursuant ~~response~~to ~~(inbound~~the &Agreement, ~~out~~the ~~bound~~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.

~~Lock~~ Pursuant to a month-~~box~~to-month &sublease agreement between GPS and the ~~treasury~~Company, the Company will continue to occupy 3,362 square feet of office space, located at 7020 Dorsey Road, Suite C, Hanover, Maryland 21076.

●23

~~Payment~~ ~~processing~~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.

~~Rugged~~With ~~Information~~respect ~~Technology~~to ~~Solutions~~information –provided ~~Mobile~~within ~~Data~~this &Quarterly Report, ~~Digital~~including ~~Video~~management’s discussion and analysis of financial condition and operating results, the sale transaction was completed on February 28, 2017. Products and services related to vehicle services have been treated as discontinued operations within this Quarterly Report. The assets and liabilities of our vehicle services business are classified as held for sale on the consolidated balance sheet as of December 31, 2016, and the operating results of the vehicle services business are reflected as discontinued operations in the consolidated statements of earnings for the period of January 1, 2017 through February 28, 2017 and the three months ended March 31, 2016.

~~Law~~ ~~enforcement~~Purchasing ~~agency, fire department~~ and ~~emergency~~Order medical services (“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.Fulfillment

~~For~~ ~~more~~We ~~than~~work awith ~~decade,~~manufacturers ~~Brekford has been a distributor~~ and ~~integrator for~~distributors ~~most~~to ~~major~~secure ~~brands in~~ the ~~mobile~~lowest cost ~~technology~~possible ~~arena.~~while Wetaking ~~handle everything~~advantage ~~from~~of ~~Panasonic~~any ~~Toughbooks®~~available ~~and~~incentives ~~Arbitrator®~~in ~~digital~~order ~~video systems~~ to ~~emergency~~provide ~~lighting~~competitive ~~systems~~pricing and ~~wireless technology. We~~minimize ~~believe~~delivery ~~that~~time ~~we have all of the high-end~~to ~~products~~ our customers ~~need~~while tomaintaining ~~handle~~our ~~their~~product ~~day-to-day~~margins. ~~operations~~Typically, ~~and~~once ~~protect~~we ~~the~~sign ~~public~~an ~~they~~ATSE ~~serve.~~contract ~~Every~~with ~~product~~our customers, we ~~sell~~then ~~is tested~~purchase byrequired ~~highly~~components ~~trained~~from ~~technicians~~manufacturers and ~~guaranteed~~assemble ~~to work in even~~ the camera ~~most~~systems ~~extreme~~at ~~conditions.~~our Wefacility ~~specialize~~ in ~~seamlessly~~Hanover, ~~incorporating custom-built solutions within existing networks~~Maryland. WeSales ~~deliver~~generally ~~our~~are ~~end-to-end solutions with service programs that work~~ for ~~agencies large~~services ~~and small~~only, ~~from turnkey~~with ~~drop~~Brekford ~~shipping~~maintaining toownership ~~municipal leases.~~of ~~Our commitment is to design and deliver solutions that meet~~provided orhardware ~~exceed industry standards for safety, ergonomics, reliability, serviceability~~ and ~~uniformity~~software.

17 Merger Agreement

We ~~develop~~As ~~integrated,~~reported ~~interoperable,~~on ~~feature~~Amendment Number 1 to a Form 8-~~rich~~K ~~mobile~~filed ~~systems~~with ~~that~~the ~~enable~~Securities ~~first~~and ~~responders~~Exchange Commission on February 14, ~~such~~2017, ason February 10, ~~police~~2017, ~~fire~~Brekford entered into an Agreement and ~~EMS,~~Plan of Merger (the “Merger Agreement”) to ~~obtain~~combine the businesses of Brekford and ~~exchange~~KeyStone ~~information~~Solutions, inInc., ~~real~~a ~~time~~Delaware corporation (“KeyStone”). The ~~rapid~~Merger ~~dissemination~~Agreement ofprovides ~~real~~that ~~time~~Brekford ~~information~~and isKeyStone ~~critical~~will toeach ~~determine~~engage ~~and~~in ~~assure~~merger ~~timely~~transactions ~~and~~(the ~~precise~~“Mergers”) ~~resource~~with ~~allocation~~separate bywholly-owned ~~public~~subsidiaries of ~~sector~~a ~~decision~~newly-formed ~~makers~~company, Novume Solutions, Inc. As, a ~~premiere~~Delaware corporation ~~Panasonic~~(“Novume”). ~~Toughbook®~~Under ~~partner~~one merger transaction (the “Brekford Merger”), weone ~~augment~~wholly-owned ~~these~~subsidiary of ~~rugged~~Novume ~~laptops~~will bymerge ~~designing~~with and ~~manufacturing~~into ~~vehicle~~Brekford, ~~mounting systems~~leaving ~~and~~Brekford ~~docking~~as ~~stations~~a wholly-owned ~~for~~subsidiary ~~in-vehicle~~of ~~communications equipment~~Novume. ~~With~~Under ~~rugged~~a ~~laptop~~separate ~~computers~~merger transaction (the “KeyStone Merger”), ~~tablets~~KeyStone will merge with and ~~hand~~into another wholly-~~held~~owned subsidiary of Novume ~~devices,~~(“KeyStone ~~GPS~~Merger ~~terminals~~Sub”), ~~two-way~~with ~~radios,~~KeyStone ~~and~~Merger ~~full~~Sub surviving ~~console~~such ~~systems~~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 weTraffic ~~provide~~Safety, ~~ergonomically~~Inc.” ~~sound~~and ~~mounting~~KeyStone ~~products~~Merger ~~with~~Sub ~~full~~will ~~port~~change its ~~replication~~name to “KeyStone Solutions, Inc.”

