Attached files

file filename
EX-31.1 - WALKER INNOVATION INC.v165336_ex31-1.htm
EX-31.2 - WALKER INNOVATION INC.v165336_ex31-2.htm
EX-32.2 - WALKER INNOVATION INC.v165336_ex32-2.htm
EX-32.1 - WALKER INNOVATION INC.v165336_ex32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

 (Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2009
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________________ to __________________
 
Commission file number: 001-33700
 
GLOBALOPTIONS GROUP, INC
(Exact name of registrant as specified in its charter)

Delaware
 
30-0342273
(State or Other Jurisdiction of Incorporation or
Organization)
 
(I.R.S. Employer Identification No.)
     
75 Rockefeller Plaza, 27th Floor
New York, New York
 
10019
(Address of Principal Executive Offices)
 
(Zip Code)

(212) 445-6262

(Registrant’s telephone number, including area code)
 
 

(Former name and former address, 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 x  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.  See definitions of "large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨ 
Accelerated filer ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):  Yes ¨  No x
 
As of November 12, 2009, there were 14,299,350 shares of the issuer’s common stock outstanding.

 

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Form 10-Q
September 30, 2009
TABLE OF CONTENTS

PART I
   
     
FINANCIAL INFORMATION
   
     
ITEM 1.       Financial Statements.
   
Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008
 
1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
   
September 30, 2009 and 2008 (Unaudited)
 
2
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended
   
September 30, 2009 (Unaudited)
 
3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
   
September 30, 2009 and 2008 (Unaudited)
 
4
Notes to Condensed  Consolidated Financial Statements (Unaudited)
 
6
     
ITEM 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
21
     
ITEM 3.       Quantitative and Qualitative Disclosures About Market Risk.
 
30
     
ITEM 4T.    Controls and Procedures.
 
30
     
PART II
   
     
OTHER INFORMATION
   
     
ITEM 1.       Legal Proceedings.
 
31
     
ITEM 1A.    Risk Factors.
 
31
     
ITEM 2.       Unregistered Sales of Equity Securities and Use of Proceeds.
 
31
     
ITEM 3.       Defaults Upon Senior Securities.
 
31
     
ITEM 4.       Submission of Matters to a Vote of Security Holders.
 
31
     
ITEM 5.       Other Information.
 
31
     
ITEM 6.       Exhibits.
 
32
     
SIGNATURES.
  
33

 

 
 
GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amount)

   
September 30, 2009
   
December 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 5,142     $ 5,276  
Accounts receivable, net
    22,272       27,485  
Inventories, net
    3,419       2,522  
Prepaid expenses and other current assets
    993       862  
                 
Total current assets
    31,826       36,145  
                 
Property and equipment, net
    6,573       5,834  
Intangible assets, net
    4,666       5,981  
Goodwill
    19,968       19,968  
Security deposits and other assets
    543       553  
                 
Total assets
  $ 63,576     $ 68,481  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Line of credit
  $ 3,677     $ 7,093  
Notes payable
    -       400  
Accounts payable
    4,592       6,199  
Deferred revenues
    645       585  
Accrued compensation and related benefits
    4,597       3,155  
Other current liabilities
    1,870       1,966  
                 
Total current liabilities
    15,381       19,398  
                 
Other long-term obligations
    801       838  
                 
Total liabilities
    16,182       20,236  
                 
Commitments and contingencies
               
                 
Stockholders'  equity:
               
Preferred stock, $0.001 par value, 14,900,000 shares authorized, no shares issued or outstanding
    -       -  
Series D convertible preferred stock, non-voting, $0.001 par value, 100,000 shares authorized, dividends do not accrue,  no anti-dilution protection, 0 and 55,388.37 shares issued and  outstanding, convertible into 0 and 3,692,743 shares of common stock at September 30, 2009  and December 31, 2008, respectively, liquidation preference of $0.001 per share or $0.
    -       -  
Common stock, $0.001 par value; 100,000,000 shares authorized; 14,414,999 shares issued and 14,291,105  shares outstanding at September 30, 2009, and   10,486,935 shares issued and 10,379,868 shares outstanding at December 31, 2008
    14       10  
Additional paid-in capital
    111,140       108,989  
Accumulated deficit
    (63,517 )     (60,546 )
Treasury stock; at cost, 123,894 shares at September 30, 2009 and 107,067 shares at December 31, 2008
    (243 )     (208 )
Total stockholders' equity
    47,394       48,245  
Total liabilities and stockholders' equity
  $ 63,576     $ 68,481  

See notes to these condensed consolidated financial statements.

