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

Attached files

file	filename
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Bonds.com Group, Inc.	ex31-2.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Bonds.com Group, Inc.	ex32-1.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Bonds.com Group, Inc.	ex31-1.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Bonds.com Group, Inc.	ex32-2.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

o 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)

	1500 Broadway, 31st Floor, New York, NY 10036
(Address of principal executive offices)

	(212) 257-4062
(Registrant’s telephone number, including area code)

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 o

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 x No o

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	o	Accelerated filer	o

Non-accelerated filer	o	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 o 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: 104,354,190 shares of common stock, par value $0.0001 per share, outstanding as of May 20, 2011.

EXPLANATORY NOTE

Bonds.com Group, Inc., a Delaware corporation (“Bonds.com Group”), is filing this Amendment No. 1 (“Amended Form 10-Q”) to its Quarterly Report on Form 10-Q for the interim period ended March 31, 2011, which was originally filed with the Securities and Exchange Commission (“SEC”) on May 20, 2011 (the “Original Form 10-Q”) to, among other things, restate Bonds.com Group’s unaudited condensed consolidated financial statements for the three-month period ended March 31, 2011 (including notes thereto), and restate disclosures in Management’s Discussion and Analysis.

Bonds.com Group filed a Current Report on Form 8-K with the SEC on April 2, 2012 (the “Form 8-K”), after it determined that its unaudited condensed consolidated financial statements in the Original Form 10-Q should no longer be relied upon due to accounting errors contained in such financial statements. As reported in the Form 8-K, Bonds.com Group erroneously accounted for the sale of units comprised of its Series D and D-1 convertible preferred stock, par value $0.0001 per share (“Series D Preferred” and “Series D-1 Preferred,” respectively), and warrants (the “Warrants”) for its common stock, par value $0.0001 per share (“Common Stock”), during Bonds.com Group’s first and second quarters of fiscal 2011. These errors caused the beneficial conversion feature of the Series D Preferred to be overstated and the incorrect assignment of a beneficial conversion feature to the Series D-1 Preferred, and such errors generally resulted in an overstatement of the deemed dividends recorded on Bonds.com Group’s preferred stock and the related expense.

Additionally, during the first, second and third fiscal quarters of 2011, Bonds.com Group erroneously used a volume-weighted average price (“VWAP”) methodology for measuring the fair value of Common Stock as a component in certain accounting valuation calculations. Bonds.com Group has determined that VWAP was not an acceptable methodology for accounting purposes, and it has obtained an appraisal of the fair value of Common Stock, which is an acceptable methodology. The result of the incorrect use of the VWAP methodology was to overstate the fair value of Common Stock and thereby further overstate the deemed dividends on Bonds.com Group’s preferred stock and related expense, overstate the losses incurred by it on certain derivative financial instruments and overstate Bonds.com Group’s share based compensation expense.

Details of the effects of the restatement are included in Note 3 to the unaudited condensed consolidated financial statements herein, and in Note 19 to Bonds.com Group’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, with the SEC on May 21, 2012 (the “2011 Form 10-K”).

Also, additional related party disclosure was added in footnote 19 regarding a major customer and a lease with the Company’s co-chairman.

This Amended Form 10-Q also includes currently-dated certifications from Bonds.com Group’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2001. Bonds.com Group has not modified or updated disclosures presented in the Original Form 10-Q, except to reflect the effects of the restatement and to clarify certain disclosures. Accordingly, this Amended Form 10-Q does not reflect other events occurring after the Original Form 10-Q, nor does it modify or update those disclosures affected by such subsequent events. Additionally, Bonds.com Group has filed (i) the 2011 Form 10-K, (ii) its Quarterly Report on Form 10-Q for the interim period ended March 31, 2012, with the SEC on May 21, 2012, (iii) its Quarterly Report on Form 10-Q for the interim period ended June 30, 2012 with the SEC on August 14, 2012, and (iv) Current Reports on Form 8-K with the SEC since March 21, 2011. See such filings made since March 31, 2011, which include disclosures of events that have occurred since such date.

BONDS.COM GROUP, INC.