~~Toughbook~~ ~~Arbitrator~~Merger 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. When combined with wearable body cameras, our total client solution provides a video capture solution that maintains the chain of evidence from the initial event through to court proceedings.Consideration

~~Vehicle~~ ~~Services~~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 1/15th ~~Upfitting~~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 Brekford~~ ~~360-degree~~The ~~vehicle~~Merger ~~solution provides complete vehicle upfitting~~Consideration, ~~mobile~~ ~~data~~ and ~~video~~each ~~solutions~~of ~~for~~the ~~public~~Brekford ~~safety~~Exchange ~~agencies. The~~Ratio ~~360-degree~~and ~~vehicle~~the ~~solutions~~KeyStone ~~approach~~Exchange ~~provides customers with a one-stop upfitting~~Ratio, ~~cutting~~were ~~edge~~determined ~~technology~~so ~~and installation~~that, ~~service.~~immediately ~~The~~after ~~comprehensive~~the ~~approach~~Effective ~~enables~~Time, ~~Brekford to be~~ the ~~only~~pre-merger stockholders ~~stop~~of ~~our~~Brekford ~~customers~~will ~~need~~own tosuch ~~make~~portion toof ~~purchase~~the ~~law~~capital ~~enforcement vehicles~~stock ~~(GM,~~of ~~Ford,~~Novume ~~Dodge), have them upfitted with lights, sirens,~~as ~~radio~~shall ~~communication~~be ~~and~~equal ~~rugged IT technology, and have them “ready~~ to ~~roll”.~~approximately ~~Our~~20% ~~mission~~of isthe toissued ~~provide~~ and ~~install~~outstanding ~~equipment~~Novume ~~that~~Common ~~ensures~~Stock, ~~safe~~on ~~and~~a ~~efficient~~fully-diluted ~~mission~~basis, ~~critical~~and ~~vehicles while incorporating~~ the ~~latest~~pre-merger stockholders ~~technological~~of ~~advances.~~KeyStone Wewill ~~adhere~~own ~~to strict~~that ~~quality~~portion ~~control~~of ~~procedures~~the ~~and~~capital ~~provide comprehensive~~stock ~~services.~~of ~~The~~Novume ~~Brekford~~as ~~certified~~is ~~installation~~equal ~~team~~to ~~provides~~approximately ~~our customers~~80% ~~the highest level~~ of ~~expertise~~the issued and outstanding ~~service~~Novume ~~from~~Common ~~inception to completion~~Stock, ~~including~~on ~~maintenance~~a ~~and upgrades~~fully-diluted basis.

Closing Conditions

The closing of the Merger Agreement will take place upon the fulfillment or waiver of all of the conditions to closing set forth in Article VIII of the Merger Agreement or as soon thereafter as practicable, but not later than July 31, 2017, unless otherwise mutually agreed by Brekford and KeyStone. One closing condition is that each of Brekford and KeyStone receive all stockholder approvals and corporate approvals required by the Delaware General Corporations Code and the organizational documents of each company to complete the Mergers. This satisfaction of this condition is assured. On February 10, 2017, the board of directors of Brekford authorized and approved the Mergers and the adoption of the Merger Agreement. On the same day, Chandra Brechin, a member of Brekford’s Board of Directors, Scott Rutherford, Brekford’s Chief Strategic Officer and a member of its Board of Directors and Robert West, a member of the Board of Directors of Brekford who own an aggregate of 25,712,787 shares of Brekford Common Stock, which represent approximately 52.13% of the issued and outstanding shares of Brekford's Common Stock entered into separate agreements (“Voting Agreements”) with Brekford pursuant to which they separately agreed with Brekford to vote all of their shares in favor of the Brekford Merger and against any action or transaction that would delay or compromise the ability of Brekford to effectuate the Mergers. On February 9, 2017, the board of directors of KeyStone (the “KeyStone Board”) authorized and approved the Mergers and the adoption of the Merger Agreement. On the same date, certain holders of more than 51% of the issued and outstanding shares of KeyStone Common Stock entered into Voting Agreements with KeyStone, and such holders indeed delivered written consents to KeyStone approving the Mergers and adopt the Merger Agreement.

A second closing condition requires Novume to prepare and file a Registration Statement on Form S-4 (the “Registration Statement”), which shall be declared effective by the Securities and Exchange Commission (the “SEC”) prior to the Effective Time, registering the Merger Consideration. This shall not include registration of the options issuable as Merger Consideration in exchange for options previously received by stockholders of Brekford under Brekford’s 2008 Director’s Compensation Plan or stockholders of KeyStone under KeyStone’s 2016 Equity Award Plan, which are intended to be registered separately on a Registration Statement on Form S-8 after the Effective Time. The Registration Statement will include an information statement of Brekford, which Brekford shall distribute to its stockholders in accordance with the rules and regulations of the Securities Exchange Act of 1934, as amended, prior to the Effective Time. In furtherance of this condition, Novume filed the Registration Statement with the SEC on February 10, 2017. The Registration Statement remains subject to the SEC’s review and comment, and to amendment, as appropriate, by Novume.

Finally, prior to the Effective Time, Novume shall enter into five-year employment agreements with each of Scott Rutherford, Brekford’s current Chief Strategy Officer, and Rodney Hillman, Brekford’s current President and Chief Operating Officer (the “Employment Agreements”). Pursuant to the Merger Agreement Mr. Rutherford shall serve as Chief Technology Officer and Mr. Hillman shall serve as President and Chief Operating officer of Brekford Traffic Safety, Inc.

Under the Merger Agreement, Novume shall use its best efforts, as soon as practicable after the Effective Time, to obtain listings for Novume Common Stock, Novume Preferred Stock and certain warrants to purchase Novume Common Stock on a national stock exchange, or, alternatively, to obtain quotations for such securities on the OTCQX.

Leadership of Novume

The leadership of Novume shall be substantially comprised of the current management of KeyStone.

At the Effective Time, the Board of Directors of Novume (the “Novume Board”), shall have seven (7) members, four (4) of whom shall be independent within the meaning of the Exchange Act, and the national stock exchange to which Novume intends to apply for listings of the Novume securities indicated above. Six (6) members of the Novume Board shall be designated by KeyStone, and one (1) member of the Novume Board shall be designated by Brekford, subject to the approval of KeyStone.

Termination Fee

If (i) the Merger Agreement (A) is terminated by KeyStone due to the withdrawal of the recommendation of the Merger Agreement by the board of directors of Brekford (the “Brekford Board”), or by Brekford or KeyStone because of the failure to obtain the requisite Brekford stockholders’ approval, or (B) is terminated as a result of Brekford’s material breach of its obligations with regard to Closing and to filing and distributing of the Registration Statement required for the transaction, which breach is not cured within thirty (30) days after notice thereof to Brekford, and (ii) at the time of such termination there shall have been an Acquisition Proposal (as defined in the Merger Agreement) involving Brekford or any of its subsidiaries (whether or not such offer shall have been rejected or shall have been withdrawn prior to the time of such termination), Brekford shall pay KeyStone a termination fee of $250,000 (the “Termination Fee”). The Termination Fee shall be payable in cash at the date of termination.