 
1

 
 
GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
(Unaudited)

   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Revenues
  $ 26,005     $ 29,488     $ 77,949     $ 77,241  
                                 
Cost of revenues
    14,441       16,876       44,033       44,349  
Gross profit
    11,564       12,612       33,916       32,892  
                                 
Operating expenses:
                               
                                 
Selling and marketing
    3,156       3,154       9,465       8,374  
                                 
General and administrative
    8,821       9,801       26,935       31,103  
                                 
Total operating expenses
    11,977       12,955       36,400       39,477  
                                 
Loss from operations
    (413 )     (343 )     (2,484 )     (6,585 )
                                 
Other income (expense):
                               
                                 
Interest income
    9       2       10       24  
                                 
Interest (expense)
    (110 )     (74 )     (497 )     (198 )
                                 
Other expense, net
    (101 )     (72 )     (487 )     (174 )
                                 
Net loss
  $ (514 )   $ (415 )   $ (2,971 )   $ (6,759 )
                                 
Basic and diluted net loss per share
  $ (0.04 )   $ (0.04 )   $ (0.24 )   $ (0.70 )
                                 
Weighted average number of common shares outstanding - basic and diluted
    13,270,411       9,734,067       12,459,456       9,660,684  

See notes to these condensed consolidated financial statements.
 
2

 
GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 2009
(Unaudited)
(dollars in thousands)

                           
Series D
                   
                           
Convertible
   
Additional
             
   
Common Stock
   
Treasury Shares
   
Preferred Stock
   
Paid-in
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance, January 1, 2009
    10,486,935     $ 10       107,067     $ (208 )     55,388.37     $ -     $ 108,989     $ (60,546 )   $ 48,245  
                                                                         
Shares issued upon conversion of Series D convertible preferred stock
    3,692,552       4       -       -       (55,388.37 )     -       (4 )     -       -  
                                                                         
Shares issued to consultants for services
    49,800       -       -       -       -       -       98       -       98  
                                                                         
Shares issued upon exercise of stock options
    44       -       -       -       -       -       -       -       -  
                                                                         
Shares issued in connection with vesting of RSUs
    134,274       -       -       -       -       -       -       -       -  
                                                                         
Issuance of common stock under employee stock purchase plan
    51,394       -       -       -       -       -       69       -       69  
                                                                         
Purchase of treasury shares
    -       -       16,827       (35 )     -       -       -       -       (35 )
                                                                         
Stock based compensation - restricted stock vested
    -       -       -       -       -       -       739       -       739  
                                                                         
Stock based compensation - employee stock purchase plan
    -       -       -       -       -       -       23       -       23  
                                                                         
Amortization of consultant stock option costs
    -       -       -       -       -       -       75       -       75  
                                                                         
Amortization of employee stock options costs
    -       -       -       -       -       -       322       -       322  
                                                                         
Amortization of consultant restricted stock unit costs
    -       -       -       -       -       -       4       -       4  
                                                                         
Amortization of employee restricted stock unit costs
    -       -       -       -       -       -       825       -       825  
                                                                         
Net loss
    -       -       -       -       -       -       -       (2,971 )     (2,971 )
                                                                         
Balance, September 30, 2009
    14,414,999     $ 14       123,894     $ (243 )     -     $ -     $ 111,140     $ (63,517 )   $ 47,394  

See notes to these condensed consolidated financial statements.

 
3

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(dollars in thousands)

   
For the Nine Months Ended September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
             
Net loss
  $ (2,971 )   $ (6,759 )
                 
Adjustments to reconcile net loss to net cash provided by operating activities:
               
                 
Provision (recovery) of bad debts
    (245 )     148  
                 
Depreciation and amortization
    2,543       3,262  
                 
Deferred rent
    14       439  
                 
Stock-based compensation
    2,086       3,021  
                 
Loss on disposition of equipment
    -       27  
                 
Changes in operating assets and liabilities:
               
                 
Accounts receivable
    5,458       (5,021 )
                 
Inventories
    (897 )     (433 )
                 
Prepaid expenses and other current assets
    (131 )     (104 )
                 
Security deposits and other assets
    10       40  
                 
Accounts payable
    (1,607 )     288  
                 
Deferred revenues
    60       189  
                 
Accrued compensation and related benefits
    1,442       1,380  
                 
Other current liabilities
    (105 )     355  
                 
Other long-term obligations
    (42 )     (41 )
                 
Total adjustments
    8,586       3,550  
                 
Net cash provided  by (used in) operating activities
    5,615       (3,209 )
                 
Cash flows from investing activities:
               
                 
Purchases of property and equipment
    (1,909 )     (921 )
                 
Purchase of intangible assets
    (58 )     (42 )
                 
Acquisition of FAIS
    -       (2,548 )
                 
Net cash used in investing activities
    (1,967 )     (3,511 )

See notes to these condensed consolidated financial statements.

