Bonds.com Group, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - SECTION 302 CERTIFICATION OF CEO - Bonds.com Group, Inc.	ex-31_1.htm
EX-31.2 - SECTION 302 CERTIFICATION OF CFO - Bonds.com Group, Inc.	ex-31_2.htm
EX-32.1 - SECTION 906 CERTIFICATION OF CEO - Bonds.com Group, Inc.	ex-32_1.htm
EX-32.2 - SECTION 906 CERTIFICATION OF CFO - Bonds.com Group, Inc.	ex-32_2.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 000-51076

Bonds.com Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware		38-3649127
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

529 Fifth Avenue, 8th Floor, New York, NY 10017

(Address of principal executive offices)

(212) 946-3998

(Registrant’s telephone number, including area code)

1515 South Federal Highway, Suite 212, Boca Raton, FL 33432

(Former name, former address and former fiscal year, 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 website, 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	¨	Smaller reporting company	x
(Do not check if a smaller reporting company)

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 76,593,154 shares of common stock, par value $.0001 per share, outstanding as of August 14, 2010.

BONDS.COM GROUP, INC.

- INDEX -

		Page
PART I – FINANCIAL INFORMATION:

Item 1.	Financial Statements (unaudited):

Condensed Consolidated Balance Sheets
	June 30, 2010 and December 31, 2009	2

Condensed Consolidated Statements of Operations
	Three and Six Months Ended June 30, 2010 and 2009	3

Condensed Consolidated Statement of Changes in Stockholders’ Equity
	Six Months Ended June 30, 2010 and Year Ended December 31, 2009	4

Condensed Consolidated Statements of Cash Flows
	Six Months Ended June 30, 2010 and 2009	5

Notes to Financial Statements (unaudited)		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32

Item 4T.	Controls and Procedures	32

PART II – OTHER INFORMATION:

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Submission of Matters to a Vote of Security Holders	34

Item 5.	Other Information	34

Item 6.	Exhibits	34

Signatures		35

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Form 10-Q (the “Quarterly Report”) that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements often can be identified by the use of terms such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate”, “approximate”, “plan”, “could”, “should” or “continue”, or the negative thereof. Bonds.com Group, Inc. (the “Company”) intends that such forward-looking statements be subject to the safe harbors for such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's expectations as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those expressed or implied by the forward-looking statements. These factors include our limited operating experience, risks related to our technology, regulatory risks, adverse economic conditions, entry of new and stronger competitors, our inadequate liquidity and capital resources, unexpected costs and other risks and uncertainties disclosed in this report and our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Except as may be required by applicable law, we do not undertake or intend to update or revise our forward-looking statements, and we assume no obligation to update any forward-looking statements contained in this report as a result of new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. You should carefully review and consider the various disclosures we make in this report and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Bonds.com Group, Inc.

Condensed Consolidated Balance Sheet

	June 30, 2010			December 31, 2009
	(unaudited)			(audited)

Assets

Currents assets
Cash and cash equivalents	$	107,977		$	2,672,230
Investment securities		2,552			9,547
Deposits with clearing organizations		647,149			1,311,220
Prepaid expenses and other assets		130,238			214,845
Total current assets		887,916			4,207,842

Property and equipment, net		117,097			163,554
Intangible assets, net		965,157			1,027,224
Other assets		166,983			166,983
Deferred tax asset		1,836,940			1,441,540
Total assets	$	3,974,093		$	7,007,143

Liabilities and Stockholders' Deficit

Current liabilities
Accounts payable and accrued expenses	$	2,963,110		$	2,665,168
Notes payable, related parties		450,000			550,000
Notes payable, other		82,000			1,144,117
Convertible notes payable, related parties, net of debt discounts		1,676,876			1,508,859
Convertible notes payable, other, net of debt discounts		1,186,597			592,716
Deferred tax liability		114,183			114,183
Liability under derivative financial instruments		4,609,130			3,527,393
Total current liabilities		11,081,896			10,102,436

Long-term liabilities
Convertible notes payable, other, net of debt discount		640,081			479,803
Deferred rent		42,877			44,248
Total liabilities		11,764,854			10,626,487


Commitments and contingencies

Stockholders' Deficit
Preferred stock $.0001 par value; 1,000,000 authorized;
46,939 and 0 issued and outstanding, respectively		5			-
Common stock $0.0001 par value; 300,000,000 authorized;
76,593,154 and 74,727,257 issued and outstanding, respectively		7,659			7,472
Additional paid-in capital		15,720,144			12,453,689
Accumulated deficit		(23,518,569	)		(16,080,505	)

Total stockholders' deficit		(7,790,761	)		(3,619,344	)

Total liabilities and stockholders' deficit	$	3,974,093		$	7,007,143

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

Bonds.com Group, Inc.

Condensed Consolidated Statements of Operations

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Revenue	$	779,939		$	1,103,321		$	1,414,090		$	2,044,624

Cost of sales		99,253			52,673			178,580			69,065

Gross Margin		680,686			1,050,648			1,235,510			1,975,559

Operating expenses
Payroll and related costs		1,890,530			894,894			4,769,508			1,668,924
Technology and communications		638,411			224,790			1,288,737			548,372
Software and support		31,722			33,841			61,251			63,016
Rent and occupancy		165,614			87,144			307,202			177,180
Legal, accounting, and other professional fees		351,142			205,315			763,158			313,538
Marketing and advertising		97,968			34,005			213,205			61,367
Other operating expenses		81,111			63,137			200,040			158,080
Depreciation		30,361			40,339			54,059			80,520
Amortization		36,321			50,158			79,043			99,961
Total operating expenses		3,323,180			1,633,623			7,736,203			3,170,958

Loss from operations		(2,642,493	)		(582,975	)		(6,500,693	)		(1,195,399	)

Other income (expense)
Interest income		49			2,154			58			6,593
Interest expense		(245,948	)		(318,298	)		(614,886	)		(524,941	)
Unrealized gain (loss) on derivative financial instruments and investment securities		3,276,289			(696,658	)		924,843			475,218
Other (expense) income		(905,000	)		(20,318	)		(905,000	)		(20,000	)
Total other income (expense)		2,125,390			(1,033,120	)		(594,985	)		(63,130	)

Income (Loss) before income tax benefit	$	(517,104	)	$	(1,616,095	)	$	(7,095,678	)	$	(1,258,529	)

Income tax (expense) benefit		(342,386	)		-			(342,386	)		-

Net income (loss) applicable to common stockholders	$	(859,490	)	$	(1,616,095	)	$	(7,438,064	)	$	(1,258,529	)

Net earnings (loss) per common share - basic	$	(.01	)	$	(.03	)	$	(.10	)	$	(.02	)

Weighted average shares outstanding - basic		76,593,154			61,283,623			76,038,427			61,190,590

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

Bonds.com Group, Inc.

Condensed Consolidated Statement of Changes in Stockholders’ Equity

									Additional						Total
	Preferred Stock				Common Stock				Paid-In			Accumulated			Stockholders'
	Shares		Amount		Shares		Amount		Capital			Deficit			Equity (Deficit)

Balances at January 1, 2009		-		-		61,216,590		6,121		8,986,505			(10,607,601	)		(1,614,975	)


Cumulative Effect of Change in Accounting Principle, net of taxes		-		-		-		-		(235,433	)		(775,955	)		(1,011,388	)

Fair value of common stock warrants issued in conjunction with convertible promissory notes, net of applicable deferred taxes		-		-		-		-		38,748			-			38,748

Issuance of common stock for consulting services		-		-		175,667		17		63,357			-			63,357

Recognition of compensation expense on date of grant relating to stock options		-		-		-		-		1,057,101			-			1,057,101

Beneficial conversion feature associated with convertible promissory notes, net of applicable deferred taxes		-		-		-		-		32,934			-			32,934

Amortization of deferred compensation		-		-		-		-		442,777			-			442,777
													-
Issuance of common stock from purchase agreement, net of issuance costs		-		-		13,335,000		1,334		4,729,977			-			4,729,977

Fair value of common stock warrants issued in conjunction with purchase agreement, net of applicable deferred taxes		-		-		-		-		(2,662,277	)		-			(2,662,277	)

Net loss		-		-		-		-		-			(4,696,949	)		(4,696,949	)

Balances at December 31, 2009		-	$	-		74,727,257	$	7,472	$	12,453,689		$	(16,080,505	)	$	(3,619,344	)


Issuance of preferred series "A" shares from purchase agreement, net of issuance costs		46,939		5		-		-		1,541,995			-			1,542,000

Issuance of common stock from purchase agreement, net of issuance costs		-		-		1,840,230		184		655,316			-			655,500

Issuance of common stock for consulting services		-		-		25,667		3		9,622			-			9,625

Recognition of option grant relating to litigation settlement		-		-		-		-		174,093			-			174,093

Recognition of compensation expense on date of grant relating to stock options		-		-		-		-		888,700			-			888,700

Amortization of deferred compensation		-		-		-		-		1,214,057			-			1,214,057
													-
Fair value of common stock warrants issued in conjunction with purchase agreement, net of applicable deferred taxes		-		-		-		-		(1,222,846	)		-			(1,222,846	)

Fair value of common stock warrants issued in conjunction with financing agreement		-		-		-		-		41,547			-			41,547

Fair value of common stock warrants issued in conjunction with 2010 May financing, net of applicable deferred taxes		-		-		-		-		(36,029	)		-			(36,029	)

Net loss		-		-		-		-		-			(7,438,064	)		(7,438,064	)

Balances at June 30, 2010 (unaudited)		46,939	$	5		76,593,154	$	7,659	$	15,720,144		$	(22,518,569	)	$	(7,790,761	)

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

	Six Months Ended June 30,
	2010			2009
	(unaudited)			(unaudited)

Cash Flows From Operating Activities
Net loss	$	(7,438,064	)	$	(1,258,529	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Income taxes		342,386			-
Depreciation		54,058			80,520
Amortization		79,043			99,961
Share-based compensation		2,102,757			138,011
Other share-based compensation		183,718			-
Unrealized (gain) on derivative financial instruments		(924,843	)		(475,218	)
Amortization of debt discount		289,478			257,424
Changes in operating assets and liabilities:
Accrued interest receivable		-			1,915
Deposit with clearing organization		664,071			-
Prepaid expenses and other assets		84,607			(1,031,383	)
Accounts payable and accrued expenses		297,942			567,498
Deferred rent		(1,371	)		3,776

Net cash used in operating activities		(4,266,218	)		(1,616,025	)

Cash Flows From Investing Activities
Purchases of property and equipment		(7,601	)		-
Purchase of intangible assets		(16,976	)		(54,798	)
Proceeds from sale/(purchase) of investment securities		6,995			(84,988	)
Cash received upon maturity of certificates of deposit		-			72,000

Net cash used in investing activities		(17,582	)		(67,786	)

Cash Flows From Financing Activities
Proceeds received from issuance of common stock		655,500			-
Proceeds received from issuance of preferred stock		1,542,000			-
Proceeds from convertible notes payable		650,000			700,000
Proceeds from notes payable		20,000			1,000,000
Repayments of notes payable		(1,147,953	)		(90,010	)
Principal payments on obligations under capital leases		-			(28,612	)

Net cash provided by financing activities		1,719,547			1,581,378

Net decrease in cash		(2,564,253	)		(102,433	)

Cash and cash equivalents, beginning of period		2,672,230			214,624

Cash and cash equivalents, end of period	$	107,977		$	112,191

Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	280,772		$	1,009
Debt discount on convertible notes payable	$	9,919		$	38,748
Debt discount on warrants issued with notes payable	$	7,243		$	37,657
Common stock and options issued in connection with services
rendered and a litigation settlement	$	183,718		$	-
Cancellation of unvested share-based compensation awards	$	22,533		$	-

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

1. Description of Business and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Bonds.com Group, Inc. and subsidiaries (the “Company”) are presented in accordance with the requirements for Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments considered necessary to fairly present the financial position, results of operations, and cash flows of the Company on a consistent basis, have been made.