Results of Operations

Results of Operations for the ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2016 and~~2017 ~~2015~~and 2016

The following tables summarize ~~and compare~~ selected items from the consolidated statements of operations from continuing operations for the ~~nine~~ three months ended ~~September~~March 3031, ~~2016~~ ~~and~~2017 compared to the ~~nine~~three months ended March ~~September 30~~31, ~~2015~~2016.

	Nine Months Ended September 30,		(Decrease) / Increase
	Three Months Ended March 31,		(Decrease) / Increase
	2016	2015	$	%
	2017	2016	$	%
Net Revenues	$~~10,~~748,~~006~~168	14$612,~~586,453~~946	(3$135,~~838,447)~~222	~~(26~~22.3) 1%
Cost of Revenues	8295,~~201,217~~187	11184,~~711,852~~130	(3111,~~510,635 )~~057	~~(30~~60.0) 3%
Gross Profit	$2452,~~546,789~~981	2$428,~~874,601~~816	~~(327~~$24,~~812 )~~165	~~(11~~5.4) 6%
Gross Profit Percentage of Revenue	2360.75%	1970.70%

Revenues

~~Revenues~~ Revenue for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 amounted to $~~10,~~748,~~006~~168 as compared to ~~revenues~~ revenue of $14612,~~586,453~~ 946 for the ~~nine~~ three months ended ~~September~~March 3031, ~~2015~~2016, representing ~~a decrease~~an increase of $3135,~~838,447 or~~222 26or 22.31%. ~~ATSE~~The ~~services~~increase was attributable to the addition of new contracts in New Rochelle, New York, Brice, Ohio, and ~~vehicle~~Calvert County, ~~services~~Maryland, ~~decreased~~as well as deployment of additional cameras for existing clients. The increase was offset by 12a decrease in revenue from our Saltillo, Mexico program which reported no revenue for the three months ended March 31, 2017.9% On March 11, 2017 the City resumed collection efforts for unpaid fines and announced that ~~28.7%~~these ~~respectively~~efforts would continue through the expiration of the contract on December 31, 2017.

~~The~~ ~~ATSE~~Our ~~decrease~~contract ~~was~~structures ~~primarily~~generate ~~driven~~revenue bybased ~~reduced collections~~ on ~~our Saltillo,~~either ~~Mexico contract as well as reduced revenue for certain~~a ~~legacy~~percentage ~~Maryland~~of ~~contracts~~fines ~~due~~collected toby ~~the~~our ~~changeover~~customers toor a fixed ~~fee~~monthly ~~invoicing~~flat ~~model~~fee per camera. ~~Revenue~~At ~~for~~March ~~existing~~31, ~~legacy~~2017 ~~Maryland~~approximately ~~contracts~~80% of our ~~should~~contracts ~~remain~~were ~~flat~~based ~~through~~on ~~expiration~~a percentage of ~~the~~fines ~~contracts,~~collected ~~barring~~and ~~any~~20% ~~unforeseen~~were ~~changes~~based inon ~~the~~a ~~number~~monthly offlat ~~cameras~~fee ~~deployed~~per camera. WeCertain ~~have~~contracts in ~~started~~the tostate ~~see~~of ~~revenue~~Maryland ~~contributions~~were ~~from~~converted ~~our~~in ~~three~~2016 ~~new~~from ~~ATSE~~percentage of ~~contracts~~fines ~~(Brice,~~collected ~~OH,~~to ~~New~~monthly ~~Rochelle,~~flat ~~NY,~~fee ~~and Calvert County, MD),~~ as ~~all~~ ~~have~~a ~~completed~~result ~~warning~~of ~~phases~~a ~~and~~change ~~are~~ in ~~full enforcement.~~the ~~Projected~~law ~~camera~~that ~~deployments~~prohibits ~~from~~ATSE ~~these~~contractors ~~three~~from ~~contracts~~being iscompensated in ~~projected~~relation to ~~more~~volume ~~than~~of ~~double~~fines incollected. ~~the~~The ~~first~~remainder ~~quarter~~ of ~~2017, with~~our ~~commitments~~Maryland tocontracts ~~add~~will 16be ~~more~~converted ~~units~~ to ~~the~~a ~~existing~~flat 11monthly fee structure in 2017.

We have also continued to experience challenges that are outside the Company’s control with respect to collection rates for our Saltillo, Mexico program. Due to extended delays with implementation of enforcement procedures and other concerns regarding uncollected fine amounts, the Company elected to terminate its exclusive distribution agreement with Grupo Canviso Tech. We have subsequently initiated discussions directly with the City of Saltillo in order to establish a direct contract to support operations through the original term of the program, which is expected to run through December 31, 2017. We chose to take this approach for the purpose of ensuring future revenue and profit streams that are beneficial to the Company. The Company anticipates that a new agreement will be signed in the fourth quarter of 2016; however, we are not able to predict when, or if, collection efforts on prior unpaid fines will be successful until we are able to implement new procedures within the new agreement structure.

Newly added contracts in New Rochelle, New York, Brice, Ohio, and Calvert County, Maryland have begun to provide a material contribution to paid citation rates as of this quarter. As stated previously, we anticipate adding 16 additional cameras specific to these contracts between now and the end of the first quarter of 2017. Additionally, we are continuing to pursue contracts in the U.S. and Latin America, via pilot projects and/or RFP processes, with a current prospect pipeline in excess of 1,000 cameras. Some of these potential programs are in advanced stages of discussion; however, there is no assurance that these efforts will lead to contracts. The Company observes a policy not to comment on the specifics of any pre-contract discussions or pilot projects.

The vehicle services decrease was primarily driven by decreased sales and installations of rugged IT products, as certain large scale orders from this period in 2015 were not repeated in 2016. Our open sales order pipeline totaled approximately $1.5 million at September 30, 2016 and we have initiated procedures to expedite shipments and installations in the future. Additionally, we are working to broaden our customer base regionally and nationally in order to offset revenue reductions caused by the three-year upgrade cycle.