 
4

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows, continued
(Unaudited)
(dollars in thousands)

   
For the Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Cash flows from financing activities:
           
             
Net  (repayments) proceeds under line of credit
  $ (3,416 )   $ 6,000  
                 
Repayment of notes payable
    (400 )     (700 )
                 
Accretion of OCS discounted notes
    -       3  
                 
Proceeds from issuance of stock in connection with ESPP
    69       10  
                 
Repurchase of common stock
    (35 )     (50 )
                 
Net cash (used in) provided by financing activities
    (3,782 )     5,263  
                 
Net decrease  in cash and cash equivalents
    (134 )     (1,457 )
                 
Cash and cash equivalents - beginning of period
    5,276       4,426  
                 
Cash and cash equivalents - end of period
  $ 5,142     $ 2,969  
                 
Supplemental disclosure of cash flow information:
               
                 
Cash paid during the period for interest
  $ 575     $ 208  
                 
Supplemental disclosures of non-cash investing and financing activities:
               
                 
Common stock issued in exchange for obligation to issue common stock
  $ -     $ 2,160  
                 
Supplemental non-cash investing and financing activity - acquisition of FAIS:
               
Assets acquired and liabilities assumed:
               
Accounts receivable
  $ -     $ 1,201  
Property and equipment
    -       102  
Intangible assets
    -       2,790  
Accounts payable
    -       (17 )
Other current liabilities
    -       (322 )
Earnout Liability
    -       (1,206 )
                 
Total purchase price, paid in cash
  $ -     $ 2,548  

See notes to these condensed consolidated financial statements.

 
5

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

1.  Nature of Operations

GlobalOptions Group, Inc. and Subsidiaries (collectively the “Company” or “GlobalOptions Group”) is an integrated provider of risk mitigation and management services to government entities, Fortune 1000 corporations and high net-worth and high-profile individuals. The Company delivers these services through four business units: Preparedness Services; Fraud and Special Investigative Unit (“SIU”) Services; Security Consulting and Investigations; and International Strategies. The Preparedness Services, Fraud and SIU Services, and Security Consulting and Investigations units represent the Company’s three financial reporting segments. The results of the International Strategies business unit, on the basis of its relative materiality, are included in the Fraud and SIU Services segment.
 
References herein to “GlobalOptions” refer to GlobalOptions, Inc., an operating subsidiary of the Company.

2.  Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal accruals) considered for a fair presentation have been included. The Company has evaluated subsequent events through November 12, 2009,  the issuance date of this Form 10-Q. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K filed on March 16, 2009 for the year ended December 31, 2008.

3.  Summary of Significant Accounting Policies

Income Taxes

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of the underlying assets and liabilities. The Company establishes a valuation allowance for deferred tax assets when it determines that it is more likely than not that the benefits of deferred tax assets will not be realized in future periods.  The Company was not required to provide for a provision for income taxes for the three and nine months ended September 30, 2009 and 2008, respectively, as a result of losses incurred during this period.

Net Loss Per Common Share
 
Basic net loss per common share is computed based on the weighted average number of shares of common stock outstanding, as adjusted, during the periods presented. Common stock equivalents, consisting of stock options, restricted stock units (“RSUs”), and Series D convertible preferred stock were not included in the calculation of the diluted loss per share because their inclusion would have been anti-dilutive.  The basic weighted average number of shares was reduced for non-vested restricted stock awards and contingently returnable escrowed shares issued in connection with acquisitions.

 
6

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

3.  Summary of Significant Accounting Policies, continued

Net Loss Per Common Share, continued

Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share, because the effect of their inclusion would have been anti-dilutive.

   
September 30 ,
 
   
2009
   
2008
 
Stock options
    1,037,794       666,923  
Restricted stock units
    229,526       368,433  
Convertible preferred stock
    -       3,692,743  
Potentially dilutive securities realizable from the vesting of performance based restricted stock
    558,063       558,063  
Contingently returnable shares related to the   acquisitions of Facticon, Inc. (“Facticon”), James Lee Witt Associates, Inc. and Hyperion Risk, Inc.
    -       162,500  
Total potentially dilutive securities
    1,825,383       5,448,662  
 
Recently Implemented Accounting Guidance

The FASB, in June 2009, issued new accounting guidance that established the FASB Accounting Standards Codification, ("Codification" or “ASC”) as the single source of authoritative GAAP to be applied by nongovernmental entities, except for the rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. This new guidance became effective for interim and annual periods ending after September 15, 2009.  Other than the manner in which new accounting guidance is referenced, the adoption of these changes did not have a material effect on the Company’s consolidated financial statements.

In December 2007, the FASB issued new accounting guidance, under ASC Topic 805 on business combinations, which established principles and requirements as to how acquirers recognize and measure in these financial statements the identifiable assets acquired, the liabilities assumed, noncontrolling interests and goodwill acquired in the business combination or a gain from a bargain purchase.  This guidance is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.   This guidance will have an impact on the Company’s accounting for any future business acquisitions.

