An Update on Brekford

Disclosure: Long BFDI, opened position on 7/24/2015, cost basis of $0.22

Brekford (BFDI) released their 10-Q for Q3 2015 on Friday morning that was a mixed bag. There were more positives than negatives (great year over year progress is still being made), but a few things we will need to watch going forward as discussed below. The success of this investment will be determined by the pace in which the company can transition more revenues to the ATSE (Automated Traffic Safety Enforcement) services business unit...and the path is paved for such a transition. It will be about execution.

The strangest part about yesterday was that the 10-Q was released but a Press Release accompanying the release was not released. After contacting the company and the new Investor Relations firm I learned that it is likely that the release will come out on Monday morning. I was also told that there are lots of positive changes ahead for investor communication strategy, so we will see what that means over the course of the next few weeks and months. 

Ok, let's get to the 10-Q:

3Q 2015 Highlights

  • Revenues were $5.77 million, up 8.7% compared to same period in 2014.

  • Gross Margin was 15.4%, down 23.7% compared to same period in 2014.

  • SG&A down 16% compared to same period in 2014. 

  • Net loss of $242,647. 

What's the deal with the gross margin decrease?

The company explains that the main driver of the decrease was a small number of large product-only (no installation) customer orders for vehicle services with lower than anticipated gross margins.  Brekford decided to fulfil these orders in an ongoing effort to obtain new clients and expand operations beyond our mid-Atlantic base.

So Scott, these numbers don't look to hot. Why are you so optimistic going forward?

Here is why..

For the full year 2015, the Company expects ATSE (Automatic Traffic Safety Enforcement) gross margin percentage to approximate 65%. As contributed revenues from ATSE (red-light cameras) services continue to rise as a percentage of overall revenues, the company anticipates continued growth in the Company’s overall gross margin percentage.

Brekford began its operations in Mexico with the red-light cameras in Q2 2015. As of September 30th, 2015, the company has achieved positive cash flow generation from the project already, and that is just with 16 cameras live. 

Additionally, the company already has completed all necessary technology and communications infrastructure installations for the project. Now, its up to Saltillo to give Brekford the "green light" (no pun intended) to install the potential approx 195 cameras. 

From the 10-Q:

As of June 30, 2015, the Company had installed all necessary technology and communications infrastructure to operate the Saltillo program as well as other programs as they are added, with Saltillo being the main operations hub for the entire country.  As of September 30, 2015, there were ten speed photo enforcement cameras in live operation, with an additional six cameras that went live in October 2015.  The agreement contemplates the installation of up to 210 speed, red light, and cell phone cameras throughout the City as program needs dictate, and the Company is working closely with Canviso and the City to plan future phases of the rollout.  Also, the City has yet to begin substantial enforcement operations for the collection of past due fines which totaled approximately $15.6 million as of September 30, 2015.  Enforcement operations began in October 2015.  A total of 27,006 collected citations have been processed from the ten cameras as of September 30, 2015.

You keep talking about "progress" with Brekford...why? Where is the progress?

Well, let's take a look at the first 9 months of 2015 compared to first 9 months of 2014:

The numbers above show year over year progress with a new COO/President taking the helms in late 2013. The efforts being put into international growth of the ATSE business unit is what can significantly propel this company forward. With 65%+ gross margins and the potential for $1,000 in recurring revenue per day for each installed camera, the opportunity to enormous. 

Most importantly, Brekford is the only company in it's space heavily focused on international ATSE growth. They were first in Mexico, and recently they signed an agreement with a large group in Colombia to begin doing the same thing they are doing in Mexico. 

Outside of ATSE business division, the company is also one of three companies in a test program with the City of Baltimore for body worn police cameras. In late December Baltimore will award a 5 year, $15-20 million contract to one of the three companies in the test program. This is obviously a significant potential catalyst for Brekford.


A few concerns that I have that I will be watching closely going forward:

  • Outstanding Accounts Receivables are $3.8 million compared to $1.7 million at year end 2014. As with any business, if you can't collect what you are owed you are in trouble. I will speak to management about this soon.
  • The gross margins for the "Vehicle Uplifting" business unit are concerning to me as well. The hope here is that the ATSE revenues swiftly pick up and that the "Vehicle Uplifting" revenues become an overall smaller revenue mix of total business. 
  • The amount of revenue generated from each red-light camera will slowly trend down as more citizens become cognizant of the possibility of being issued a ticket. After all, this is the point of these deter citizens from running red lights and speeding. All this to say that it's important the company maintains a steady and consistent installation of new cameras. 


I may be early into Brekford, but I would rather be early than late into a company that is showing so much potential for explosive recurring revenue growth at impressive 65%+ gross margins. The success of this investment will be determined by the pace in which the company can transition more revenues to the ATSE services business unit-- I think they are on track internationally to make significant progress in doing just that. 

Disclosure: Long BFDI, opened position on 7/24/2015, cost basis of $0.22