Cost of Revenues

Cost of revenues for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 amounted to to $8295,~~201,217~~187 as compared to $11184,~~711,852~~130 for the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~2016, aan ~~decrease~~increase of $3111,~~510,635~~057 or 3060.03%. ~~The~~This ~~change~~increase was ~~primarily~~related ~~due~~ to ~~the~~direct ~~lower~~labor ~~sales volume~~ and ~~direct~~materials ~~expenses~~costs ~~for~~associated with ~~ATSE~~increased ~~programs~~camera ~~and~~deployments ~~lower sales~~ and ~~installations~~citation ~~of rugged IT products~~issuances.

Gross Profit

~~Gross~~ Gross profit for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 amounted to $2452,~~546,789~~981 as compared to $2428,~~874,601~~816 for the ~~nine~~three months ended ~~September 30~~March 31, ~~2015~~2016, aan ~~decrease~~increase of $~~327~~24,~~812~~165 or 115.46%. The ~~change~~ increase was primarily due to ~~the~~new ~~lower sales volume and direct expenses for ATSE~~ programs ~~and~~ ~~lower sales~~ and ~~installations~~offset ofby ~~rugged~~a ITreduction ~~products. Overall~~in ~~gross~~recurring ~~margin~~revenue ~~for~~from the ~~nine months ended September 30~~Saltillo, ~~2016~~Mexico ~~was~~program ~~23.7%~~ as ~~compared to 19~~discussed previously.7% Gross ~~for the nine months ended September 30, 2015. ATSE gross~~ margin for ~~the~~three ~~nine~~ months ended ~~September 30~~March 31, ~~2016~~2017 was 67 60.85% as compared to 6870.70% for the ~~nine~~three months ended March ~~September 30~~31, ~~2015~~ 2017. ~~Vehicle~~The ~~services gross~~ margin ~~for~~reduction ~~the nine months ended September 30, 2016~~ was ~~14.3%~~primarily asdue ~~compared~~ to ~~11.1% for the nine~~an ~~months ended September 30, 2015. The~~ increase in ~~gross~~percentage ~~margin was due to a higher concentration~~ of ~~e-ticketing~~monthly ~~and~~flat ~~installation purchase~~fee ~~orders~~contracts ~~for~~as ~~the nine months ended September 30,~~discussed ~~2016~~previously.

Expenses

	Nine Months Ended September 30,		Increase / (Decrease)
	Three Months Ended March 31,		Increase / (Decrease)
	2016	2015	$	%
	2017	2016	$	%
OPERATING EXPENSES
Salaries and related expenses	$1426,~~489,311~~963	1$402,~~482,003~~180	7$24,~~308~~783	06.52%
Selling, general and administrative expenses	1352,~~122,333~~472	1301,~~264,458~~645	~~(142~~50,~~125)~~827	~~(11~~16.2) 9%
Total operating expenses	$2779,~~611,644~~435	2$703,~~746,461~~825	~~(134~~$75,~~817 )~~610	(410.9) 7%

1926

Salaries and Related Expenses

Salaries and related expenses for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 amounted to $1426,~~489,311as~~ 963 as compared to $1402,~~482,003~~180 for the ~~nine~~ ~~months~~three months ended ~~September~~March 3031, ~~2015~~2016, an increase of $724,~~308~~783 or 0 6.51%,. asThe increase ~~there~~ was noattributable ~~significant~~to ~~difference~~compensation inincreases ~~personnel~~for ~~head~~existing ~~count~~engineering orand ~~compensation~~business ~~expense~~development personnel.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 amounted to $1352,~~122,333~~472 as compared to $1301,~~264~~645,~~458~~ for the ~~nine~~three months ended ~~September~~ 30March 31, ~~2015~~2016, aan ~~decrease~~increase of $~~142~~50,~~125~~827 or 11 16.29%. The ~~decrease~~increase was primarily driven by ~~lower~~corporate ~~ATSE~~and professional ~~program~~fees ~~management~~related ~~and~~to ~~depreciation expenses~~our recent transactions.

Other Expenses, net

Total other expenses, ~~increased~~net for the ~~nine~~three months ended ~~September~~March 3031, 2017 ~~2016~~amounted to $~~739~~236,~~143~~368 compared to $~~526~~230,~~515~~900 for the ~~nine~~three months ~~ended~~ ~~September~~ended 30March 31, ~~2015. The~~2016, ~~increased~~an ~~expenses were due to primarily to a net~~ increase ~~in financing cost~~ of $~~528~~5,~~039~~468, ~~that includes~~or ~~non-cash~~2.4%. ~~interest~~The ~~expense~~increase is ~~related~~due to the ~~original~~expense ~~issue discount~~ of ~~$28,076~~finance and ~~the~~interest ~~debt~~related ~~discount~~costs ~~amortization~~ of $~~280~~248,~~761~~352, as ~~well~~primarily asrelated to the ~~loss~~early ontermination ~~extinguishment~~fees of ~~debt of $291,912 resulting~~ ~~from the~~ $~~300~~124,000 ~~conversion~~and write-off of ~~debt~~prepaid tofinancing ~~Common~~costs ~~Stock~~of ~~during~~$69,681, ~~the~~in ~~period~~the ~~September~~three ~~30,~~months ~~2016~~ended ~~related~~March to31, ~~the~~2017 ~~Investor~~compared ~~Note~~to finance and ~~Warrant. The~~interest ~~remainder~~related costs of ~~the~~$107,588 ~~increase~~and ~~was~~the ~~due~~loss toon ~~cash interest~~extinguishment ~~expense~~of ~~associated~~debt ~~with~~of ~~balances~~$122,472 on for the ~~Company’s revolving~~three ~~line~~months ofended ~~credit~~March 31, 2016.

Net Income (Loss) ~~Income~~

Net ~~loss~~income from continuing operations for the ~~nine~~three months ended ~~September 30~~March 31, ~~2016~~2017 amounted to $~~803~~1,~~998~~505,310 compared to a net loss of $~~398~~505,~~375~~ 909 for the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~2016, an increase of $~~405~~2,~~623~~011,219. ~~The~~A ~~increased loss~~tax benefit of $2,068,132 was ~~primarily~~the ~~due~~primary todriver ~~lower~~of the ~~sales~~increase. ~~and~~Excluding ~~gross~~the ~~profits~~tax benefit, net loss from ~~rugged~~continuing IToperations ~~and~~before ~~ATSE~~income ~~services,~~taxes asfor ~~well~~the asthree ~~other~~months ~~expenses~~ended ~~consisting~~March of31, ~~non-cash~~2017 ~~financing~~amounted ~~costs~~to ~~associated~~$562,822 ~~with~~for ~~the~~an ~~Investor~~increase ~~Note~~of ~~and Warrant. Excluding~~$56,913 ~~other~~or ~~expenses~~11.2% ~~consisting of both~~as ~~cash~~compared ~~and~~to ~~non-cash~~net ~~interest~~loss ~~expense,~~from ~~operating~~continuing ~~loss~~operations ~~amounted~~before toincome taxes of $64505,~~855~~909 for the ~~nine~~three months ended ~~September~~March 3031, 2016. asThe ~~compared~~small change was attributable to ~~income~~ ofhigher ~~$128~~overall expenses,~~140~~ ~~for~~offset by the higher ~~nine~~gross ~~months~~profit, ~~ended~~as ~~September~~discussed ~~30, 2015~~previously.