In December 2007, the FASB issued new accounting guidance, under ASC Topic 810 on consolidations, which establishes the accounting for noncontrolling interests in a subsidiary and the deconsolidation of a subsidiary. This guidance requires (a) the ownership interest in the subsidiary held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent’s equity, (b) the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and (c) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently. Entities must provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. This guidance will have an impact on the Company’s accounting for any future business acquisitions.

 
7

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

3.  Summary of Significant Accounting Policies, continued

Recently Implemented Accounting Guidance, continued

In April 2008, the FASB issued new accounting guidance, under ASC Topic 350 on intangibles, which outlines the requirements for determining the useful life of an intangible asset.  The new guidance is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for entity-specific factors. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years.  The Company expects the new guidance to have an impact on the accounting for any future business acquisitions.

In June 2008,  the FASB issued new accounting guidance, under ASC Topic 260 on earnings per share, related to the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In June 2008, the FASB issued new accounting guidance, under ASC Topic 815 on derivatives and hedging, as to how an entity should determine whether an instrument (or an embedded feature) is indexed to an entity's own stock. This guidance  provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted.  The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In November 2008, the FASB issued new accounting guidance, under ASC Topic 323 on investments— equity method and joint ventures, relating to the accounting for equity method investments.  This guidance addresses how the initial carrying value of an equity method investment should be determined, how it should be tested for impairment, and how changes in classification from equity method to cost method should be treated.  This guidance is effective on a prospective basis in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years.  The Company expects this guidance to have an impact on its accounting for any future business acquisitions.

In May 2009, the FASB issued new accounting guidance, under ASC Topic 855 on subsequent events, which sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance was effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 
8

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

4.   Acquisition

Acquisition of Omega Insurance Services, Inc. (d/b/a First Advantage Investigative Services) (“FAIS”)

On April 21, 2008, GlobalOptions Group acquired substantially all of the business and net assets of FAIS. The aggregate purchase price paid for the assets and business was $2,548, consisting of cash in the amount of $2,164, a broker fee of $350 and acquisition and related legal expenses of $34.  The Company began consolidating the results of operations of FAIS with its operations beginning April 21, 2008.

The following presents the unaudited pro-forma combined results of operations for the nine months ended September 30, 2008 of the Company with FAIS, as if the acquisition had occurred as of January 1, 2008.

   
For the Nine
months ended
September 30,
 
   
2008
 
Revenues
  $ 80,233  
         
Net loss
  $ (7,916 )
         
Pro-forma basic and diluted net loss per common share (not rounded)
  $ (0.82 )
         
Pro-forma weighted average common shares outstanding -  basic and diluted
    9,660,684  

The pro-forma combined results of operations are not necessarily indicative of the results of operations that actually would have occurred if the acquisition of FAIS had been completed as of the beginning of 2008, nor are they necessarily indicative of future consolidated results.

5. Inventories

Inventories are comprised of the following: 

   
As of
 
   
September
30, 2009
   
December
31, 2008
 
Raw materials
  $ 2,152     $ 1,373  
Work in progress – DNA Analysis
    395       304  
Finished goods
    922        900  
      3,469       2,577  
                 
Less: Reserve for obsolescence
    (50 )     (55 )
Total
  $ 3,419     $ 2,522  

 
9

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

 6.  Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following:

   
Trade
Names
   
Developed
Technology
   
Non-Compete
Agreements
   
Client
Relationships
   
Patents
   
Accumulated
Amortization
   
Total
 
Balance as of  January 1, 2009
  $ 2,560     $ 440     $ 1,660     $ 8,715     $ 115     $ (7,509 )   $ 5,981  
Additions:
                                                       
Costs of patents
    -       -       -       -       59       -       59  
Amortization
    -       -       -       -       -       (1,374 )     (1,374 )
Balance as of  September 30, 2009
  $ 2,560     $ 440     $ 1,660     $ 8,715     $ 174     $ (8,883 )   $ 4,666  
                                                         
Weighted average amortization period at September 30, 2009 (in years)
    5.6       0.6       0.2       2.0       - (1)                

(1)  Patents not yet approved and as such, the amortization period has not yet begun as of September 30, 2009.

The Company recorded amortization expense related to the acquired amortizable intangibles of $358 and $777 for the three months ended September 30, 2009 and 2008, and $1,374 and $2,224 for the nine months ended September 30, 2009 and 2008, respectively.

 
10

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

7.  Accrued Compensation and Related Benefits

A summary of accrued compensation and related benefits is comprised of the following:

   
As of
 
   
September 30,
2009
   
December 31,
2008
 
Accrued performance based bonuses
  $ 1,341     $ 1,237  
Accrued payroll and commissions
    2,194       1,172  
Accrued employee benefits
    1,062        746  
                 
Total
  $ 4,597     $ 3,155  

8.  Line of Credit

The Company maintains a working capital line of credit (the “Facility”) which is secured by accounts receivable and is subject to certain liquidity and earnings financial covenants. The Company has granted a first priority security interest in substantially all of its assets to the financial institution that provides this Facility.
 