These results have been determined on the basis of Generally Accepted Accounting Principles (“GAAP”) and practices applied consistently with those used in the preparation of the Company's consolidated financial statements for the year ended December 31, 2009. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The Company recommends that the accompanying condensed consolidated financial statements for the interim period be read in conjunction with the Company's consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 as filed on April 1, 2010.

Description of Business

Bonds.com Holdings, Inc. was incorporated in the State of Delaware on October 18, 2005 under the name Bonds Financial, Inc. On June 14, 2007, an amendment was filed thereby changing the name from Bonds Financial, Inc. to Bonds.com Holdings, Inc. On October 4, 2007, Bonds.com Holdings, Inc. acquired Pedestal Capital Markets, Inc., an existing Financial Industry Regulatory Authority (“FINRA”) registered broker dealer, which was subsequently renamed Bonds.com, Inc. Bonds.com, Inc. offers corporate bonds, municipal bonds, agency bonds, certificates of deposit, and U.S. Treasuries to potential customers via Bonds.com Holdings, Inc.’s software and website, www.bondstation.com and bondstationpro.com.

Bonds.com, LLC was formed in the State of Delaware on June 5, 2007 to facilitate an acquisition that was not finalized. Bonds.com, LLC remains a wholly-owned subsidiary of Bonds.com Holdings, Inc. but currently is inactive.

Insight Capital Management, LLC was formed in the State of Delaware on July 24, 2007 under the name Bonds.com Wealth Management, LLC. This wholly-owned subsidiary is intended to manage assets for high net worth individuals and is registered in the State of Florida to operate as an investment advisor. As of December 31, 2009, there were no assets under management. On January 19, 2010, Insight Capital Management, LLC was dissolved.

On December 21, 2007, Bonds.com Holdings, Inc. consummated a merger with IPORussia (a public “shell”). As a result of the merger, IPORussia changed its name to Bonds.com Group, Inc. and became the parent company of Bonds.com Holdings, Inc. and its subsidiaries. In connection with the merger, IPORussia acquired all the outstanding shares and options of Bonds.com Holdings, Inc.’s common stock in exchange for its common stock and options. The acquisition was accounted for as a reverse merger with Bonds.com Holdings, Inc. as the accounting acquirer.

2. Summary of Significant Accounting Policies

Cumulative Effect of a Change in Accounting Principle

On June 25, 2008, the Financial Accounting Standards Board Ratified the consensus reached by the Contracts in Entity’s Own Equity Topic of FASB ASC 815-40-15. This Topic provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock, which is the first part of the scope exception in the Derivatives and Hedging Topic of FASB ASC 815. If an embedded feature (for example, the conversion option embedded in a convertible debt instrument) does not meet the scope exception in FASB ASC 815, it would be separated from the host contract (the debt instrument) and be separately accounted for as a derivative by the issuer. FASB ASC 815-40-15 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, to be applied to outstanding instruments as of the effective date.

The Company’s Secured Convertible Notes contain terms in which the conversion rate is reduced to match the share price in a future sale of securities for a per share amount less than the conversion rate. Under the consensus reached in ASC 815-40-15, the conversion option is not considered indexed to the Company’s own stock because the conversion rate can be affected by future equity offerings undertaken by the Company at the then-current market price of the related shares. Upon adoption of ASC 815-40-15 on January 1, 2009, the Company decreased additional paid in capital by $235,433, increased accumulated deficit by $775,955, and recorded a derivative financial instrument liability in the amount of $1,161,696.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of Bonds.com Group, Inc., Bonds.com Holdings, Inc., Bonds.com, Inc., and Bonds.com, LLC. These entities are collectively referred to as the “Company”.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.

Revenue Recognition

Revenues generated from securities transactions and the related commissions are recorded on a settlement date basis as the transactions are settled.

Prepaid Expenses and Other Assets

Prepaid expenses and other assets primarily represent amounts paid to vendors reflecting costs applicable to future accounting periods. Costs are recognized over the useful life of the prepaid expense or asset on a straight-line basis.

Deposits with Clearing Organizations

Deposits with Clearing Organizations consist of (a) cash proceeds from commissions and fees related to securities transactions net of all associated costs, and (b) a cash deposit by the Company to satisfy our broker-dealer’s regulatory net capital requirements. The balance primarily is comprised of cash and cash equivalents.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the estimated useful lives or related lease terms. The Company periodically reviews property and equipment to determine that the carrying values are not impaired.

Intangible Assets

Intangible assets are initially recorded at cost, which is considered to be fair value at the time of purchase. Amortization is provided for on a straight-line basis over the estimated useful lives of the assets. The Company’s domain name (www.bonds.com) is presumed to have an indeterminate life and is not subject to amortization. The Company evaluates the recoverability of intangible assets periodically and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. No impairments of intangible assets have been identified during any of the periods presented.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes indicate that the carrying amount of an asset or group of assets may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets. There were no impairment losses recorded during the three months ended June 30, 2010.

Income Taxes

Current income taxes are based on the year’s taxable income for federal and state income tax reporting purposes. Deferred income taxes are provided on a liability basis whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and rates on the date of enactment.

Marketing and Advertising Costs

Marketing and advertising costs are expensed as incurred. Marketing and advertising expenses for the three months ended June 30, 2010 and 2009, were $97,968 and $34,005, respectively. Marketing and advertising expenses for the six months ended June 30, 2010 and 2009, were $213,205 and $282,419, respectively.

Operating Leases

The Company leases office space under operating lease agreements with original lease periods up to 63 months. Certain of the lease agreements contain rent holidays and rent escalation provisions. Rent holidays and rent escalation provisions are considered in determining straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the lease property for purposes of recognizing lease expense on a straight-line basis over the term of the lease. Lease renewal periods are considered on a lease-by-lease basis and are generally not included in the initial lease term.

Share-Based Compensation

The Company accounts for its share-based awards associated with share-based compensation arrangements with employees and directors in accordance with FASB ASC 718. Equity-based awards granted by the Company are recorded as compensation. These costs are measured at the grant date (based upon an estimate of the fair value of the compensation granted) and recorded to expense over the requisite service period, which generally is the vesting period. Fair value of share-based compensation arrangements are estimated using the Black-Scholes option pricing model.

Reclassification

Certain amounts in prior periods have been reclassified for comparative purposes.

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends the Fair Value Measurements and Disclosures Topic to require additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy. Entities are also required to disclose information in the Level 3 rollforward about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, ASU 2010-06 clarifies existing guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The guidance in ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to separately disclose purchases, sales, issuances and settlements in the Level 3 rollforward, which becomes effective for fiscal years (and for interim periods within those fiscal years) beginning after December 15, 2010. The Company’s adoption of ASU 2010-06, effective January 1, 2010, did not have a material impact on its consolidated financial position, results of operations or cash flows during the three months ended June 30, 2010. The Company does not expect the deferred portion of the adoption of ASU 2010-06 to have a material impact on its consolidated financial statements.

3. Going Concern

Since its inception, the Company has generated no significant revenues and has incurred a cumulative net loss of $23,518,569. As of June 30, 2010, the Company has a working capital deficit of $10,193,982, including approximately $532,000 of outstanding notes payable and $2,863,473 of outstanding convertible notes payable due within the next twelve months. Management commenced operations in December of 2007 utilizing additional capital raised throughout the years ended December 31, 2009, 2008 and 2007. Operations during the year ended December 31, 2009 and the six months ended June 30, 2010 have also been funded using proceeds received from the issuance of convertible notes to related and unrelated parties, secured promissory notes to related and unrelated parties and the issuance of common stock. If the Company does not obtain additional capital in the near term, its ability to continue to implement its business plan may be limited. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The accompanying unaudited condensed consolidated financial statements have been presented on the basis of the continuation of the Company as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

4. Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted the Fair Value Measurements and Disclosures Topic of FASB ASC 820. FASB ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. This Topic applies under other accounting pronouncements that require or permit fair value measurements.

In accordance with FASB ASC 820, the Company measures the financial assets in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow a company to sell its ownership interest back at net asset value (“NAV”) on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities or funds.

Level 2 – Valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government and agency debt securities, and mortgage-backed securities. Valuations are usually obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The availability of observable inputs can vary from instrument to instrument and in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement of an instrument requires judgment and consideration of factors specific to the instrument.

Recurring Fair Value Measurement Valuation Techniques

The fair value for certain financial instruments is derived using pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available will generally have a higher degree of price transparency than financial instruments that are thinly traded or not quoted. In accordance with FASB ASC 820, the criteria used to determine whether the market for a financial instrument is active or inactive is based on the particular asset or liability. For certificates of deposit, the Company’s definition of actively traded was based on market trading statistics, such as historical interest rates. The Company considered the market for other types of financial instruments, including certain derivative financial instruments, to be inactive as of June 30, 2010. As a result, the valuation of these financial instruments included significant management judgment in determining the relevance and reliability of market information available. The Company considered the inactivity of the market to be evidenced by several factors, including limited trading of the Company’s stock since its inception in December of 2007.

Investment Securities

As of June 30, 2010, investment securities included corporate bonds. These securities were valued utilizing recent market transactions for identical or similar instruments to corroborate pricing service fair value measurements and are generally categorized in Level 2 of the fair value hierarchy.

Derivative Financial Instruments

The Company’s derivative financial instruments consist of conversion options embedded in convertible promissory notes and warrants issued in connection with the sale of common stock and preferred shares that contain “down round” protection to the holders. These derivatives are valued with pricing models commonly used by the financial services industry using inputs generally observable in the financial services industry. The Company considers these models to involve significant judgment on the part of management, including the inputs utilized in its pricing models. The majority of the Company’s derivative financial instruments are categorized in Level 3 of the fair value hierarchy. The Company estimates the fair value of derivatives utilizing the Black-Scholes option pricing model, as the derivatives held by the Company are comprised of options to convert outstanding promissory notes payable into shares of the Company’s stock, at the note holder’s option and warrants that contain “down round” protection features. This model is dependent upon several variables such as the expected option term, expected risk-free interest rate over the expected option term, the expected dividend yield rate over the expected option term and the expected volatility of the Company’s stock price over the expected term. The expected term represents the period of time that the options granted are expected to be outstanding. The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected terms of the options at the date of issuance. Expected dividend yield is based on historical trends. For the year ended December 31, 2009, the Company estimated the volatility of its common stock based on an average of published volatilities contained in the most recent audited financial statements of other publicly reporting companies in the similar industry to that of the Company. As discussed in Note 2, during the quarter ended March 31, 2009, the Company ceased classifying itself as a development stage entity, and among other factors, determined that the historical prices of the Company were no longer the best proxy to estimate the Company’s volatility.

Level 3 Assets and Liabilities

Level 3 liabilities include instruments whose value is determined using pricing models and for which the determination of fair value requires significant management judgment or estimation.

Fair values of assets measured on a recurring basis at June 30, 2010 and December 31, 2009 are as follows:

	Fair Value			Quoted Prices in Active Markets for Identical Assets / Liabilities (Level 1)		Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2010
Assets
Investment securities		$	2,552	$	-	$	2,552	$	-
Total assets measured at fair value on a recurring basis		$	2,552	$	-	$	2,552	$	-

Liabilities
Derivative financial instruments		$	4,609,130		-		-	$	4,609,130
Total liabilities measured at fair value on a recurring basis		$	4,609,130	$	-	$	-	$	4,609,130

December 31, 2009
Assets
Investment securities			9,547		-		9,547		-
Total assets measured at fair value on a recurring basis		$	9,547	$	-	$	9,547	$	-

Liabilities
Derivative financial instruments		$	3,527,393		-		-	$	3,527,393
Total liabilities measured at fair value on a recurring basis		$	3,527,393	$	-	$	-	$	3,527,393

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains for liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs. The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the three months ended June 30, 2010:

	Unrealized Gains
	Derivative Financial Instruments

January 1, 2010	$	(3,527,393	)
Included in Earnings		924,843
Included in Other Comprehensive Income		-
Total	$	(2,602,550	)
Purchases, Sales, Other Settlements and Issuances, Net		(2,006,580	)
Net Transfers In and/or (Out) of Level 3		-
June 30, 2010	$	(4,609,130	)

The majority of total unrealized gains were related to Level 3 instruments held at June 30, 2010.

5. Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and investment securities. Management believes the financial risks associated with these financial instruments are not material. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits.

6. Property and Equipment

Property and equipment consisted of the following at June 30, 2010 and December 31, 2009:

	June 30,			December 31,
	2010			2009
Leased property under capital leases	$	209,757		$	209,758
Computer equipment		216,476			212,690
Furniture and fixtures		46,904			43,088
Office equipment		111,177			111,177
Leasehold improvements		10,372			10,372
Total property and equipment		594,686			587,085
Less: accumulated depreciation and amortization		(477,589	)		(423,531	)
Property and equipment, net	$	117,097		$	163,554

Depreciation expense for the three and six months ended June 30, 2010 was $30,361 and $54,058, respectively. Depreciation expense for the three and six months ended June 30, 2009 was $40,339 and $80,520 respectively.

7. Intangible Assets

Intangible assets consisted of the following at June 30, 2010 and December 31, 2009:

	June 30,			December 31,
	2010			2009
Non-amortizing intangible assets
Domain name (www.bonds.com)	$	850,000		$	850,000
Broker dealer license		50,000			50,000
		900,000			900,000
Amortizing intangible assets
Software		431,996			431,996
Capitalized website development costs		196,789			179,814
Other		6,529			6,529
Total intangible assets		1,535,314			1,518,339
Less: accumulated amortization		(570,157	)		(491,115	)
Intangible assets, net	$	965,157		$	1,027,224

Amortization expense for the three and six months ended June 30, 2010 was $36,321 and $79,043, respectively. Amortization expense for the three and six months ended June 30, 2009 was $50,158 and $99,961 respectively.

The following is a schedule of estimated future amortization expense of intangible assets as of June 30, 2010:

Year Ending December 31,
2010		36,603
2011		30,387
2012		6,721
2013		2,829
2014		-
	$	76,540

8. Investment in Broker-Dealer

On October 4, 2007, the Company acquired all of the outstanding shares of Pedestal Capital Markets, Inc. an existing FINRA registered broker dealer entity, in exchange for a cash purchase price of $50,000 plus the existing regulatory capital at the closing date $61,599. Pedestal was subsequently renamed Bonds.com, Inc. by the Company.

During the six months ended June 30, 2010 and the year ended December 31, 2009, the Company invested an additional $1,000,000 and $500,000 in Bonds.com, Inc., respectively, bringing the total investment to $3,468,609 as of June 30, 2010.

9. Notes Payable, Related Parties

The following is a summary of related party notes payable at June 30, 2010 and December 31, 2009:

	June 30,			December 31,
	2010			2009
$250,000 unsecured promissory note payable to John Barry III, one of the Company's directors, originating from a total of $250,000 in cash received in January and February of 2008, bearing interest at 15% per annum. Amended in January 2010 for principal and accrued interest to be due when either (a) the Company has at least 12 months cash reserve for working capital and regulatory capital requirements, or (b) once John Barry III is no longer a director of the Company. Original maturity was April 15, 2010.	$	250,000		$	250,000

$300,000 secured promissory note held by the Nadel Receiver, originating from the $400,000 Valhalla Investment Partners Note (the "Valhalla Note"), an investment fund that is a beneficial owner of shares of our common stock and was formerly co-managed by Christopher D. Moody, a former director ("Christopher Moody"). The note bears interest at 9% per annum, principal of $100,000 and accrued interest due on April 1, 2010, July 1, 2010 and October 1, 2010, secured by the Company's Bonds.com domain name.		200,000			300,000
Total	$	450,000		$	550,000
Less: current portion		(450,000	)		(550,000	)
Long-term portion	$	-		$	-

During the year ended December 31, 2008, the Company received an aggregate of $2,050,000 of proceeds from related parties in exchange for notes payable bearing interest from 3.6% to 15.0%, respectively.

On September 24, 2008, an aggregate of $1,440,636 of previously outstanding related party notes payable and accrued interest was converted to new convertible notes payable bearing interest at 10% per annum, with principal and accrued interest due at maturity on September 24, 2010, and with principal and accrued interest being convertible into common stock at any time prior to maturity at a conversion price of $0.375 per share.

On January 21, 2009, in the matter Securities and Exchange Commission v. Arthur Nadel, Scoop Capital, LLC and Scoop Management, Inc., which is pending in the U.S. District Court for the Middle District of Florida, a receiver was appointed to administer and manage the affairs of Valhalla Investment Partners, L.P. and its general partner Valhalla Management Inc. (the “Nadel Receiver”). As a result of the appointment of the Nadel Receiver, Christopher Moody and Neil V. Moody no longer have the right or authority to exercise any management or control over Valhalla Investment Partners, L.P., Valhalla Management Inc. or their respective assets or affairs and those entities are now under the control of the court-appointed receiver.

On April 30, 2009, the Company amended and restated the Valhalla Note, to, among other things, (1) extend the Maturity Date to October 31, 2009, (2) decrease the amount outstanding under the Valhalla Note to an aggregate of $400,000, and (3) clarify that the holder of the Valhalla Note has a first priority security interest in the domain name “bonds.com”. Additionally, on April 30, 2009, the Company made a cash payment to the holder of the Valhalla Note in the amount of the accumulated but unpaid interest due there under as of April 30, 2009.

On November 2, 2009, the Company paid $117,000 pursuant to the Valhalla Note, consisting of $100,000 in principal repayment and $17,000 in accrued interest. On November 13, 2009, the Valhalla Note was amended and restated by the Company and the Nadel Receiver, acting on behalf of Valhalla Investment Partners. The amended and restated Valhalla Note, which is dated as of November 9, 2009 but was entered into on November 13, 2009, has in a principal amount of $300,000 (reflecting the $100,000 principal payment on November 2, 2009). Pursuant to the amended and restated Valhalla Note, the principal balance of $300,000 is required to be paid in installments of $100,000 on April 1, 2010, July 1, 2010 and October 1, 2010, along with accrued and unpaid interest at each installment.

On July 28, 2010, Bonds.com Group, Inc.’s wholly-owned subsidiary Bonds.com Holdings, Inc. (“Holdings”) issued a 15% Promissory Note in the principal amount of $400,000 (the “Promissory Note”) to an accredited investor (the “Holder”), in exchange for the Holder’s payment of an aggregate of $400,000. The Promissory Note is due and payable on October 31, 2010 and contains affirmative and negative covenants. The Promissory Note obligates Holdings to secure its obligations under the Promissory Note by pledging to the Holder 24.9% of its ownership interest in Bonds.com, Inc., which pledge and security interest would be subordinate in all respects to all secured indebtedness in existence as of the date of the Promissory Note. The $400,000 payment by the Holder was made in two equal installments on July 26 and 27, 2010. The Holder of the Promissory Note does not have the right to convert it into equity of Bonds.com, Inc., Holdings or the Company. However, we anticipate that if we are able to raise additional equity capital, the Holder would apply the principal amount of the Promissory Note to the purchase of equity in connection with such financing. Holder is a newly formed limited liability company created to raise and invest funds in the Company. Edwin L. Knetzger, III, Co-Chairman and a member of our Board of Directors, provided Holder with fifty percent of the funds it advanced to Holdings and is a significant equity owner in Holder.

Interest expense recognized on related party notes payable for the three months ended June 30, 2010 and 2009 was $14,030 and $9,479, respectively. Interest expense recognized on related party notes payable for the six months ended June 30, 2010 and 2009 was $30,155 and $21,954, respectively.

10. Convertible Notes Payable, Related and Non-Related Parties

The following is a summary of related party and non-related party convertible notes payable at June 30, 2010 and December 31, 2009:

	June 30,			December 31,
	2010			2009
Related Parties
$1,236,836 secured convertible promissory note held by the Nadel Receiver, originating from the conversion of $1,236,836 of previously outstanding promissory notes and accrued interest in September of 2008, and $50,000 in cash received in December of 2008, bearing interest at 10% per annum, principal and accrued interest is due at maturity on September 24, 2010.	$	1,286,836		$	1,286,836

$203,800 secured convertible promissory note payable to Valhalla Investment Partners, an investment fund formerly co-managed by Christopher Moody, originating from the conversion of $203,800 of previously outstanding promissory notes and accrued interest in September of 2008, bearing interest at 10% per annum, principal and accrued interest is due at maturity on September 24, 2010.		203,800			203,800

$250,000 secured convertible promissory note payable to the Neil Moody Revocable Trust, an entity affiliated with Christopher Moody, originating from $250,000 in cash received in October of 2008, bearing interest at 10% per annum, principal and accrued interest is due at maturity on September 24, 2010.		250,000			250,000
Total		1,740,636			1,740,636
Less: unamortized debt discount		(63,760	)		(231,777	)
Total Related Parties		1,676,876			1,508,859

Non-Related Parties

$1,275,000 in secured convertible promissory notes payable to various individuals, originating from $1,275,000 in cash received during the period from September 22, 2008 through June 30, 2009.		1,275,000			1,275,000
Secured convertible promissory notes in the aggregate principal amount of $650,000 and warrants to purchase up to 1,300,000 shares of our Common Stock at an exercise price of $0.375 per share. The aggregate purchase price for the Notes and Warrants was $650,000.		650,000			-
Total		1,925,000			1,275,000
Less: unamortized debt discount		(98,322	)		(202,481	)
Total Non-Related Parties		1,826,678			1,072,519

Total		3,503,554			2,581,378
Less: current portion		(2,863,473	)		(2,101,575	)
Long-term portion	$	640,081		$	479,803

On September 24, 2008, in connection with the execution of secured convertible note and warrant purchase agreements with Christopher Moody, and Valhalla Investment Partners (“Valhalla”), an investment fund formerly co-managed by Moody, a former director of the Company, an aggregate of $1,440,636 of previously outstanding notes payable and accrued interest due to Christopher Moody and Valhalla was converted into new convertible notes payable to the Christopher D. Moody Revocable Trust, an entity affiliated with Christopher Moody, and Valhalla with aggregate principal amounts of $1,236,836 and $203,800, respectively.

On October 20, 2008, the Company also executed a $250,000 secured promissory note and warrant agreement with the Neil Moody Revocable Trust, an entity affiliated with Neil V. Moody, Christopher Moody’s father.

On December 12, 2008, the Company executed an additional $50,000 secured promissory note and warrant agreement with the Christopher D. Moody Revocable Trust.

During the period from September 24, 2008 through December 31, 2008, the Company also executed secured convertible promissory note and warrant purchase agreements with certain third-party investors in the aggregate principal amount of $575,000.

On January 30, 2009, the Company executed secured convertible promissory note and warrant purchase agreements with unrelated third party investors, in the principal amount of $125,000. During the period from April 1, 2009

through June 30, 2009, the Company also executed secured convertible promissory note and warrant purchase agreements with certain third-party investors in the aggregate principal amount of $575,000 (collectively the “Convertible Notes”).

Under the terms of the Convertible Notes, the entire principal amount of the Convertible Notes is due and payable on September 24, 2010 (the “Maturity Date”); interest accrues at a rate of 10% per annum, with unpaid interest payable, in full, upon the earlier of (1) the conversion of the Convertible Notes or (2) on the Maturity Date. Holders of the Convertible Notes have the right to convert principal and interest due and payable into shares of common stock of the Company at a conversion price equal to the lesser of (1) $0.375 per share, as adjusted for stock splits, and reverse splits, or (2) the price paid for the Company’s common stock in any future sale of the Company’s securities while the Convertible Notes are outstanding, exclusive of certain excluded transactions. The Convertible Notes are secured in general by all of the Company’s assets, pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008, as amended on February 3, 2009.

