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Bonds.com Company Analysis

By Theodor Tonca, Nov. 20, 2010.

 Qualitative Analysis

 Company Overview

 Founded: Dec. 21, 2007 Headquarters: Boca Raton, Florida Employees: 31 (As of March 31, 2010) Ticker Symbol: OTCBB: BDCG

Bonds.com Inc. operates a web based electronic trading platform for fixed income securities which isused by both individual and institutional investors to trade fixed income securities including municipalbonds, corporate bonds, US Treasury securities, agency bonds, emerging market debt, mortgagebacked securities as well as CD’s.

The company's products are:

• BondStation (Proprietary tading platform for retail investors)

• BondStation Pro (Proprietary trading platform for institutions)

• CD-Station (Technology platform which allows banks to issue brokered CD's)

These three electronic trading platforms provide users with basic functionality such as real-timeexecutable bids and quotes in addition to other features.

 Revenue Model

Bonds.com Inc. is a FINRA registered broker-dealer. These registrations are required to conduct their business of providing clients with their BondStation, BondStation Pro and CD-Station electronictrading platforms.

As such, the majority of the company’s business is derived from mark-ups on secondary marketsecurities and sales concessions on primary issues relating to trading of fixed income securities ontheir electronic trading platforms.

The company also generates additional revenues from the:

• issuance of new CD’s by purchasing these from issuing banks at a discount and then sellingsuch CD’s to clients at face value.

• Private labeling of their BondStation electronic trading platform to select partners.

This revenue model contrasts with the traditional online brokerage model of charging clients amonthly subscription fee or transaction fees per trade executed. Since the company's revenue modelis relatively new it is hard to evaluate its economic viability at this time.

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Management Team

• Michael Sanderson, CEO Prior to joining Bonds.com Group Inc. Michael was the CEO of NASDAQ Europe and before that CEO of Reuters Americas. In addition Michael is also theformer CEO of Merrill Lynch Canada.

• Jeffrey Chertoff, CFO Before joining Bonds.com Group Inc. Jeffrey was the CFO of Cantor Fitzgerald.

• George O'Krepkie, Senior Managing Director Mr. O'Krepkie acts as head of sales and trading.Prior to this Mr. O'Krepkie was the head of dealer relationship management at MarketAxess.

Together executive officers and directors own approx. 83% of the company's common stock.

Needless to say this is a very experienced senior management team with deep knowledge of themarkets which they serve. While this is the case, I cannot comment on the collective integrity,vision and drive of the fore mentioned individuals as I have not had the pleasure of speaking to themor their associates. I consider these characteristics to be the determining factor, above all else if abusiness is to be successful in executing their strategy in the long term.

Industry Overview

  Industry: Financial Services  Sector: Brokerage

Bonds.com operates in the brokerage services sub-sector of the brokerage industry. The companyparticipates in the well defined niche of fixed income brokerage services. Their primary competitorsin this niche are:

Additionally Bonds.com also faces competition from online brokerage services providers and banksthat provide online trading platforms. While the majority of online discount brokers and banks do notprovide access to the fixed income securities market, there is a distinct possibility that they may doso at some point in the future.

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  Quantitative  Analysis 

Valuation

• P/E: 0.11

• P/B: 0.07

• P/S: 4.3

• P/CF: -2.0

• Div. Yield: -

Looking at the above figures from a value standpoint, the P/E and P/B ratios certainly meetconservative criteria, but the P/S ratio is well above the 2x maximum which is sought.

• EV/FCF: -0.43

• Price per share: $0.12

• Fair market valuation: $7,560,000

Using the simple enterprise value (Market capitalization + debt) formula we find that the company'scurrent EV/FCF ratio (Enterprise Value/Free Cash Flow) is negative.

The price per share and fair market valuation figures discern what an informed buyer wouldreasonable pay for the business in an all-cash private market transaction. This figure is below thecurrent stock market valuation of $0.18 per share and market cap of $13,800,000.

With that said, Bonds.com Group's stock price was $0.13 as recently as Nov. 16 which entailed amarket valuation of approx. $8,190,000 still overvalued but just slightly above what could reasonablybe deemed a fair market valuation.

  Conclusion

  Without going into an extensive top down macro-economic look at the industry and marketsin which the company currently operates, which would only add further uncertainty as to theeconomic viability of the company given the deteriorating economic condition in the domestic UnitedStates equity and fixed income markets. It can reasonably be discerned using a simple screen suchas EV/FCF that the company is currently intrinsically overvalued.

However, given the company's recent increase in top line revenue ($3 Mil. in fiscal year 2009 from fiscal year 2008) and the fact that most of the company's operating expenses aredecreasing year over year it can be said that the company may be a turnaround situation.

As Benjamin Graham once said: “Every company is overvalued at one price and cheap at another.”  I would conclude that if Bonds.com Group's market valuation were to fall in thefuture considerably below approx. $7.5 Mil. then there may be an inherent margin of safetyin its securities.