Effective as of March 30, 2009, the financial institution that provides the Facility entered into an amendment to the Company’s working capital line of credit to (i) reduce the maximum amount available under the Facility to $10,000 (ii) increase the range of the applicable interest rate with respect to the amount outstanding under the line of credit  to 1.00% to 1.75% based upon the Company’s liquidity, plus the greater of 6.25% or the lender’s most recently announced “prime rate”, and (iii) extend the maturity of the Facility to March 29, 2010.  The Company paid a one-time fee of $55 in connection with the March 30, 2009 modification, which is included in general and administrative expenses.  The interest rate on the line of credit at September 30, 2009 was 7.25%.  As of September 30, 2009, the Company’s net borrowings were $3,677 under the line of credit and based upon the amount of qualifying accounts receivable, the Company was eligible to draw an additional $6,323 for up to a total of $10,000, under the Facility.
 
Effective as of August 26, 2009, the financial institution that provides the Facility entered into an amendment to the Company’s working capital line of credit to modify certain collateral requirements.  The maximum amount available under the Facility remains $10,000.

 
11

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

9.  Notes Payable

Notes payable, which matured at various dates through 2009, consisted of the following:

   
As of
 
   
December 31,
2008
 
Note payable to seller for acquisition of Secure Source, Inc. (“Secure Source”)
  $ 250  
Notes payable to seller for acquisition of SPZ Oakland Corporation dba On Line Consulting Service, Inc. (“On Line Consulting”)
    150  
         
Total
  $ 400  

On January 6, 2009, the Company repaid $150 in satisfaction of a note payable issued in connection with the purchase of On Line Consulting.

On May 6, 2009, the Company repaid $288, consisting of $250 and $38 of principal and interest, respectively, in satisfaction of a note payable issued in connection with the purchase of Secure Source.

10.  Commitments and Contingencies

           Employment Agreements

On April 1, 2009, the Company entered into an amendment of an employment agreement with one of its key executives, at an annual salary of $375, expiring March 31, 2010. The agreement provides, among other things, for the payment of an annual performance bonus.

On August 13, 2009, the Company entered into employment agreement modifications with Harvey W. Schiller, the Company’s Chairman and Chief Executive Officer, and Jeffrey O. Nyweide, the Company’s Chief Financial Officer.    These modified agreements clarified the employment and compensation provisions upon a termination of employment or a change of control.   Aggregate annual salary compensation levels of $425 and $375 for each of Dr. Schiller and Mr. Nyweide, respectively, will remain in effect for the remaining term of the agreements, which currently is through January 31, 2011, as will the terms of the bonus program in effect prior to the modification.

Operating Leases

The Company has obligations for various office and laboratory leases.  Such lease obligations expire at various dates through August 2016.

Rent expense charged to operations amounted to $894 and $918, for the three months ended September 30, 2009 and 2008, and $2,748 and $2,805 for the nine months ended September 30, 2009 and 2008, respectively.

The terms of certain of the Company’s lease obligations provide for scheduled escalations in the monthly rent. The non-contingent rent increases are being amortized over the life of the leases on a straight line basis. Deferred rent of $789 and $784 represents the long-term unamortized rent adjustment amount at September 30, 2009 and at December 31, 2008 and is reflected within other long-term obligations in the condensed consolidated balance sheet. In addition, the current portion of deferred rent was $62 and $40 as of September 30, 2009 and December 31, 2008, respectively, and is reflected within other current liabilities in the condensed consolidated balance sheets.

 
12

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

10.  Commitments and Contingencies, continued

Litigation, Claims and Assessments

From time to time, in the normal course of business, the Company may be involved in litigation.  Except for certain claims as described below, the Company’s management has determined any asserted or unasserted claims to be immaterial to the consolidated financial statements. 

The Company was added as a defendant in federal and state litigation matters related to Facticon, which were initially filed by the plaintiffs prior to the Company’s acquisition of the assets of  Facticon, under the successor liability theory.  The federal matter was settled in full on December 22, 2008 with a cash payment of $657.  In the State Court Matter, Wonsch, et al. vs. Facticon Inc. and GlobalOptions Group, Inc., filed in the State Court for the Central District of California, the plaintiffs in a class action (the “State Plaintiffs”), alleged that Facticon failed to pay overtime wages under the California Civil Code.  The State matter was settled in full on May 12, 2009 with a cash payment of $118.

11.   Stockholders’ Equity

Common Stock Issued
 
On February 17, 2009, the Company issued 2,817,235 shares of its common stock upon the conversion of 42,258.53 shares of  Series D convertible preferred stock.
 