Results of Operations for the Three Months Ended September 30, 2016 and 2015

The following tables summarize and compare selected items from the statement of operations for the three months ended September 30, 2016 and the three months ended September 30, 2015.

	Three Months Ended September 30,		(Decrease) / Increase
	2016	2015	$	%
Net Revenues	$3,035,153	5,776,862	(2,741,709)	(47.5) %
Cost of Revenues	2,158,181	4,887,299	(2,729,118 )	(55.8) %
Gross Profit	$876,972	889,563	(12,591)	(1.4) %
Gross Profit Percentage of Revenue	28.9%	15.4%

Revenues

Revenues for the three months ended September 30, 2016 amounted to $3,035,153 as compared to revenues of $5,776,862 for the three months ended September 30, 2015, representing a decrease of $2,741,709 or 47.5%. ATSE services decreased by 5.8% and vehicle services decreased by 53.4%.

The ATSE decrease was primarily driven by reduced collections on our Saltillo, Mexico contract as well as reduced revenue for certain legacy Maryland contracts due to the changeover to a fixed fee invoicing model, offset by collections from the initial startup of contracts in Brice Ohio, New Rochelle New York, and Calvert County Maryland. Revenue for existing legacy Maryland contracts should remain flat through expiration of the contracts, barring any unforeseen changes in the number of cameras deployed. We have started to see revenue contributions from our three new ATSE contracts (Brice OH, New Rochelle NY, and Calvert County MD), as all have completed warning phases and are in full enforcement. Projected camera deployments from these three contracts is projected to more than double in the first quarter of 2017, with commitments to add 16 more units to the existing 11.

The vehicle services decrease was primarily driven by decreased sales and installations of rugged IT products, as certain large scale orders from this period in 2015 were not repeated in 2016 Our open sales order pipeline totaled approximately $1.5 million at September 30, 2016 and we have initiated procedures to expedite shipments and installations in the future. Additionally, we are working to broaden our customer base regionally and nationally in order to offset revenue reductions caused by the three-year upgrade cycle.

Cost of Revenues

Cost of revenues for the three months ended September 30, 2016 amounted to $2,158,181 as compared to $4,887,299 for the three months ended September 30, 2015, a decrease of $2,729,118 or 55.8%. The change was primarily due to the decrease in sales volume for rugged IT products.

Gross Profit

Gross profit for the three months ended September 30, 2016 amounted to $876,972 as compared to $889,563 for the three months ended September 30, 2015, a decrease of $12,591 or 1.4%. Overall gross margin for the three months ended September 30, 2016 was 22.9% as compared to 15.4% for the three months ended September 30, 2015. ATSE gross margin for the three months ended September 30, 2016 was 72.7% as compared to 64.5% for the three months ended September 30, 2015. The increase was due to a reduction in fixed direct program expenses. Vehicle services gross margin for the three months ended September 30, 2016 was 16.4% as compared to 8.5% for the three months ended September 30, 2015. The increase in gross margin was due to a higher concentration of e-ticketing and installation purchase orders for the three months ended September 30, 2016 compared to a higher concentration of lower margin rugged IT orders for the three months ended September 30, 2015.

Expenses

	Three Months Ended September 30,		Increase / (Decrease)
	2016	2015	$	%
OPERATING EXPENSES
Salaries and related expenses	$484,783	485,740	(957)	(0.2) %
Selling, general and administrative expenses	335,666	397,473	(61,887)	(15.5) %
Total operating expenses	$820,449	883,213	(62,764)	(7.1) %

Salaries and Related Expenses

Salaries and related expenses for the three months ended September 30, 2016 amounted to $484,783 as compared to $485,740 for the three months ended September 30, 2015, a decrease of $957 or 0.2%, as there was no significant difference in personnel head count or compensation expense.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended September 30, 2016 amounted to $335,666 as compared to $397,473 for the three months ended September 30, 2015, a decrease of $61,887 or 15.5%. The decrease was primarily driven by lower ATSE program management and depreciation expenses.

Other Expenses, net

Total other expenses decreased for the three months ended September 30, 2016 to $327,079 compared to $248,997 for the three months ended September 30, 2015. The increase in expenses was primarily due to conversion of debt to common stock during the three months ended September 30, 2016 related to the Investor Note and Warrant. The remainder of the expense included financing costs of $207,062 that includes non-cash interest expense related to the original issue discount of $8,740 and the debt discount amortization of $87,402, as well as the loss on extinguishment of debt of $130,517 resulting from the $150,000 conversion of debt to common stock during the three months ended September 30, 2016 related to the Investor Note and Warrant. The remainder of the increase was due to an increase in cash interest expense associated with balances on the Company’s revolving line of credit.

Net (Loss) Income

Net loss for the three months ended September 30, 2016 amounted to $270,556 compared to a net loss of $242,647 for the three months ended September 30, 2015, an increase of $27,909. The increased loss was primarily due to other expenses consisting of non-cash financing costs associated with the Investor Note and Warrant. Excluding other expenses consisting of both cash and non-cash interest expense, operating income amounted to $56,523 for the three months ended September 30, 2016 as compared to income of $6,350 for the three months ended September 30, 2015.

Financial Condition, Liquidity and Capital Resources

At ~~September~~At 30March 31, ~~2016~~2017, we had total current assets of approximately $3~~,544,580~~.17 million and total current liabilities of approximately $~~3,012,867~~1.13 million resulting in a working capital surplus of approximately $~~531,713~~2.04 million. At ~~September~~March 3031, ~~2016~~2017 inventory totaled approximately $~~472,800~~0.3 million consisting primarily of ~~raw~~ATSE ~~materials~~cameras ~~related to our existing pipeline of committed customer sales orders~~components. In In comparison, at December 31, ~~2015~~2016, we had total current assets of approximately $~~5,344,344~~2.36 million and total current liabilities of approximately $41.81 million,~~952,773,~~ resulting in a working capital surplus of of approximately $~~391,571~~0.55 million.