In connection with the execution of the convertible note and warrant purchase agreements, Moody, Valhalla and the third-party investors were granted warrants to purchase an aggregate of 1,627,114 shares of the Company’s common stock at an exercise price of $0.46875 per share and expiring on September 24, 2013.

On April 30, 2009, the Company amended and restated its Security Agreement with Bonds.com Holdings, Inc., Bonds.com, Inc., and Insight Capital Management, LLC (the “Amended and Restated Security Agreement”), to, among other things: (1) allow it to add the March 2009 Investor (as defined in Note 11) as a secured party; (2) allow it to add additional purchasers of promissory notes of up to an additional $2,100,000 as secured parties; and (3) clarify that Valhalla Investment Partners has a first priority security interest in the domain name “bonds.com” with respect to the indebtedness owed by the Company under the Valhalla Note (See Note 9), and the other secured parties have a subordinated security interest in the domain name.

On August 5, 2009, the shares of the Company’s common stock and convertible promissory note formerly held by Christopher Moody and the Christopher D. Moody Revocable Trust were transferred to the Nadel Receiver pursuant to a court order in the matter Securities and Exchange Commission v. Arthur Nadel, Scoop Capital, LLC and Scoop Management, Inc. According to a Schedule 13D filed with the Securities and Exchange Commission by the Nadel Receiver on August 13, 2009, the Nadel Receiver (directly and through Valhalla Investment Partners) at that time was the beneficial owner of approximately 14.62% of the Company’s common stock (which includes shares that may be acquired upon the exercise of warrants).

On May 28, 2010, the Company entered into a Secured Convertible Note and Warrant Purchase Agreement with a group of accredited investors. Pursuant to the Purchase Agreement, we issued to the Purchasers (a) secured convertible promissory notes in the aggregate principal amount of $650,000 and (b) warrants to purchase up to 1,300,000 shares of our Common Stock at an exercise price of $0.375 per share. The Purchasers paid an aggregate purchase price of $650,000 for the Notes and Warrants. The Purchase Agreement provides that the Company may issue and sell up to an additional $1,000,000 principal amount of Notes and Warrants for up to an additional 2,000,000 shares of our Common Stock at any time on or prior to June 11, 2010.

Additionally, in connection with the Purchase Agreement and issuance of the Notes and Warrants, on May 28, 2010, the Company entered into a Second Amended and Restated Security Agreement with the Purchasers and existing holders of previously issued and outstanding secured convertible promissory notes (the “Second Amended and Restated Security Agreement”). The Second Amended and Restated Security Agreement amends and restates the Amended and Restated Security Agreement, dated April 30, 2009, to add the Purchasers as parties thereto and provide for the security interest granted to the holders of the Notes.

The Company has accounted for the warrants issued in conjunction with the Convertible Notes in accordance with the provisions of APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“APB 14”). Accordingly, the warrants were valued at the time of issuance using a Black-Scholes option pricing model with the following assumptions: (i) risk free interest rates ranging from 1.55 % to 2.91%, (ii) a contractual life of 5 years, (iii) expected volatility of 50% and (iv) a dividend yield of zero. The relative fair value of the warrants, based on an allocation of the value of the Convertible Notes and the value of the warrants issued in conjunction with the Convertible Notes, was recorded as a debt discount (with a corresponding increase to additional paid-in capital) in the amount of $355,472, and is being amortized to interest expense over the expected term of the Convertible Notes.

The Company has accounted for the conversion feature issued in conjunction with the Convertible Notes in accordance with the provisions of FASB ASC 815-40-15. Pursuant to the transition provisions of the ASC 815-40-15, the conversion options were valued at the time of issuance using a Black-Scholes option pricing model with the following assumptions: (i) risk free interest rates ranging from 0.78 % to 2.03%, (ii) a contractual life of 2 years, (iii) expected volatility of 50% and (iv) a dividend yield of zero. The fair value of the options was recorded as a debt discount in the amount of $719,338, and is being amortized to interest expense over the expected term of the Convertible Notes. In addition, pursuant to the provisions of FASB ASC 815, the conversion option is classified as a derivative liability was created to offset the debt discount, which is being marked-to-market each reporting period with corresponding changes in the fair value being recorded as unrealized gains or losses on derivative financial instruments in the consolidated statement of operations.

During the three and six months ended June 30, 2010, the Company recognized $141,802 and $282,092, respectively, in interest expense related to the amortization of the debt discount associated with the warrants and the debt discount associated with the beneficial conversion feature.

During the three and six months ended June 30, 2010, the Company also recognized $76,228 and $151,619, respectively, in interest expense on the outstanding related party and non-related party Convertible Notes.

11. Notes Payable, Other

The following is a summary of outstanding principal due on unrelated third party notes payable at June 30, 2010 and December 31, 2009:

	June 30,			December 31,
	2010			2009

$250,000 note payable to an investment advisory firm for services rendered in relation to the Company's reverse merger transaction, amended on March 12, 2010, bearing interest at 10.0% per annum, principal and accrued interest payments is due on June 15, 2010, September 15, 2010 and December 15, 2010.		82,000			151,500

$1,000,000 secured promissory note payable to an unrelated third party, originating from $1,000,000 in cash received on March 31, 2009, bearing interest at 15% per annum, principal and accrued interest is due at maturity on March 31, 2010, secured by the assets of Bonds.com Holdings, Inc. and a pledge of 4,500,000 shares of common stock of the Company by an entity controlled by John Barry IV, founder and director.		-			1,000,000

Less: unamortized debt discount		-			(7,383	)
Total		82,000			1,144,117
Less: current portion		(82,000	)		(1,144,117	)
Long-term portion	$	-		$	-

In September of 2008, the Company amended its note payable to the investment advisory firm pursuant to which (i) the original maturity date of June 21, 2008 was extended until December 31, 2009, (ii) repayment of principal and interest can now be accelerated in the event that the Company raises certain amounts of capital, (iii) monthly principal payments of $7,500 are required beginning on April 30, 2009 and each month thereafter until the maturity date, (iv) penalty interest that might have otherwise been due following the original maturity date was waived, and (v) the ability of the Company to repay outstanding principal and accrued interest through the issuance of common stock was eliminated.

On March 12, 2010, the Company entered into a second amendment to the note payable to the investment advisory firm, pursuant to which the Company is required to repay the remaining principal balance as of March 12, 2010 ($144,000) along with unpaid consulting fees ($20,000) in installments of $41,000 on March 15, 2010, June 15, 2010, September 15, 2010 and December 15, 2010 along with accrued and unpaid interest at each installment.

On March 31, 2009, the Company entered into a Commercial Term Loan Agreement (the “Term Loan Agreement”) with an unrelated third party investor (the “March 2009 Investor”). Pursuant to the terms and conditions of the Term Loan Agreement, the Company raised gross proceeds of $1,000,000 in exchange for the issuance to such investor of a promissory note in the principal amount of $1,000,000 (the “March 2009 Note”), and a warrant to purchase 1,070,000 shares of the Company’s common stock at an initial exercise price of $0.375 per share, subject to adjustment (the “March 2009 Warrant”). The Term Loan Agreement contains provisions customary for a financing of this type, including customary representations and warranties by the Company to the investor.

The March 2009 Note accrues interest at the rate of 15% per annum and had a maturity date of March 31, 2010. Accrued and unpaid interest is due in a single payment on the maturity date. The March 2009 Note contains customary events of default, including the right of the holder to accelerate the maturity date and payment

of principal and interest in the event of the occurrence of any such event. The March 2009 Note is guaranteed by the Company’s subsidiary Bonds.com Holdings, Inc pursuant to a Guaranty Agreement. Additionally, Siesta Capital LLC, an entity owned and controlled by John Barry IV, the Company’s founder and one of the Company’s directors, secured the Note by pledging 4,500,000 shares of the Company’s common stock. On March 19, the Company repaid the principal balance of the $1,000,000 note payable, along with all accrued interest to the investor.

The March 2009 Warrant is exercisable at any time through and until March 31, 2014 for 1,070,000 shares of the Company’s common stock at an initial exercise price of $0.375 per share. However, in the event of default (failure to pay any principal or interest under the March 2009 Note when due), the exercise price of the March 2009 Warrant will be reset to an amount equal to $0.0001 per share. On March 5, 2010, the Company repaid the principal balance of the $1,000,000 note payable, along with all accrued interest to the investor.

The Company has accounted for the March 2009 warrant in accordance with the provisions of ASC 470-20, Debt with Conversion and Other Options. Accordingly, the March 2009 warrant was valued using a Black-Scholes option pricing model with the following assumptions: (i) a risk free interest rate of 1.67%, (ii) a contractual life of 5 years, (iii) an expected volatility of 50%, and (iv) a dividend yield of zero. The relative fair value of the March 2009 warrants, based on an allocation of the value of the notes and the value of the warrants issued in conjunction with the notes, was recorded as a debt discount (with a corresponding increase to additional paid-in capital) in the amount of $32,934, and is being amortized to interest expense over the expected term of the Convertible Notes.

On January 7, 2010, the Company issued an additional 500,000 warrants to the unrelated third party to purchase shares of the Company’s common stock at an initial exercise price of $0.375 per share. The warrants are exercisable at any time through and until January 7, 2015.

Interest expense recognized on third party notes payable for the three months ended June 30, 2010 and 2009 was $22,104 and $52,785, respectively. Interest expense recognized on third party notes payable for the six months ended June 30, 2010 and 2009 was $82,297 and $65,152, respectively.

Interest expense related to the amortization of the debt discount associated with the warrants for the three months ended June 30, 2010 and 2009 was $0 and $8,457, respectively. Interest expense related to the amortization of the debt discount associated with the warrants for the six months ended June 30, 2010 and 2009 was $7,379 and $8,457, respectively.

12. Commitments and Contingencies

Operating Leases

The Company leases office facilities and equipment and obtains data feeds under long-term operating lease agreements with various expiration dates and renewal options. These data feeds and associated equipment provide information from financial markets that are essential to the Company’s business operations. The following is a schedule of future minimum rental payments required under operating leases as of June 30, 2010:

Year Ending December 31,
2010	$	196,641
2011		255,722
2012		238,511
2013		-
2014		-
Total minimum payments required	$	690,874

Rent expense for all operating leases for the three months ended June 30, 2010 and 2009 was $165,614 and $87,144, respectively. Rent expense for all operating leases for the six months ended June 30, 2010 and 2009 was $307,202 and $177,180, respectively.

Capital Leases

The Company leases internet servers under long term lease agreements that are classified as capital leases. Amortization for capital leases is included in depreciation expense (See Note 6). Interest expense under capital leases for the six months ended June 30, 2010 and 2009 was $0 and $1,010, respectively.

Customer Complaints and Arbitration

From time to time the Company’s subsidiary broker dealer, Bonds.com, Inc., may be a defendant or co-defendant in arbitration matters incidental to its retail and institutional brokerage business. Bonds.com, Inc. may contest the allegations in the complaints in these cases and carries errors and omissions insurance policy to cover such incidences. The policy terms require that the Company pay a deductible of $50,000 per incidence. The Company is not currently subject to any customer complaints or arbitration claims and therefore has not accrued any liability with regards to these matters.

Other Litigation

The Company, along with John Barry III, one of its directors, commenced an action in the Supreme Court of the State of New York, County of New York, on or about August 15, 2006, against Kestrel Technologies LLC a/k/a Kestrel Technologies, Inc. (“Kestrel”) and Edward L. Bishop III, Kestrel’s President, alleging certain defaults and breaches by Kestrel and Mr. Bishop under agreements with the Company. On March 13, 2008, the Supreme Court of the State of New York granted the Company’s motion for summary judgment with respect to the payment of amounts owed under the agreements. On April 1, 2008, a jury sitting in the Supreme Court of the State of New York found Kestrel liable for anticipatory breach of certain of its contractual obligations to the Company under the agreements and awarded the Company $600,000 plus interest.