 
On April 14, 2009, the Company issued 36,900 shares valued at $75 for services rendered during 2008, and 12,900 shares valued at $22 for services rendered during the three months ended March 31, 2009, to Lippert/Heilshorn and Associates.
 
On May 1, 2009, the Company issued 398,000 shares of its common stock upon the conversion of 5,970 shares of Series D convertible preferred stock.
 
During July  2009, the Company issued 44 shares of its common stock in connection with the exercise of a stock option.
 
During September 2009, the Company issued 477,317 shares of its common stock upon the conversion of the remaining outstanding 7,159.75 shares of Series D convertible preferred stock.  After this conversion, no shares of Series D convertible stock were outstanding.
 
During the nine months ended September 30, 2009, the Company issued 134,274 shares of its common stock pursuant to the vesting of RSUs under the 2006 Long Term Incentive Plan (the “Incentive Plan”).  Of the 134,274 shares issued, 31,912 and 14,094 shares were issued to the Chief Executive Officer and Chief Financial Officer, respectively.  The Chief Executive Office and Chief Financial Officer elected to have the Company withhold 12,063 and 4,764 shares, respectively, in satisfaction of their tax obligations in connection with the vesting of these RSUs.  Such withheld shares valued at $25 and $10, respectively are reflected as treasury shares in the Company’s books and records.
 
During the nine months ended September 30, 2009, the Company issued 51,394 shares of its common stock under the Amended and Restated 2006 Employee Stock Purchase Plan (the “Stock Purchase Plan”).  The Company realized proceeds of $69 and recognized stock based compensation of $ $23 in connection with the issuance of these shares.

Restricted Stock Issued Under Performance Based Executive Bonus Plan
 
On December 19, 2006, the Company awarded 100,000 and 75,000 shares of unvested restricted stock to its Chief  Executive Officer and Chief Financial Officer, respectively, in connection with the extension of their respective employment and consulting agreements. On July 24, 2008 the Company awarded an additional 250,000 and 187,500 shares of unvested restricted stock to its Chief Executive Office and Chief Financial Officer, respectively, in connection with the 2006 Executive Compensation Performance Bonus Plan.

 
13

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

12.  Stock Based Compensation

Restricted Stock Issued Under Performance Based Executive Bonus Plan, continued
 
At September 30, 2009, an aggregate of 558,063 of the restricted shares awarded to these executives remain subject to vesting based on certain performance and stock price targets that have been established by the Compensation Committee.

 Amended and Restated 2006 Long-Term Incentive Plan
 
Under the Company’s Amended and Restated 2006 Long-Term Incentive Plan (the “Incentive Plan”), the Company may issue up to 3,000,000 shares of the Company’s common stock.  The Compensation Committee has the authority to determine the amount, type and terms of each award, but may not grant awards under the Incentive Plan, in any combination, for more than 625,000 shares of the Company’s common stock to any individual during any calendar year, increased from 312,500 under the Company’s original 2006 Long-Term Incentive Plan.
 
As of September 30, 2009, 993,857 shares of common stock remain eligible to be issued under the Incentive Plan.
 
Amended and Restated 2006 Employee Stock Purchase Plan
 
Under the Company’s Amended and Restated Employee Stock Purchase Plan (the “Stock Purchase Plan”), eligible employees of the Company are permitted to automatically purchase at the end of each month at a discounted price, a certain number of shares of the Company’s common stock by having the effective purchase price of such shares withheld from their base pay.  The Stock Purchase Plan provides for the issuance of up to 2,000,000 shares of the Company’s common stock.
 
As of September 30, 2009, 1,926,488 shares of common stock remain unissued under the Stock Purchase Plan.
 
Stock Based Compensation
 
Equity instruments issued to employees are recorded at their fair value on the date of grant and are amortized over the vesting period of the award.  Stock based compensation for employees was approximately $634 and $734 for the three months ended September 30, 2009 and 2008, respectively, and $1,909 and $2,759 for the nine months ended September 30, 2009 and 2008, respectively.   For the three months ended September 30, 2009 and 2008, $130 and $85, respectively, were reflected in selling and marketing expenses, and $504 and $649, respectively, were reflected in general and administrative expenses. For the nine months ended September 30, 2009 and 2008, $245 and $189 respectively, were reflected in selling and marketing expenses, and $1,664 and $2,570, respectively, were reflected in general and administrative expenses.
 
Equity instruments issued to non-employees are recorded at their fair value on the grant date. The non-vested portions of the award are adjusted based on market value on a quarterly basis and the adjusted value of award is amortized over the expected service period.  Stock based compensation for non-employees was approximately $20 and $24 for the three months ended September 30, 2009 and 2008 respectively, and $177 and $263 for the nine months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009 and 2008, all stock based compensation for non-employees was reflected in general and administrative expenses.  For the nine months ended September 30, 2009 and 2008, $98 and $0, respectively, were reflected in selling and marketing expenses, and $79 and $263, respectively, were reflected in general and administrative expenses.
 