~~The~~ The Company’s accumulated deficit ~~increased~~decreased to approximately $~~11,746,378~~7.2 million at ~~September~~ 30December 31, 2016 from $~~10,942,380~~12.0 million at December 31, ~~2015~~2016, as a result of the net ~~loss~~income recorded for the ~~period~~three months ended ~~September~~March 3031, ~~2016~~ 2017. Cash flows ~~provided~~used byin continuing operations for the ~~period~~three months ended ~~September~~ 30March 31, ~~2016~~2017 were approximately $~~426~~0.6 million,~~780,~~ compared to cash flows used in continuing operations for the ~~period~~three months ended ~~September~~March 3031, ~~2015~~2016 of approximately $~~1,971,248~~0.03 million.

As ~~discussed~~On inJuly ~~Note~~12, 52016 to(the “Closing Date”), the ~~condensed~~Company entered ~~consolidated~~into ~~financial~~a loan and security agreement (the “Loan ~~statements~~Agreement”) ~~presented~~with ~~elsewhere~~Fundamental inFunding ~~this~~LLC ~~Quarterly~~(the “Lender”). The ~~Report,~~primary purpose of the new ~~Company~~Loan Agreement is ~~indebted~~ to ~~C.B.~~pay ~~Brechin~~off the prior loan, and ~~Scott~~provide ~~Rutherford~~additional working ~~under~~capital. The Loan Agreement provides for a multi-draw loan ~~unsecured~~to ~~promissory~~the ~~notes~~Company infor (i) the ~~aggregate~~Company’s ~~balance~~accounts receivable, the lesser of (y) $2,500,000 or as (z) 85% of ~~December~~the ~~31,~~Company’s eligible ~~2015. On~~accounts ~~November~~and 9(ii) the Company’s inventory advances, the ~~2015~~lesser of (y) $500,000 ~~the~~or ~~maturity dates~~(z) 50% of ~~these~~the ~~unsecured~~eligible ~~promissory~~inventory (the ~~notes~~“Revolving ~~were~~Loans”). ~~extended~~The maximum amount available to the ~~earlier~~ ofCompany ~~(i)~~under ~~November~~the 9,Loan ~~2016~~Agreement orfor the Revolving Loans is $3,500,000 (~~ii)~~the 10“Credit ~~business~~Limit”). ~~days~~In ~~from~~addition, the ~~date~~Lender onagreed ~~which~~to ~~Brekford~~provide ~~closes~~the anCompany ~~equity~~with ~~financing~~an ~~that~~accommodation ~~generates~~loan in ~~gross~~an ~~proceeds~~amount not to exceed $500,000, which shall be repaid in thirty-six ~~the~~(36) ~~aggregate~~equal ~~amount~~monthly installments of ~~not~~principal ~~less~~and interest ~~than~~(the “Accommodation Loan” and together with $5the Revolving Loans,~~000,000~~ the “Loans”).

~~The~~ ~~Company~~As ~~intends~~discussed toin ~~continue~~Note ~~its~~6 ~~efforts~~ to ~~expand~~the ~~sales~~condensed ofconsolidated ~~ATSE~~financial ~~services,~~statements ~~and~~presented ~~such~~elsewhere ~~expansion~~in ~~may~~this ~~significantly~~Quarterly ~~increase~~Report, the Company’s ~~working~~is ~~capital needs~~indebted to C.B. OnBrechin ~~March~~and ~~17,~~Scott ~~2015,~~Rutherford ~~the~~under ~~Company~~unsecured ~~entered~~promissory ~~into~~notes ain ~~note~~the ~~and~~aggregate ~~warrant~~balance ~~purchase agreement providing for immediate funding~~ of $~~650~~500,000 ~~through the issuance of~~as ~~the~~of ~~Investor~~December ~~Note~~31, ~~(see~~2016. On ~~Note~~November 67, to2016, the ~~condensed~~ ~~consolidated~~maturity ~~financial~~dates ~~statements presented elsewhere in this Quarterly Report for additional detail). The primary use~~ of ~~proceeds~~these ~~was~~unsecured topromissory ~~fund startup~~notes ~~costs~~were ~~for~~extended ~~the initial phase of a project in Mexico providing turnkey ATSE services~~ to the ~~City of Saltillo, which~~ ~~began operations~~earlier ~~in the second quarter~~ of ~~2015.~~(i) ~~Additionally~~November 7, ~~the~~ ~~Company~~2017 ~~entered~~or ~~contracts~~(ii) ~~for~~10 ~~three~~business ~~ATSE~~days ~~programs~~from ~~in Calvert~~the ~~County,~~date ~~Maryland,~~on ~~Brice,~~which ~~Ohio~~Brekford ~~and~~closes ~~New~~an ~~Rochelle,~~equity ~~New~~financing ~~York,~~that ~~which~~generates ~~started~~gross ~~generating~~proceeds ~~revenue~~ in the ~~3rd~~aggregate ~~quarter~~amount of not less than ~~2016~~$5,000,000.