On May 14, 2008, the Company entered into a Payment Agreement with Kestrel. Under the terms of the Payment Agreement, Kestrel is required to pay the Company a total of $826,730 in monthly payments, which would result in the Company receiving monthly payments of: (i) $300,000 on or before June 1, 2008; (ii) $77,771 on or before the first day of each month from July through December 2008; and (iii) 59,653 on or before the first day of January 1, 2009. In connection with entering into the Payment Agreement, Kestrel waived any rights it may have to appeal the jury verdict and summary judgment. On June 1, 2008, Kestrel breached its obligations under the Payment Agreement by failing to make the $300,000 payment due on or before June 1, 2008. As of the date of this filing, Kestrel has only paid $319,950 to the Company under the Payment Agreement. The Company has sent Kestrel written notices of breach under the Payment Agreement and the Company is currently evaluating its options as a result of Kestrel’s breach of its obligations under the Payment Agreement, including commencing a collection action against Kestrel in satisfaction of the jury verdict and summary judgment awards. Amounts to be collected under the Payment Agreement have been attached as collateral for payment of related legal fees.

On September 2, 2008, a complaint was filed against the Company and its subsidiaries in the Circuit Court of the 15th Circuit in and for Palm Beach County, Florida by William Bass, under an alleged breach of contract arising from the Company’s termination of Mr. Bass’ Employment Agreement with the Company. Mr. Bass sought monetary damages for compensation allegedly due to him and for the future value of forfeited stock options. Additionally, on April 28, 2009, Mr. Bass filed a complaint against the Company and its subsidiaries in the U.S. District Court for the Southern District of Florida based on the same breach of contract claims identified above. In this suit, Mr. Bass also sued the Company and its subsidiaries for violation of federal and state disability laws.

On March 19, 2010, the Company entered into a Settlement Agreement with Mr. Bass that provided for a dismissal of the above lawsuits and a complete waiver by Mr. Bass of any claims against the Company and its subsidiaries, in exchange primarily for the Company’s agreement to (a) pay Mr. Bass $315,000 in 41 monthly installments commencing in March 2010, (b) to pay Mr. Bass up to an additional $100,000 based on the performance of Bonds.com Inc. in 2010 and 2011, and (c) the Company’s issuance to Mr. Bass of an option to purchase 1,500,000 shares of our common stock at an exercise price of $0.375 per share, which is exercisable until January 31, 2017.

In January 2009, the Company learned that Duncan-Williams, Inc. filed a complaint against the Company and its subsidiaries in the United States District Court for the Western District of Tennessee, Western Division, alleging breach of contract and unjust enrichment arising from the Company’s previous relationship with Duncan-Williams, Inc. In that action, Duncan Williams, Inc. sought damages of $2,300,000, a declaration of an ownership interest in our online trading platform and an accounting of income earned by the Company. It is the Company’s position that such relationship was in fact terminated by the Company on account of Duncan-Williams, Inc.’s breach and bad faith and thus the Company believes it has meritorious defenses to the claims. In February 2009, the Company filed a motion to dismiss the complaint, and in October 2009, the court entered an order administratively closing this case. Such order did not affect the substantive and/or procedural rights of the parties to proceed before the court at a later date, or any rights the Company or Duncan Williams, Inc. to seek arbitration. Duncan-Williams, Inc. has notified the Company of its intention to initiate arbitration regarding the claims in its prior complaint, including proposing procedures and timing for the appointment of arbitrators. To date, the Company has not provided a substantive response to this notice. The Company continues to believe it has meritorious defenses. However, the initiation of the arbitration could have a material adverse effect on the Company, including by potentially precluding the Company from raising the capital necessary to continue operations. Additionally, an arbitration ruling against the Company could have a material adverse effect on the Company.

The Company may be involved in various asserted claims and legal proceedings from time to time. The Company will provide accruals for these items to the extent that management deems the losses probable and reasonably estimable. The outcome of any litigation is subject to numerous uncertainties. The ultimate resolution of these matters could be material to the Company’s results of operations in a future quarter or annual period.

13. Stockholders’ Equity

Capital Structure

The Company’s Articles of Incorporation originally authorized the issuance of 150,000,000 shares of common stock, $0.0001 par value and 1,000,000 shares of preferred stock, $0.0001 par value.

On December 31, 2009, our Board unanimously adopted resolutions approving an amendment to the Company’s Certificate of Incorporation to increase the number of shares of common stock the Company is authorized to issue from 150,000,000 to 300,000,000 (the “Charter Amendment”). On the same date, holders of a majority of the shares of our common stock acted by written consent in lieu of a special meeting of stockholders to approve the Charter Amendment. Pursuant to Rule 14c-2 under the Securities Exchange Act of 1934, as amended, the Charter Amendment and related increase in our authorized shares of common stock will not be effective until at least twenty calendar days after the mailing of a definitive Information Statement to our stockholders. On March 11, 2010, we filed the definitive Information Statement Securities and Exchange Commission and mailed it to our stockholders. On March 31, 2010, the Charter Amendment was filed with the Secretary of State of the State of Delaware and such Charter Amendment and the increase in our authorized shares of common stock from 150,000,000 to 300,000,000 became effective.

On January 11, 2010, the Company amended its Certificate of Incorporation by filing a Certificate of Designation of Series A Participating Preferred Stock (the “Certificate of Designation”) which authorized and created 200,000 shares of Series A Participating Preferred Stock. The shares of Series A Participating Preferred Stock (the “Series A Preferred) have the following rights, privileges and preferences, among others, as more fully set forth in the Certificate of Designation. Subject to the liquidation preference described below, the Series A Preferred ranks pari passu with the Company’s common stock with respect to dividends and distributions upon liquidation, winding-up and dissolution of the Company and junior to any class or series of capital stock that ranks senior to the Series A Preferred as to dividends or distributions upon liquidation, winding-up and dissolution of the Company that is created in accordance with the consent rights described below. The Company may not declare, pay or set aside any dividends on shares of its common stock unless the holders of the Series A Preferred then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred in an amount at least equal to a rate per share of Series A Preferred determined by multiplying the amount of the dividend payable on each share of common stock by one hundred (100) (subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization with respect to the Series A Preferred if there is no proportionate action taken with respect to the common stock). In the event of any liquidation, dissolution or winding up of the Company (including certain changes of control that are deemed a liquidation), subject to the rights of any series of preferred stock which may from time to time come into existence, the holders of Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock or the holders of any series of preferred stock expressly made junior to the Series A Preferred, an amount per share equal to $.01 (subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization with respect to the Series A Preferred). Thereafter, subject to the rights of any series of preferred stock which may from time to time come into existence, the remaining assets of the Company available for distribution to its stockholders are required to be distributed among the holders of shares of Series A Preferred and common stock, pro rata based on the number of shares held by each such holder, treating for this purpose each such share of Series A Preferred as if it had been converted into one hundred (100) shares of common stock (subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization with respect to

the Series A Preferred if there is no proportionate action taken with respect to the common stock) immediately prior to such liquidation (including a deemed liquidation), dissolution or winding up of the Company. The Series A Preferred is non-voting capital stock of the Company, except as may otherwise be required by applicable law and except that the holders thereof have certain limited approval rights, including.

On December 21, 2007, the Company facilitated a stock split in connection with the consummation of a reverse merger into a public shell company. As a result, the share capital has been restated for all periods based on a conversion of 1 to 6.2676504 shares.

Equity Transactions

On October 18, 2005, the Company issued to its two founders 17,236,048 shares each (an aggregate of 34,472,097 shares) in exchange for subscriptions receivable aggregating $500,000, of which $150,000 was received as of December 31, 2005 and the remaining $350,000 was received during 2006.

On January 5, 2006, the Company issued to various consultants an aggregate of 1,662,544 shares in exchange for services rendered having an estimated fair market value of $26,526.

On May 18, 2006, the Company issued 2,195,671 shares in exchange for subscriptions receivable aggregating $1,000,000, all of which was received during 2006.

On November 30, 2006, the Company issued 1,192,815 shares in exchange for subscriptions receivable aggregating $600,000, of which $200,000 was received during 2006 and the remaining $400,000 was received during the period ended September 30, 2007.

On May 5, 2007, the Company issued 146,380 shares in exchange for a subscription receivable of $100,000, all of which was received during the period ended September 30, 2007.

On September 6, 2007, the Company issued 7,584,672 shares in exchange for the rights to the domain name www.bonds.com (and all associated trademark rights) valued at $4,000,000. The Company acquired the domain name from the Company’s co-founders, who received the rights via distribution by an entity controlled by them. Thus, while $4,000,000 of securities was issued for the domain name, pursuant to Staff Accounting Bulletin Topic 5:G, the transaction has been recorded at the co-founders’ carryover basis of $850,000.

On September 30, 2007, the Company issued 2,051,985 shares to settle $1,054,955 of notes payable and $27,217 of related accrued interest.

From October 19, 2007 to November 2, 2007, the Company sold an aggregate of 8,236,551 shares of common stock and warrants to purchase up to an aggregate of 4,118,569 shares of common stock to 49 accredited investors for cash of $4,350,000 (less $374,896 in offering costs paid to the placement agent) and satisfaction of $600,000 in outstanding indebtedness. The Company also issued warrants to purchase an aggregate of up to 823,695 shares of common stock to designees of the placement agent. All warrants are exercisable at $.66 for a period of five years with the exception of warrants granted to two persons in the shell company, prior to the reverse merger, exercisable for an aggregate of up to 2,406 shares of common stock at an exercise price of $38.40 per share. These warrants expired on December 14, 2009.

As a result of the reverse merger, the previous shareholders of the shell company were issued 3,389,847 shares of common stock that resulted in an increase to stockholders equity of $740.

The placement agent warrants were ascribed an aggregate value of approximately $175,000 using a Black-Scholes pricing model with expected volatility of 45%, expected dividends of 0%, expected term of five years and risk-free rate of 3.67%.

During the year ended December 31, 2007, the Company issued options to acquire 1,890,406 shares. The value of the granted options was $599,073, of which $132,645 has been recognized as expense and $466,428 as deferred

compensation at December 31, 2007. During the year ended December 31, 2008, the Company recognized $90,358 of compensation expense related to these options.

On January 11, 2008, a director of the Company exercised warrants to purchase 284,039 shares of common stock of the Company at $0.66 per share and total cash of $187,466.

On July 14, 2008, an officer of the Company was removed from his position and as a result of the termination of the employment agreement between the officer and the Company, $338,934 of previously recorded unamortized deferred compensation was reversed during the year ended December 31, 2008.

As discussed in Note 10, in connection with the execution of convertible note and warrant purchase agreements, the Company issued warrants to purchase an aggregate of 1,627,114 shares of the Company’s common stock at an exercise price of $0.46875 per share and expiring on September 24, 2013 to various related and non-related parties. The fair value of the warrants at the time of issuance was $218,731, which was recorded as additional paid in capital in the accompanying condensed consolidated financial statements. In addition, the fair value of the beneficial conversion feature associated with the notes was $609,862, which is recorded as a derivative financial instrument in the accompanying condensed consolidated financial statements.

On May 1, 2009, the Company Board of Directors approved the issuance of 100,000 shares of common stock to a service provider in consideration for certain consulting services provided to the Company. The fair value of the services rendered is $35,000, which has been recorded as other professional fees in the accompanying condensed consolidated financial statements. This stock issuance was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act in reliance on representations and warranties made by the service provider.