 
14

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)
 
12. Stock Based Compensation, continued
 
Stock Based Compensation, continued

The following table summarizes total stock based compensation costs recognized for the three and nine months ended September 30, 2009 and 2008, respectively.
 
   
For the Three Months Ended September 30,
 
   
2009
   
2008
 
   
Non-
employees
   
Employees
   
Total
   
Non-
employees
   
Employees
   
Total
 
Stock options
  $ 20     $ 103     $ 123     $ 22     $ 133     $ 155  
RSUs
    -       247       247       2       256       258  
Stock purchase plan
    -       8       8       -       3       3  
Vesting of restricted shares under  performance based executive bonus award
    -       276       276       -       342       342  
Total
  $ 20     $ 634     $ 654     $ 24     $ 734     $ 758  

   
For the Nine months ended September 30,
 
   
2009
   
2008
 
   
Non-
employees
   
Employees
   
Total
   
Non-
employees
   
Employees
   
Total
 
Stock options
  $ 75     $ 322     $ 397     $ 93     $ 1,558     $ 1,651  
RSUs
    4       825       829       2       272       274  
Stock purchase plan
    -       23       23       -       3       3  
Vesting of restricted shares under performance based executive bonus award
    -       739       739       -       926       926  
Shares issued to consultants for services
    98       -       98       168       -       168  
Total
  $ 177     $ 1,909     $ 2,086     $ 263     $ 2,759     $ 3,022  

 
15

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

12. Stock Based Compensation, continued

Stock Options

The fair value of each option grant during the nine months ended September 30, 2009 and three and nine months ended September 30, 2008 was estimated on the date of grant using the Black-Scholes option pricing model.  No options were granted by the Company during the three months ended September 30, 2009.  The weighted average assumptions used to compute the grant date value of the options granted during the nine months ended September 30, 2009 and thee and nine months ended September 30, 2008 were as follows:

   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Dividend yield
   
-
     
0%
     
0%
%    
0%
 
Expected volatility
   
-
     
99.8%
     
104%
%    
87.0%
 
Risk-free interest rate
   
-
     
3.37%
     
1.86%
%    
2.97%
 
Expected lives
   
-
   
4 years
   
3.6 years
   
5 years
 

The Company has determined that the expected life of options granted is the same as the contractual term for options granted prior to July 1, 2008, because the employees were expected to remain with the Company for the full term of the option award.  The expected life of options granted after June 30, 2008 was calculated using the simplified method, calculating the expected life as the average of the contractual term and the vesting period.

The weighted average fair value of the options on the date of grant, using the fair value based methodology was $1.24 per share for the nine months ended September 30, 2009, and was $1.64 and $1.80 per share for the three and nine months ended September 30, 2008, respectively.

On January 1, 2009, the Company granted, in the aggregate, options for the purchase of 75,000 shares of its common stock at an exercise price of $1.99 per share, under the Incentive Plan, to three members of the Board of Directors. The options have a five year term and vest ratably at the end of each of the four quarterly periods following the date of grant.  In the aggregate, these options have a value of approximately $96 utilizing the Black-Scholes option pricing model with the following assumptions used: expected life of three years, volatility of 104%, dividends of 0%, and a risk free interest rate of 1.55%.

On January 1, 2009, the Company granted, in the aggregate, options for the purchase of 100,000 shares of its common stock at an exercise price of $1.99 per share, under the Incentive Plan, to certain members of its advisory boards for their advisory services to the Company.  The options have a five year term and vest ratably at the end of each of the four quarterly periods following the date of grant.  In the aggregate, these options have a value of approximately $128 utilizing the Black-Scholes option pricing model with the following assumptions used: expected life of three years, volatility of 104%, dividends of 0%, and a risk free interest rate of 1.55%.

On February 25, 2009, the Company granted, in the aggregate, options for the purchase of 267,500 shares of its common stock at an exercise price of $1.70 per share, under the Incentive Plan, to certain officers and employees.  The options have a five year term and vest ratably upon the first, second and third anniversaries of the date of grant.  In the aggregate, these options have a value of approximately $325 utilizing the Black-Scholes option pricing model with the following assumptions used: expected life of four years, volatility of 104%, dividends of 0%, and a risk free interest rate of 2.06%.

 
16

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

12. Stock Based Compensation, continued

Stock Options, continued

At September 30, 2009, the unamortized value of stock options held by employees was approximately $562.  The unamortized portion will be expensed over a weighted average period of 1.2 years.