On ~~July 12~~March 17, ~~2016 (the “Closing Date”)~~2015, the Company entered into a ~~loan~~note and ~~security~~warrant purchase agreement ~~(the~~providing “Loan Agreement”) with Fundamental Funding LLC (the “Lender”). The primary purpose of the new Loan Agreement is to pay off the prior loan, and provide additional working capital. The Loan Agreement provides for aimmediate ~~multi-draw~~funding ~~loan to the Company for (i) the Company’s accounts receivable, the lesser~~ of ~~(y)~~ $2650,~~500,~~000 ~~or (z) 85% of the Company’s~~ ~~eligible~~through ~~accounts and (ii)~~ the ~~Company’s~~issuance ~~inventory~~of ~~advances,~~ the ~~lesser~~Investor ofNote (y)see ~~$500,000~~Note or7 ~~(z) 50% of the eligible inventory~~to (the consolidated ~~“Revolving~~financial ~~Loans”).~~statements ~~The~~presented ~~maximum~~elsewhere ~~amount available~~in tothis ~~the~~Quarterly ~~Company~~Report ~~under the Loan Agreement~~ for ~~the~~additional ~~Revolving Loans is $3,500,000 (the “Credit Limit”~~detail). InThe ~~addition,~~primary ~~the Lender~~use ~~agreed to provide the Company with an accommodation loan in~~of anproceeds ~~amount~~was ~~not~~ to ~~exceed~~fund ~~$500,000,~~startup ~~which~~costs ~~shall~~for ~~be repaid in thirty-six (36) equal monthly installments of principal and interest (~~the ~~“Accommodation~~initial ~~Loan”~~phase ~~and together with the Revolving Loans, the “Loans”). Management believes that the Company’s current level~~ of ~~cash~~a ~~combined~~project ~~with cash that it expects to generate~~ in ~~its~~Mexico ~~operations during~~providing ~~the~~turnkey ~~next~~ATSE ~~twelve~~services ~~months including anticipated new customer contracts and funds available from the credit facility (see Note 14) will be sufficient~~ to ~~sustain~~ the ~~Company’s~~City ~~business~~of ~~initiatives through at least September 30~~Saltillo, ~~2017,~~which ~~but~~began operations ~~there~~in ~~can~~the ~~be no~~second ~~assurance~~quarter ~~that these measures will be successful or~~of ~~adequate~~2015.

2227

~~In the~~ ~~event~~On ~~that~~February ~~the Company’s cash reserves~~28, ~~cash flow from operations and funds available under the Credit Facility (see Note 14) are not sufficient to fund the Company’s future operations~~2017, itas ~~may~~presented ~~need~~elsewhere ~~to obtain additional capital. We currently have no firm commitments for any additional capital. No assurance can be given that the Company will be able to obtain additional capital~~ in ~~the~~this ~~future or that such capital will be~~Quarterly ~~available~~Report, to the Company oncompleted ~~acceptable~~a ~~terms. The Company’s~~transaction ~~ability~~ to ~~obtain~~sell ~~additional capital will be~~substantially ~~subject~~all toassets ~~a number of factors, including market conditions, the Company’s operating performance~~ and ~~investor~~certain ~~sentiment,~~liabilities ~~which may~~related ~~make it difficult for the Company~~ to ~~consummate~~its avehicle ~~transaction~~services atbusiness. ~~the~~From ~~time, in~~ the ~~amount~~approximately ~~and/or upon the terms and conditions that the Company desires~~$4. ~~Even~~0 ifmillion wein ~~are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected~~ cash ~~requirements that would force us to seek alternative financing. Further~~proceeds, ~~if we issue additional equity~~all oroutstanding debt ~~securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those~~ of ~~existing holders of our shares of common stock or~~ the ~~debt securities may cause us to be subject to restrictive covenants. If the~~ Company iswas ~~unable to raise additional capital at the times~~retired, inincluding the ~~amounts~~Loan Agreement, ~~or upon~~ the ~~terms and~~Investor ~~conditions that it desires~~Note, ~~then~~and itthe ~~might~~notes ~~have~~payable to ~~delay,~~Brechin ~~scale~~and ~~back or abandon its expansion efforts~~Rutherford. ~~Even with such changes, the Company’s operations could consume available capital resources and liquidity.~~

Management believes that the Company’s current level of cash combined with cash that it expects to generate in its operations during the next twelve months including anticipated new customer contracts will be sufficient to sustain the Company’s business initiatives through at least May 2018, but there can be no assurance that these measures will be successful or adequate.

In the event that the Company’s cash reserves and cash flow from operations are not sufficient to fund the Company’s future operations, it may need to obtain additional capital. No assurance can be given that the Company will be able to obtain additional capital in the future or that such capital will be available to the Company on acceptable terms. The Company’s ability to obtain additional capital will be subject to a number of factors, including market conditions, the Company’s operating performance and investor sentiment, which may make it difficult for the Company to consummate a transaction at the time, in the amount and/or upon the terms and conditions that the Company desires. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock or the debt securities may cause us to be subject to restrictive covenants. If the Company is unable to raise additional capital at the times, in the amounts, or upon the terms and conditions that it desires, then it might have to delay, scale back or abandon its expansion efforts. Even with such changes, the Company’s operations could consume available capital resources and liquidity.

Cash Flows Used in Operating Activities

Our cash flows from operating activities are significantly affected by our cash to support the growth of our business in areas such as selling, general and administrative. Our operating cash flows are also affected by our working capital needs to support growth and fluctuations in inventory, personnel related expenditures, accounts payable and other current assets and liabilities.

~~Net~~ Net cash ~~provided~~used byin operating activities from continuing operations was $~~426~~648,~~780~~005 for the ~~nine~~ three months ended ~~September~~March 3031, ~~2016~~2017 compared to net ~~$1,971,248~~cash used in operating activities from continuing operations of $261,788 for the ~~nine~~three months ended ~~September~~March 3031, ~~2015, respectively~~2016. Cash was used primarily to fund our operations and working capital needs, net of non-cash expenditures such as depreciation and amortization, share based compensation for services and financing related costs. ~~During~~ For the ~~nine~~three months ended ~~September~~ 30March 31, ~~2016~~2017, the net ~~loss~~income of $~~803~~4,~~998~~778, 732, offset by ~~adjustments~~ a gain on sale of ~~customer~~the ~~payments~~vehicle services of $5,700,446, a decrease in current assets, net, of $170,683 and ~~vendor~~an ~~payments~~increase in current liabilities, ~~was~~net, of $338,919 were the primary ~~driver~~drivers of the cash ~~provided~~used by in operating activities for continuing operations.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~2016, the net loss of $~~398~~554,~~375~~285 ~~and~~offset ~~increase~~by ina ~~accounts~~non-cash ~~receivable amounting~~loss toon athe ~~net~~extinguishment ~~cash~~of debt of $122,472, a decrease in current assets, net, of $2102,~~133~~000 and an increase in current liabilities,~~049~~ net, of $145,163 were the primary drivers of the cash ~~used,~~provided ~~offset~~ by ~~an increase in other working~~ ~~capital~~operating ~~assets~~activities ~~and~~for ~~liabilities~~continuing operations.

Net cash provided by operating activities from discontinued operations was $3,634,882 for the three months ended March 31, 2017 compared to net cash used in operating activities from discontinued operations of $26,065 for the three months ended March 31, 2016. In the three months ended March 31, 2017, the gain on sale of the vehicle services of $5,700,446 was offset by a $2,000,000 note receivable, providing $3,700,446 in proceeds, net of costs, offset by net cash used to fund operating activities from discontinued operations of $65,564.