On June 4, 2009, the Company entered into an agreement with a consultant to provide certain consulting services to the Company. As part of the agreement, 75,667 shares of common stock were issued to the consultant during the fourth quarter of 2009, along with 25,667 shares of common stock during the first quarter of 2010. The fair value of the services rendered in 2009 and 2010 is $28,375 and $9,625, respectively. The expense for these services has been recorded as other professional fees in the accompanying condensed consolidated financial statements.

The Company’s most recent financing activities involve a series of related equity financings that began in August 2009 and were completed in January 2010. These financings commenced on August 28, 2009, when the Company entered into a Unit Purchase Agreement with Fund Holdings, LLC (“Fund Holdings”). This Unit Purchase Agreement (the “Fund Holdings UPA”) provided for a financing of up to $5,000,000 through the sale of up to 5,000 Units. Each Unit consisted of: (a) 2,667 shares of the Company’s common stock; and (b) the right, within three years of the applicable closing date upon which such Unit is purchased, to purchase an additional 9,597 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share (the “Ordinary Purchase Rights”). Additionally, in connection with this transaction, the Company issued Fund Holdings the unvested right to purchase up to 26,893,580 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share (the “Additional Purchase Rights”). The Additional Purchase Rights will vest in the future only to the extent and in such amount as is equal to the number of shares of common stock, up to 26,893,580, that the Company actually issues in the future on account of convertible notes, warrants and options in existence as of the initial closing of this transaction. The Ordinary Purchase Rights are exercisable by the purchaser generally at any time within three years of the date of the closing in which the applicable Unit was purchased. The Additional Purchase Rights are exercisable by the purchaser at any time within three years of the date that the applicable Additional Purchase Rights vest. In addition, pursuant to the Fund Holdings UPA, the Company issued Fund Holdings an additional right (the “Special Purchase Rights”) to purchase 1,000,000 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share. Fund Holdings has the right to exercise the Special Purchase Rights at any time during the three year period following the initial closing under the Unit Purchase Agreement.

On December 31, 2009, the Company and Fund Holdings consummated the final closing under the Fund Holdings UPA, with Fund Holdings investing an aggregate of $3.7 million in connection with all closings (before deduction of fees and expenses payable or reimbursable by the Company pursuant to the Fund Holdings Purchase Agreement) for the purchase of 3,690 Units consisting of an aggregate of 9,841,230 shares of the Company’s common stock and 37,767,000 Ordinary Purchase Rights.

In connection with the final closing under the Fund Holdings UPA, on December 31, 2009, the Company entered into a Unit Purchase Agreement (the “LVPIII UPA”) with Laidlaw Venture Partners III, LLC (“Laidlaw Venture Partners III”). Pursuant to the LVPIII UPA and at closings that occurred on December 31, 2009 and January 13, 2010, Laidlaw Venture Partners III invested $2,000,000 (before deduction of fees and expenses payable or reimbursable by the Company pursuant to the LVPIII UPA) and purchased 2,000 of Units of the Company, with each Unit consisting of 2,667 shares of the Company’s common stock and rights to purchase 7,200 additional shares the Company’s common stock (the “Laidlaw Ordinary Purchase Rights”). The Laidlaw Ordinary Purchase Rights are exercisable for a period of three years from the date of issuance at an exercise price of $0.375 per share.

Additionally, on January 11, 2010, the Company entered into a Unit Purchase Agreement (the “UBS UPA”) with UBS Americas Inc. (“UBS”). Pursuant to the UBS UPA, the Company issued and sold to UBS 1,760 Units, with each unit consisting of 26.67 shares of the Company’s Series A Participating Preferred Stock and rights to purchase 72 shares of Series A Preferred Stock (“Preferred Stock Purchase Rights”). UBS paid an aggregate purchase price of $1,760,000 (before deduction of transaction fees and expenses) for such Units. Each Preferred Stock Purchase Right gives UBS the right to purchase 72 shares of Series A Preferred Stock at a purchase price of $37.50 per share (payable in cash or by net exercise). In the event the Company issues shares of its common stock at a price per share less than $0.375, the exercise price of the Preferred Stock Purchase Rights shall be decreased to a purchase price equal to such lower price per share of common stock multiplied by 100 (subject to certain exceptions). The Preferred Stock Purchase Rights must be exercised on or before January 11, 2013.

All Ordinary Purchase Rights, Laidlaw Ordinary Purchase Rights, Special Purchase Rights, Additional Purchase Rights and Preferred Stock Purchase Rights have the right to be exercised through a “cashless exercise” feature in which the right to purchase shares representing the in-the-money value, if any, of the purchase right is surrendered to the Company in satisfaction of the exercise price and a net number of shares are issued to the holder. Additionally, the foregoing purchase rights associated include provisions that protects the purchasers from certain declines in the Company’s stock price (or “down-round” provisions). Down-round provisions reduce the exercise price of the warrants if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new convertible instruments that have a lower exercise price. Due to the down-round provision and in accordance with the Contracts in Entity’s Own Equity Topic of FASB ASC 815-40-15, all warrants issued are recognized as liabilities at their respective fair values on each reporting date. The fair values of these securities were estimated using a Black-Scholes valuation model.

14. Earnings (Loss) Per Share

Basic earnings (loss) per share are computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share considers the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the entity.

The calculation of diluted earnings (loss) per share at June 30, 2010 does not include options to acquire 21,860,732 shares or warrants to acquire 115,587,631 shares of common stock, or 8,041,701 shares issuable upon promissory note conversion, as their inclusion would have been anti-dilutive. The calculation of diluted earnings (loss) per share at December 31, 2009 does not include options to acquire 12,360,732 shares or warrants to acquire 103,617,249 shares of common stock, or 8,041,701 shares issuable upon promissory note conversion, as their inclusion would have been anti-dilutive.

15. Net Capital and Reserve Requirements

Bonds.com, Inc., the broker dealer subsidiary of the Company, is subject to the requirements of the securities exchanges of which they are members as well as the Securities and Exchange Commission Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital. The Company claims an exemption from Rule 15c3-3 under Paragraph (k)(2)(ii) of the Rule as all customer transactions are cleared through other broker-dealers on a fully disclosed basis. Bonds.com, Inc. is also required to maintain a ratio of aggregate indebtedness to net capital that shall not exceed 15 to 1.

Net capital positions of the Company’s broker dealer subsidiary were as follows at June 30, 2010:

Ratio of aggregate indebtedness to net capital	0.59 to 1
Net capital	$	510,738
Required net capital	$	100,000

At December 31, 2008, Bonds.com, Inc. was not in compliance with its minimum net capital or ratio of aggregate indebtedness requirements. As of December 31, 2008, the Company’s Convertible Notes were secured by the assets of the Company, as well as its subsidiaries, including Bonds.com, Inc., and Bonds.com, Inc. provided a guaranty of the Company’s obligations there under. Due to the existence of the pledge of assets by Bonds.com, Inc. as collateral for the Convertible Notes and the related guaranty, the notional value of the obligation was included in Bonds.com, Inc.’s computation of aggregate indebtedness, and reflected as a deduction in Bonds.com, Inc.’s computation of net capital, in accordance with Rule 15c3-1, as of December 31, 2008, which resulted in the noncompliance.

This noncompliance may result in regulatory fines and/or disciplinary actions against Bonds.com, Inc. or individuals associated with it. Management is unable at this time to estimate the nature and extent of potential loss arising from regulatory action against it or its associated persons, if any. The ultimate outcome could be material to the future financial condition and results of operations of Bonds.com, Inc. which are included in the consolidated results of operations presented herein.

On February 3, 2009, the Company amended the Purchase and Security Agreements underlying its private issuance of Convertible Notes to remove Bonds.com, Inc.’s guaranty and pledge of assets as collateral for the Convertible Notes. At such time as the Purchase and Security Agreements were amended, Bonds.com, Inc. was no longer in violation of its minimum net capital and ratio of aggregate indebtedness requirements.

16. Share-Based Compensation

On August 15, 2006, the Company established the 2006 Equity Plan (the “Plan”), which was approved by the Board of Directors on the same date and is effective for 10 years. The Plan provides for a total of 3,133,825 shares to be allocated and reserved for the purposes of offering non-statutory stock options to employees and consultants and incentive stock options to employees. If any option expires, terminates or is terminated or canceled for any reason prior to exercise in full, the shares subject to the unexercised portion shall be available for future options granted under the Plan. Options become exercisable over various vesting periods depending on the nature of the grant. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plan).

On July 7, 2009, the Company amended its 2006 Equity Plan (the “Amendment”). The Amendment increased the number of shares of common stock issuable pursuant to the 2006 Equity Plan, from 3,133,825 shares of the Company’s common stock to 13,133,825 shares of the Company’s common stock.

As of June 30, 2010 and December 31, 2009, 0 and 996,921 shares, respectively, remained reserved for future issuances under the Plan.

On April 17, 2009, the Company issued non-statutory stock options to various employees, granting the right to acquire up to 1,005,000 shares of stock at an exercise price of $0.33 per share. The shares subject to the options vest one-third on the one year anniversary of the employees start date and then one-forty-eighth each month thereafter.

On July 7, 2009, the Company issued non-statutory stock options to various executives and a board member, granting the right to acquire up to 9,425,000 shares of stock at an exercise price of $0.375 per share. The shares subject to the options vested between 20% and 50% on Board approval and 5% to 10% every quarter thereafter.

On July 7, 2009, the Company also issued non-statutory stock options to an outside consultant, granting the right to acquire up to 500,000 shares of stock at an exercise price of $0.375 per share. All the shares underlying the option fully vested on the date of grant.

On August 28, 2009, and in connection with the initial closing under the Unit Purchase Agreement with Fund Holdings, LLC (see Note 13), the Company granted Edwin L. Knetzger, III, the new Chairman of the Company’s Board of Directors and current Co-Chairman, an option to purchase 500,000 shares of common stock with an exercise price equal to $0.375. All of the shares underlying the option were fully vested on the date of grant. Also, on the same date, the Company granted Mark Hollo, an

affiliate of Fund Holdings, LLC and special advisor to the Company Board of Directors, an option to purchase 250,000 shares of common stock as of the initial closing with an exercise price equal to $0.375. All of the shares underlying the option were fully vested on the date of grant.

On February 26, 2010, pursuant to the letter agreement with John J. Barry, IV, John Barry, III and Holly A.W. Barry (the “Letter Agreement”), John J. Barry, IV was granted the right to acquire up to 6,000,000 shares of stock at an exercise price of $0.375 per share. All stock options granted vested immediately on that date. Also pursuant to the Letter Agreement, all remaining unvested options granted to Mr. Barry on July 7, 2009 vested on February 26, 2010.

On May 14, 2010, the Company granted two independent members of the Board of Directors one million common stock options each, which fully vested on the date of grant. The options have a ten year life and an exercise price of $0.375 per share.

The Company estimates the fair value of the options granted utilizing the Black-Scholes option pricing model, which is dependent upon several variables such as the expected option term, expected volatility of the Company’s stock price over the expected term, expected risk-free interest rate over the expected option term, expected dividend yield rate over the expected option term, and an estimate of expected forfeiture rates. Expected volatility is based on the average of the expected volatilities from the most recent audited condensed consolidated financial statements available for three public companies that are deemed to be similar in nature to the Company. Expected dividend yield is based on historical trends. The expected term represents the period of time that the options granted are expected to be outstanding. The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected terms of the options at the date of grant. The Company believes this valuation methodology is appropriate for estimating the fair value of stock options granted to employees and consultants which are subject to the Compensation-Stock Compensation Topic of FASB ASC 718. These amounts, which are recognized ratably over the respective vesting periods, are estimates and thus may not be reflective of actual future results, nor amounts ultimately realized by recipients of these grants.