 A summary of the status of the Company’s stock option plans and the changes during the nine months ended September 30, 2009, is presented in the table below:

   
Number of 
Options
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
   
Intrinsic
Value
 
         
(per share)
   
(in years)
       
Options outstanding at December 31, 2008
    634,687     $ 3.62      
4.1
       
Exercised
    (44 )                      
Granted
    442,500                        
Forfeited
    (39,349 )                      
Options outstanding at September 30, 2009
     1,037,794     $ 2.58      
3.7
    $ 46  
Exercisable at September 30, 2009
     454,812     $ 3.41      
3.5
    $ 8  

Restricted Stock Units (“RSUs”)
 
At September 30, 2009, the unamortized value of RSUs held by employees was approximately $1,515. The unamortized portion will be expensed over a weighted average period of 1.6 years.
 
A summary of the activity related to RSUs for the nine months ended September 30, 2009 is presented below:

   
Total
   
Weighted
Average Grant
Date Fair Value
 
Nonvested at January 1, 2009
    366,087     $ 2.12  
RSUs vested
    (134,274 )        
RSUs forfeited
    (2,287 )        
Nonvested at September 30, 2009
    229,526     $ 2.12  

 
17

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

12. Stock Based Compensation, continued

Stock Purchase Plan
 
The Stock Purchase Plan was established for eligible employees to purchase shares of the Company’s common stock on a monthly basis at 85% of the lower of the market value of the Company’s common stock on the first or last business day of each month. Under the Stock Purchase Plan, employees may authorize the Company to withhold up to 15% of their compensation during any monthly offering period for common stock purchases, subject to certain limitations. The Stock Purchase Plan was implemented during July 2008 and is qualified under Section 423 of the Internal Revenue Code.
 
For the three months ended September 30, 2009 and 2008 14,770 and 6,140 shares respectively were issued under the Stock Purchase Plan.  The Company recognized $8 and $3, respectively of stock based compensation in connection with the issuance of these shares.
 
For the nine months ended September 30, 2009 and 2008, 51,394 and 6,140 shares respectively were issued under the Stock Purchase Plan.  The Company recognized $23 and $3 of stock based compensation in connection with the issuance of these shares.
 
13.   Client and Segment Data
 
The Company’s reportable operating segments consist of the following three business segments: Preparedness Services, Fraud and SIU Services, and Security Consulting and Investigations. The Company’s reportable segments are organized, managed and operated along key product and service lines. These product and service lines provided to similar clients are offered together as packaged offerings, generally produce similar margins and are managed under a consolidated operations management.

The Preparedness Services segment develops and implements crisis management and emergency response plans for disaster mitigation, continuity of operations and other emergency management issues for governments, corporations and individuals.

The Fraud and SIU Services segment provides investigative surveillance, anti-fraud solutions and business intelligence services to the insurance industry, law firms and multinational organizations. The results of the Company’s International Strategies business unit, on the basis of its relative materiality, are included in the Fraud and SIU Services segment.

The Security Consulting and Investigations segment delivers specialized security and investigative services to governments, corporations and individuals.

Total revenues by segment include revenues to unaffiliated clients. The Company evaluates performance based on income (loss) from operations. Operating income (loss) is gross profit less operating expenses.

The following tables summarize financial information about the Company’s business segments for the three and nine months ended September 30, 2009 and 2008.   
 
For the Three Months Ended September 30, 2009
 
   
   
Preparedness
Services
   
Fraud & SIU
Services-
   
Security
Consulting &
Investigations
   
Corporate
   
Consolidated
 
                               
Revenues
  $ 9,461     $ 7,806     $ 8,738     $  -     $   26,005  
                                         
Income (loss) from Operations 
  $ 735     $ (680 )   $   (468 )   $ -     $ (413 )
                                         
Depreciation and Amortization
  $ 62     $ 269     $ 440     $  -     $ 771  
                                         
Interest Expense, net
  $ -     $ -     $ -     $ 101     $ 101  

 
18

 


GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(In thousands except share and per share amounts)

13.   Client and Segment Data, continued

For the Three Months Ended September 30, 2008
 
   
   
Preparedness
Services
   
Fraud & SIU
Services-
   
Security
Consulting &
Investigations
   
Corporate
   
Consolidated
 
                               
Revenues
  $ 11,820     $ 8,657     $ 9,011     $ -     $ 29,488  
                                         
Income (loss) from Operations
  $ (1,191 )   $ (1,117 )   $ (417 )   $ -     $ (343 )
                                         
Depreciation and Amortization
  $ 320     $ 383     $ 432     $ -     $ 1,135  
                                         
Interest Expense, net
  $ -     $ -     $ -     $ 72     $ 72  

For the Nine months ended September 30, 2009
 
   
   
Preparedness
Services
   
Fraud & SIU
Services-
   
Security
Consulting &
Investigations
   
Corporate
   
Consolidated
 
                               
Revenues
  $ 30,450     $ 22,391     $ 25,108     $  -     $   77,949  
                                         
Income (loss) from Operations 
  $ 2,197     $ (2,533 )   $   (2,148 )   $ -