Cash Flows Used in Investing Activities

~~Net~~There was no cash used ~~in investing activities was $140,574~~ for the period ended ~~September~~ 30March 31, ~~2016~~2017 ~~and~~or ~~there~~March ~~was no cash used~~ 2016 for ~~the~~continuing ~~period ended September 30, 2015~~operations.

Cash Flows Provided by Financing Activities

Net cash used in financing activities from continuing operations was $~~273~~354,~~763~~646 for the ~~nine~~ three months ended ~~September~~March 3031, ~~2016,~~2017 ~~compared~~and to net cash provided by financing activities was $16,~~659,160~~716 for the ~~nine~~three months ended ~~September 30~~March 31, ~~2015~~2016. In the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017, the ~~Company~~ ~~made~~Company ~~payments~~paid toother ~~line~~notes ofpayable ~~credit~~ of $~~584~~354,~~960~~646. ~~under~~In the ~~Credit~~three months ~~Facility~~ended ~~related~~March to31, ~~outstanding customer invoices~~2016, ~~compared~~the toCompany ~~line of~~made ~~credit~~aggregate ~~advance~~principal payments of $17,~~441,126~~273 ~~for~~under ~~the~~capital ~~nine~~leases ~~months~~and ~~ended~~other ~~September~~note obligations and 30advanced net proceeds of $13,989 ~~2015~~from the line of credit.

Net cash used in financing activities from discontinued operations was $1,155,283 for the three months ended March 31, 2017 compared to net cash provided by financing activities from discontinued operations of $269,762 for the three months ended March 31, 2016.

Off-Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

Certain of our accounting policies are considered critical, as these policies require significant, difficult or complex judgments by management, often requiring the use of estimates about the effects of matters that are inherently uncertain. Our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2015~~2016 discusses those critical accounting policies and estimates that management uses to prepare our consolidated financial statements, which include those relating to accounts receivables allowances, revenue recognition and income taxes. We have reviewed those polices and believe that they remain our most critical accounting policies for the ~~period~~three months ended ~~September~~March 3031, ~~2016~~2017, and that no material changes therein have occurred.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Exchange Act, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer (Principal Financial Officer) as appropriate, to allow timely decisions regarding required disclosure. During the quarter ended ~~September~~March 3031, ~~2016~~2017, we carried out an evaluation, under the supervision and with the participation of our management, including the ~~Chief~~Principal Executive Officer and Chief Financial ~~Officer~~ Officer (Principal Financial Officer), of the effectiveness of the ~~design~~ design and operation of our disclosure controls and procedures, as ~~defined~~ defined in Rule 13(a)-15(e) under the Exchange Act. Based on ~~this~~ this evaluation, because of the Company’s limited resources ~~and~~ and limited number of employees as discussed below, management concluded that our disclosure controls and procedures were ineffective as of ~~September~~March 3031, ~~2016~~2017.

Management has identified the major control deficiencies as the lack of segregation of duties and limited accounting knowledge of Company debt and equity transactions. Our management believes that these material weaknesses are due to the small size of our accounting staff. The small size of our accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the high cost of such remediation relative to the benefit expected to be derived thereby.

To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of external legal and accounting professionals. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework. These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness. In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the quarter ended ~~September~~March 3031, ~~2016~~2017 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our financial statements for the quarter ended ~~September~~ 30March 31, ~~2016~~2017 are fairly stated, in all material respects, in ~~accordance~~ accordance with U.S. GAAP. This report does not include an ~~attestation~~ attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not required to attestation by our registered public accounting firm under section 404(a) of the Sarbanes-Oxley Act.

Limitations on Effectiveness of Controls and Procedures

Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Controls

During the ~~quarter~~three months ended ~~September~~March 3031, ~~2016~~2017, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

2430

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company was not a party to pending legal proceedings during the ~~period~~three months ended ~~September~~March 3031, ~~2016~~2017 that are material to the Company or or its assets.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

None.

Issuer Repurchases of Equity Securities

Neither Brekford Corp. nor any of its affiliated purchasers (as defined by ~~Rule~~ Rule 10b-18 under the Exchange Act) purchased any shares of its ~~common~~ common stock during the ~~quarter~~three months ended ~~September~~March 3031, ~~2016~~ 2017.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

2531

SIGNATURES

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

	Brekford Corp.
Date: November 14, 2016	By:	/s/ C.B. Brechin
Date: May 15, 2017	By:	/s/ Rodney Hillman
		C.B. Brechin
		Rodney Hillman
		Chief Executive Officer, Chief Financial Officer, Treasurer and Director
		President and Chief Operating Officer, Chief Financial Officer (Principal Executive Officer and Principal Financial Officer)
		(Principal Executive Officer and Principal Financial Officer)

2632

EXHIBIT INDEX

Exhibit Number			Description
10.1			Contribution and Unit Purchase Agreement, dated February 6, 2017(1)
10.2			Agreement and Plan of Merger dated February 10, 2017, among Novume Solutions, Inc., KeyStone Solutions, Inc.(2) Brekford Corp., KeyStone Merger Sub, Inc., and Brekford Merger Sub, Inc.
10.3			Subordinated Promissory Note issued to Brekford Corp.(3)
10.4			Pledge Agreement by LB&B Associates Inc. in favor of Brekford Corp.(3)
10.5			Transition Services Agreement between Brekford Corp. and Global Public Safety, LLC(3)
10.6			Sublease Agreement between Global Public Safety, LLC and Brekford Corp.(3)
10.7			Amended and Restated Limited Liability Company Agreement.(3)
31.1			Certification of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1			Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS			XBRL Instance Document (filed herewith).
101.SCH			XBRL Taxonomy Extension Schema (filed herewith).
101.CAL			XBRL Taxonomy Extension Calculation Linkbase (filed herewith).
101.DEF			XBRL Taxonomy Extension Definition Linkbase (filed herewith).
101.LAB			XBRL Taxonomy Extension Label Linkbase (filed herewith).
101.PRE			XBRL Taxonomy Extension Presentation Linkbase (filed herewith).

27 (1) Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 7, 2017

(2) Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 14, 2017

(3) Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on March 4, 2017

Filing Compare · Brekford Traffic Safety, Inc.