A summary of option activity under the Plan as of June 30, 2010 and changes during the three months then ended is presented below:

	No. of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value

Outstanding at January 1, 2010	12,136,904		$	0.38	9.17	$	-
Granted	2,000,000			0.38	10.00		-
Exercised	-			-	-		-
Expired	-			-	-		-
Forfeited	(32,987	)		0.68	-		-
Outstanding at June 30, 2010	14,103,917		$	0.38	9.43		-

Exercisable at June 30, 2010	9,872,085		$	0.38	9.20		-

The compensation expense recognized under the Plan for the three months ended June 30, 2010 and 2009 was $998,828 and $131,822, respectively. As of June 30, 2010 and December 31, 2009, there was $2,102,757 and $267,628, respectively, of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over the vesting period.

17. Related Party Transactions

The Company has entered into a Revenue Sharing Agreement with Radnor Research and Trading Company, LLC (“Radnor”). In turn, Radnor has entered into an agreement with Edwin L. Knetzger, III, who is co-chairman of the Company’s Board of Directors, pursuant to which Radnor will pay Mr. Knetzger a percentage of the proceeds received by Radnor from the Company under the Revenue Sharing Agreement. George O’Krepkie, the Company’s Head of Credit Sales, has a similar arrangement with Radnor.

The Company is renting office space in San Francisco from an institution that is affiliated with our co-chairman, Edwin L. Knetzger, III.

On February 26, 2010, the Company entered into a letter agreement with John J. Barry, IV, John Barry, III and Holly A.W. Barry (the “Letter Agreement”). Among other things, the Letter Agreement provided for Mr. Barry’s transition from our Chief Executive Officer and President to Vice Chairman and Chief Strategic Officer. The Letter Agreement also set forth certain additional binding and nonbinding provisions, including the nonbinding provision that the Company and Mr. Barry would negotiate for a period of sixty days with respect to a new employment agreement for Mr. Barry and the binding provision that in the event the Company and Mr. Barry did not execute such new employment agreement within sixty days, Mr. Barry would be deemed to have resigned as Vice Chairman and Chief Strategic Officer. The foregoing sixty day period ended on April 27, 2010 without the Company and Mr. Barry executing a new employment agreement. Accordingly, as of April 27, 2010, Mr. Barry resigned as our Vice Chairman and Chief Strategic Officer.

Pursuant to the previously disclosed Letter Agreement, Mr. Barry is entitled to: (a) a payment of $300,000, $150,000 of which was previously paid, $75,000 is required to be paid on July 15, 2010, and $75,000 is required to be paid on December 1, 2010; and (b) additional payments equal to $900,000, which shall be paid to him over three years in equal monthly installments of $25,000 per month. The Letter Agreement also contains a waiver by Mr. Barry in favor of the Company and an agreement by Mr. Barry not to compete with the Company, solicit any of the Company’s customers, employees or business partners or disparage the Company or its officers, directors, employees or shareholders for a period of six months from the date of his resignation. As of June 30, 2010, the net present value of remaining future payments to Mr. Barry amount to $905,000, which is recorded as an other expense.

See notes 9 and 10 with respect to Notes Payable, Related Parties and Convertible Notes Payable, Related Parties

18. Subsequent Events

Capital Raise

Departure of Directors

On Friday, July 23, 2010, John J. Barry, III and John J. Barry, IV resigned from the Company’s Board of Directors through an electronic mail sent to both Edwin L. Knetzger, III, our Co-Chairman, and Michael O. Sanderson, our Co-Chairman and Chief Executive Officer.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is management’s discussion and analysis of the financial condition and results of operations of Bonds.com Group, Inc. (“we”, “our”, “us”, or the “Company”), as well as our liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Overview

The Company, through Bonds.com Inc., operates an electronic trading platform, called BondStation, which is utilized by individual investors, institutional investors, and other broker-dealers primarily for electronic trading of fixed income securities. These securities include municipal bonds, corporate bonds, U.S. Treasury securities, agency bonds, emerging market debt, TLG (Temporary Liquidity Paper), mortgage backed securities and certificates of deposit, among others. Our BondStation electronic trading platform provides investors with the ability to obtain real-time executable bids or offers on thousands of bond offerings sourced directly from broker-dealers and other end users. Unlike other electronic trading platforms that charge subscription fees, access charges, ticket fees, or commissions in order to generate revenue, BondStation allows us to generate revenue through mark-ups or mark-downs on secondary market securities and sales concessions on primary issues. Securities purchase orders placed with us, utilizing the BondStation platform, when executed, are simultaneously matched with our purchases from the offering counterparty. Through this process, we believe that we will be able to avoid, or at least minimize, the market risk, carrying cost, and hedging expense of holding an inventory of securities. Our target customers originally consisted of high net work individuals and mid-tier institutional investors. However given the cost of client acquisition and the current economic climate, the firm has made the strategic decision to focus primarily on the mid-tier institutional investors and portfolio managers.

BondStation provides a direct channel between institutional investors and the trading desks at our participating broker-dealers, which we expect will reduce sales and marketing costs, and eliminate layers of intermediaries between dealers and end investors. We expect our investor clients, as well as other broker-dealers, to benefit from the direct access to the fixed income marketplace provided by BondStation.

Until recently, trading of fixed income securities including, without limitation, product searching and price discovery functions, were conducted primarily over the telephone among two or more parties. This process presents several shortcomings primarily due to the lack of a central trading facility for these securities, which can make it difficult to match buyers and sellers in an efficient manner for a particular issue. Based on management’s experience, we believe that in recent years, an increasing number of institutional bond trading participants have utilized e-mail and other electronic means of communication for locating, pricing, and trading fixed income securities. While we believe that this has addressed some of the shortcomings associated with more traditional methods of trading, we also believe that the process is still hindered by a limited supply of securities, limited liquidity, limited price efficiency, significant transaction costs, compliance and regulatory challenges, and difficulty in executing numerous trades in a timely manner.

During 2009, we integrated BondStation with other trading tools and real-time executable offerings directly to the desktops of investor clients. BondStation also offers straight-through processing, which provides clients with the ability to execute and trade securities electronically with little or no human intervention throughout the trade cycle. This process includes the entry of orders with all brokerage firms participating in the trade. The BondStation electronic trading platform offers state-of-the-art advanced order placement functions and automated and manual order placement capabilities.

In 2009, we also began developing BondStation Pro, an electronic trading platform that caters to professional traders and large institutional investors. Similar to the BondStation platform, BondStation Pro also provides users with the ability to obtain real-time executable bids or offers from the same pool of fixed income securities, but with increased functionality. Users are able to customize screens and utilize dynamic filtering capabilities to quickly and easily select and view only those market areas that meet their criteria. The platform supports a broad range of trading opportunities, offering cutting edge technology solutions for list trading, Application Programming Interface (“API”) based order submission, and user portfolio specific market views. In December of 2009, we filed a Form ATS (alternative trading system) with the United States Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”). We anticipate FINRA approval during the second quarter of 2010.

Our business requires significant expenditures on software and hardware to support the anticipated volume of online activity associated with our BondStation and BondStation Pro electronic trading platforms. A substantial portion of our working capital has been utilized to contract with third parties for computer programming, information and data feeds, servers with backup locations and onsite computer trading equipment. Also, during the quarter ended March 31, 2010, the Company expanded its operations in its New York City location by adding additional temporary office space and increasing employee headcount. If we do not generate revenues at the levels projected in our business plan and/or do not become profitable in the timeframe expected, we will need to raise additional capital. We may not be able to obtain additional financing, if needed, in amounts or on terms acceptable to us, if at all. If we are not able to timely and successfully raise additional capital and/or achieve profitability or positive cash flow, our operating business, financial condition, cash flows and results of operations may be materially and adversely affected.

Earnings Overview

The Company incurred a loss of $0.9 million for the three months ended June 30, 2010. During the three months ended June 30, 2009, the Company incurred a loss of $1.6 million, which is a change of approximately $0.7 million. The net income was due largely to the recognition of $3.3 million in unrealized gains on derivative financial instruments which was a direct result of the adoption of the Contracts in Entity’s Own Equity Topic of FASB ASC 815-40-15. During the three months ended June 30, 2010, the Company recognized an unrealized gain on derivative financial instruments of $3.3 million, which is a difference of $4 million from the prior year quarter of a loss of $0.7 million.

Revenue

Total revenue decreased by 29% to $0.8 million from $1.1 million for the three months ended June 30, 2010, compared to the same period in 2009. Sales revenues from trading in fixed income securities are generated by spreads we receive equal to the difference between the prices at which we sell securities on our BondStation and BondStation Pro trading platforms and the prices we pay for those securities. Given that our revenue is measured as a function of the aggregate value of the securities traded, our per trade revenue varies to a great deal based on the size of the applicable trade. The decrease in revenues was mainly due to a decrease in the average size of trades from the same quarter in the prior year.

Gross Margin

Gross margin as a percentage of sales, or gross margin, decreased by 800 basis points to 87% for the three months ended June 30, 2010 compared to the prior year quarter ended June 30, 2009. The decrease in gross margin was driven by the marginal costs per trade which are not variable based on the size of the traded securities. The Company noted an increase in the number of trades for the quarter ended June 30, 2010 compared to the prior year quarter ended June 30, 2009, however, the average size per trade decreased. Based on the Company’s current operating costs to date, our marginal costs of executing and settling a trade over our systems, inclusive of clearing fees and licensing fees range between $13 and $22 per trade. Our operating costs may change in the future as we increase in size and are able to obtain more favorable terms with our vendors.

Operating Expenses

Operating expenses increased 206%, or $1.7 million, to $3.3 million from $1.6 million for the three months ended June 30, 2010 and June 30, 2009, respectively. The increases were driven by increases in payroll and related costs of $1.0 million for the three months ended June 30, 2010, which was a direct result of increases in share-based compensation of $0.5 million when compared to the same period in the prior year. The Company also had an increase of $0.4 million in technology, communications and information services related costs during the period ended June 30, 2010 mainly due to costs associated with the development of the BondStation Pro platform. Legal, Accounting and Other Professional Fees increased by $0.2 million during the first quarter of 2010 compared to the same period in 2009 due to higher consulting and legal fees incurred during the current quarter.

Liquidity and Capital Resources

As of June 30, 2010, the Company had total current assets of approximately $0.9 million comprised of cash and cash equivalents, deposits with clearing organizations, and prepaid expenses and other assets. This compares with current assets of approximately $4.2 million, comprised of cash and cash equivalents, investment securities, deposits with clearing organizations, and prepaid expenses and other assets, as of December 31, 2009. As of June 30, 2010 and December 31, 2009, $1.3 million and $0.7 million, respectively, of current assets were classified as deposits with clearing organizations. The decrease was the result of the Company using cash and cash equivalents available as of December 31, 2009 for operations in during the quarter ended June 30, 2010.

The Company’s current liabilities as of June 30, 2010 totaled approximately $11.1 million, comprised of accounts payable and accrued expenses of approximately $3.0 million, liabilities under derivative financial instruments of $4.6 million, notes payable due to related parties within the next 12 months of approximately $0.5 million, and other notes payable due prior to June 30, 2011 of approximately $2.9 million. This compares to current liabilities at December 31, 2009 of approximately $10.1 million, comprised of accounts payable and accrued expenses of approximately $2.7 million, liabilities under derivative financial instruments of $3.5 million, notes payable due to related parties of approximately $0.6 million, and other notes payable of approximately $3.2 million due within the next 12 months.

The Company is currently in negotiations with two executives, our Chief Operating Officer and also our Executive Vice President and President of Bonds.com, Inc., with respect to their separation from the Company. The Company and these executives are parties to employment agreements that provide for significant salary and other benefits if they continue to be employed by the Company or significant severance and other benefits if they resign or are terminated under certain circumstances. The result of these negotiations may have a material future effect to the Company’s working capital and financial statements. We anticipate that we may enter into written separation agreements with these executives that provide for significant cash payments to them over a period of 24 to 36 months.

As of June 30, 2010, we had negative working capital of approximately $10.2 million, which includes convertible notes payable of approximately $3.0 million. We currently do not believe we have sufficient liquidity to satisfy all other current obligations when they come due; however, management is actively pursuing additional financing in amounts and on terms acceptable to us or the restructuring of certain obligations and arrangements to obtain the necessary liquidity. There is no assurance that those efforts will be successful. If we are unable to secure additional funding or restructure certain obligations, the holders of the note may exercise their rights as a creditor of the Company, which could materially impair our ability to continue to operate our business.

The Company faces a liquidity crisis. Historically, we have satisfied our funding needs primarily through equity and debt financings, and we need to raise additional funding promptly or we risk a cessation or interruption in our business. Additionally, we have convertible debt in the principal amount of $2,440,636 due on September 24, 2010 and nonconvertible debt in the principal amount of $582,000 due at various points through the balance of 2010. We currently do not have sufficient liquidity to satisfy these obligations when they come due, though we are actively exploring the extension of the maturity date of a significant portion of this indebtedness. As of August 10, 2010, the Company had cash on hand and liquid deposits with clearing organizations in the total amount of approximately $575,000. We intend to use the majority of these funds for working capital purposes. Management anticipates that our current liquidity, along with cash generated from revenues, will be sufficient for sustaining our operating activities only until approximately the end of August 2010. While we are actively negotiating for additional equity investments by existing and new investors, there is no assurance that we will be successful in raising additional capital. If we are unable to raise sufficient capital in the very near term, we may experience an interruption or cessation of our business and may be forced to seek reorganization or liquidation under U.S. bankruptcy laws. For these reasons and others, there is substantial doubt about our ability to continue as a going concern.

Recently, the Company’s Chief Executive Officer was informed that a source of liquidity the Company had previously believed to be available would not be provided in the time or manner or on the terms anticipated by the Company, which significantly exacerbated our liquidity issues. In response, management and members of our Board of Directors have sought immediate investments from existing investors (including members of our Board of Directors) and other sources.

The Company is actively pursuing additional equity capital from existing and new investors. These potential investors have discussed potential terms of their investments which include, among other things, a valuation of the Company that would significantly dilute the ownership stake of existing stockholders and result in such investors owning at least a majority of the Company’s Common Stock. The final terms of any such investment – including the valuation of the Company – have not been determined. Nevertheless, it appears that the Company will not be able to raise additional equity capital, if at all, except at a valuation that will be significantly dilutive to existing investors. Dilution to existing stockholders pursuant to any equity financing will be exacerbated as a result of such anticipated lower price per share triggering full-ratchet antidilution protection of certain outstanding convertible securities, unless we obtain waivers.

The following is a summary of the Company's cash flows provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2010 and 2009 (in 000’s):

	Six Months Ended June 30, 2010			Six Months Ended June 30, 2009
Net cash used in operating activities	$	(4,266	)	$	(1616	)
Net cash (used in)/provided by investing activities	$	(17	)	$	(67	)
Net cash provided by financing activities	$	1,719		$	1581
Net (decrease) increase in cash	$	(2,564	)	$	(102	)

Net cash used in operations for the first six months of 2010 was $4.3 million, compared with a use of cash of $1.6 million for the first six months of 2009. The increase in cash usage in 2010 was due to higher expenses over the same period last year and lower revenues. The higher expenses in 2010 were primarily for payroll, technology and communication costs, and professional fees.

Net cash used in investing for the first six months of 2010 was $0.02 million, compared with a use of cash of $0.07 million for the first six months of 2009. We currently continue to expand and fund our operations primarily through financing activities.

Net cash provided by financing activities were approximately $1.7 million for the first six months of 2010, compared with cash provided by financing activities of $1.6 million in the first six months of 2009. Cash flows provided by financing activities in 2010 reflected the issuance of approximately $0.7 million in common stock, $1.8 million in Series A Preferred Stock and $0.7 million of secured convertible notes. These amounts were offset pay payments of debt made during the quarter ended march 31, 2010 of $1.1 million. Cash flows provided by financing activities for the first six months of 2009 reflected proceeds from the issuance of $1.0 million of promissory notes payable.

Recent Financing Activities

During the period from October 2007 through June 30, 2010, we have funded our operations primarily through equity and debt financings. During that time, we raised approximately $22.0 million through the sale of shares of our common stock, shares of preferred stock, convertible promissory notes, warrants and loans. We expect to continue to rely heavily on financing activities to fund our operations and provide necessary liquidity. There is no assurance that our efforts to obtain additional financing will be successful.

Our most recent financing activities involve a series of related equity financings that began in August 2009 and were completed in January 2010. These financings commenced on August 28, 2009, when the Company entered into a Unit Purchase Agreement with Fund Holdings, LLC (“Fund Holdings”). This Unit Purchase Agreement (the “Fund Holdings UPA”) provided for a financing of up to $5,000,000 through the sale of up to 5,000 Units. Each Unit consisted of: (a) 2,667 shares of the Company’s common stock and (b) the right, within three years of the applicable closing date upon which such Unit is purchased, to purchase an additional 9,597 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share (the “Ordinary Purchase Rights”). Additionally, as part of this transaction, we issued Fund Holdings the unvested right to purchase up to 26,893,580 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share (the “Additional Purchase Rights”). The Additional Purchase Rights will vest in the future only to the extent and in such amount as is equal to the number of shares of common stock, up to 26,893,580, that the Company actually issues in the future on account of convertible notes, warrants and options in existence as of the initial closing of this transaction. The Ordinary Purchase Rights are exercisable by the purchaser generally at any time within three years of the date of the closing in which the applicable Unit was purchased. The Additional Purchase Rights are exercisable by the purchaser at any time within three years of the date that the applicable Additional Purchase Rights vest. In addition, pursuant to the Fund Holdings UPA, the Company issued Fund Holdings an

additional right (the “Special Purchase Rights”) to purchase 1,000,000 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share. Fund Holdings has the right to exercise the Special Purchase Rights at any time during the three year period following the initial closing under the Fund Holdings UPA.

In connection with the final closing under the Fund Holdings UPA, on December 31, 2009, the Company entered into a Unit Purchase Agreement (the “LVPIII UPA”) with Laidlaw Venture Partners III, LLC (“Laidlaw Venture Partners III”). Pursuant to the LVPIII UPA and at closings that occurred on December 31, 2009 and January 13, 2010, Laidlaw Venture Partners III invested $2,000,000 (before deduction of fees and expenses payable or reimbursable by the Company pursuant to the LVPIII UPA) for the purchase of 2,000 Units of the Company, with each Unit consisting of 2,667 shares of the Company’s common stock and rights to purchase 7,200 additional shares the Company’s common stock (the “Laidlaw Ordinary Purchase Rights”). The Laidlaw Ordinary Purchase Rights are exercisable for a period of three years from the date of issuance at an exercise price of $0.375 per share.

All Ordinary Purchase Rights, Laidlaw Ordinary Purchase Rights, Special Purchase Rights, Additional Purchase Rights and Preferred Stock Purchase Rights have the right to be exercised through a “cashless exercise” feature in which the right to purchase shares representing the in-the-money value, if any, of the purchase right is surrendered to the Company in satisfaction of the exercise price and a net number of shares are issued to the holder. Additionally, the foregoing purchase rights include provisions that protect the purchasers from certain declines in the Company’s stock price (or “downround” provisions). These down-round provisions reduce the exercise price of the rights if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new convertible instruments that have a lower exercise price. Due to the down-round provision and in accordance with the Contracts in Entity’s Own Equity Topic of FASB ASC 815-40-15, all warrants issued are recognized as liabilities at their respective fair values on each reporting date. The fair values of these securities were estimated using a Black-Scholes valuation model.

The Notes bear interest at the rate of 9% per annum, are convertible into our Common Stock at a conversion price of $0.375 per share (subject to adjustment) and are due and payable on May 28, 2011. The maturity date of the notes may be

extended for an additional year by the holders of a majority in principal amount outstanding under all of the Notes. The Notes contain a provision providing that the conversion price thereof will be adjusted downward from $0.375 per share to any lower price per share at which the Company sells Common Stock to any other person or entity (excluding options or restricted stock awards granted to employees). In the event the maturity date of the notes is extended, the Company would be required to issue to the holders of the Notes, for no additional consideration, warrants to purchase two shares of our Common Stock for each dollar of principal amount outstanding under the Notes at an exercise price of $0.50 per share. The Notes may be prepaid prior to the initial maturity date only upon the payment of all principal and accrued interest plus a prepayment premium equal to 3.5% of the principal amount outstanding. If the maturity date of the Notes is extended, no prepayment premium is required. The Company’s obligations under the Notes are secured by a security interest in the assets of the Company and Bonds.com Holdings, Inc. pursuant to the Second Amended and Restated Security Agreement.

The Warrants provide that upon and during the continuance of a payment default at either the initial maturity date or any extended maturity date, the number of shares of Common Stock issuable upon exercise of the Warrants shall increase to an aggregate amount equal 9.9% of the Company’s issued and outstanding shares of Common Stock as of the date of exercise of the Warrants; provided, however, that such provision shall not apply and shall be of no force or effect from and after the date that either (a) our Common Stock is approved for listing on the New York Stock Exchange, NYSE Amex, NASDAQ Stock Market or any successor thereto, or (b) the twenty trading-day trailing average closing price of our Common Stock equals at least $0.75.

Going Concern

Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the consolidated financial statements of Bonds.com Group, Inc. for the years ended December 31, 2009 and 2008, with respect to their doubt about our ability to continue as a going concern due to our recurring losses from operations and our accumulated deficit. We have a history of operating losses since our inception in 2005, and have a working capital deficit of approximately $10.2 million and an accumulated deficit of approximately $23.5 million at June 30, 2010, which together raises doubt about the Company’s ability to continue as a going concern. Our ability to continue as a going concern will be determined by our ability to sustain a successful level of operations and to continue to raise capital from debt, equity and other sources. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified in Note 2 - "Summary of Significant Accounting Policies" to the Financial Statements contained in this Quarterly Report certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the financial statements.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.

Item 4T. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Any system of disclosure controls and internal controls, even if well conceived, is inherently limited in detecting and preventing all errors and fraud and provides reasonable, not absolute, assurance that its objectives are met. The design of a control system must reflect resource constraints. Inherent limitations include the potential for faulty judgments in decision-making, breakdowns because of simple errors or mistakes, and circumvention of controls by individual acts, collusion of two or more people, or management override of the controls.

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the company’s Chief Executive officer and Chief Financial Officer, of the effectives of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.

Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this quarterly report, and for the period from such date to the date of this report, our disclosure controls and procedures were not operating effectively to provide reasonable assurance that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time period specified by the SEC, and that material information relating to the Company and its consolidated subsidiaries is made known to management, including the Chief Executive Officer, particularly during the period when our periodic reports are being prepared.

The determination that our disclosure controls and procedures are not operating effectively at the reasonable assurance level is based on our conclusions that we have material weaknesses in our internal control over financing reporting, which we consider an integral part of our disclosure controls and procedures. The Company’s newly appointed Chief Financial Officer is currently overseeing our disclosure controls and procedures and assisting the Company in remediating all of the above or other weaknesses in controls.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended June 30, 2010 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item. Please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, as filed with the Securities and Exchange Commission on April 1, 2010, for a detailed discussion of risk factors applicable to us.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Previously reported.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

(a) Exhibits required by Item 601 of Regulation S-K.

Exhibit Description

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).

32.2 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)).

SIGNATURES

Pursuant to the requirements of 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.

Dated: August 16, 2010	BONDS.COM GROUP, INC.

	By:	/s/ Jeffrey Chertoff
	Name:	Jeffrey Chertoff
	Title:	Chief Financial Officer

(Signing in his capacity as duly authorized officer

and as Principal Financial Officer of the Registrant)

Bonds.com Group, Inc. - FORM 10-Q - August 16, 2010

Attached files

Bonds.com Group, Inc. Reports