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 SHEETS

	March 31, 2011 (unaudited) (RESTATED)			December 31, 2010
Assets

Current assets
Cash	$	107,308		$	548,030
Investment securities		2,527			2,527
Deposits from clearing organizations		3,892,647			373,128
Deferred tax assets		2,306			2,306
Prepaid expenses and other assets		105,696			89,700
Total current assets		4,110,484			1,015,691

Property and equipment, net		73,234			83,167
Intangible assets, net		1,872,956			939,759
Goodwill		99,000			—
Other assets		66,983			66,983
Deferred tax asset		44,750			172,614
Total assets	$	6,267,407		$	2,278,214

Liabilities and Stockholders’ Deficit

Current liabilities
Accounts payable and accrued expenses	$	4,579,569		$	4,867,861
Notes payable, other		—			82,000
Convertible notes payable, other, net of debt discounts		24,874			24,243
Preferred stock dividend payable		128,063			—
Liability under derivative financial instruments		713,714			464,844
Total current liabilities		5,446,220			5,438,948
Long-term liabilities
Notes payable, related parties		100,000			300,000
Convertible notes payable, other, net of debt discount		1,230,105			1,227,486
Convertible notes payable, related parties		2,390,636			2,390,636
Deferred rent		37,605			41,506
Total liabilities		9,204,566			9,398,576
Commitments and contingencies
Stockholders’ Deficit
Preferred stock Series A $0.0001 par value; 450,000 authorized; 85,835 and 85,835 issued and outstanding, respectively (aggregate liquidation value of $858 and $469, respectively)		8			5
Convertible preferred stock Series B $0.0001 par value; 20,000 authorized, 0 and 2,250 issued and outstanding, respectively (aggregate liquidation value of $0 and $2,736,000, respectively)		—			2
Convertible preferred stock Series B-1 $0.0001 par value; 6,000 authorized, 0 and 1,250 issued and outstanding, respectively (aggregate liquidation value of $0 and $1,520,000, respectively)		—			1
Convertible preferred stock Series C $0.0001 par value;10,000 authorized, 10,000 and 0 issued and outstanding, respectively (aggregate liquidation value of $6,500,000 and $0, respectively)		1			—
Convertible preferred stock Series D $0.0001 par value; 14,500 authorized, 9,150 and 0 issued and outstanding, respectively (aggregate liquidation value of $11,091,419 and $0, respectively)		1			—
Convertible preferred stock Series D-1$0.0001 par value; 1,500 authorized, 1,250 and 0 issued and outstanding, respectively (aggregate liquidation value of $1,515,616 and $0, respectively)		—			—
Common stock $0.0001 par value; 1,500,000,000 authorized; 104,354,190 and 103,694,139 issued and outstanding, respectively		10,435			10,369
Additional paid-in capital		29,832,400			21,464,512
Accumulated deficit		(32,780,004	)		(28,595,251	)
Stockholders’ Deficit		(2,937,159	)		(7,120,362	)
Total liabilities and stockholders’ deficit	$	6,267,407		$	2,278,214

See the accompanying notes to the condensed consolidated financial statements.

BONDS.COM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,
	2011			2010
	(unaudited) (RESTATED)			(unaudited)

Revenue	$	820,746		$	634,151

Operating expenses
Payroll and related costs		1,857,889			2,878,969
Technology and communications		651,354			746,275
Rent and occupancy		132,511			141,588
Professional and consulting fees		1,197,051			412,016
Marketing and advertising		25,000			115,237
Other operating expenses		234,549			118,930
Clearing and executing cost		153,273			79,327
Total operating expenses		4,251,627			4,492,342
Loss from operations		(3,430,881	)		(3,858,191	)

Other income (expense)
Interest expense, net		(109,804	)		(368,938	)
Gain on settled derivatives		465,952			—
Change in value of derivative financial instruments		14,286			(2,351,446	)
Other income (expense), net		61,622			—
Total other income (expense)		432,056			(2,720,384	)
Loss before income tax expense	$	(2,998,825	)	$	(6,578,575	)
Income tax expense		(127,864	)		—
Net loss		(3,126,689	)		(6,578,575	)
Preferred stock dividends		(1,058,064	)		—
Net loss applicable to common stockholders	$	(4,184,753	)	$	(6,578,575	)
Net loss per common share - basic and diluted	$	(0.04	)	$	(0.09	)
Weighted average number of shares of common stock outstanding		104,354,190			75,483,700

See the accompanying notes to the condensed consolidated financial statements.

BONDS.COM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT)

	Preferred Stock				Common Stock				Paid-In			Accumulated			Total Stockholders’
(UNAUDITED) (RESTATED)	Shares		Amount		Shares		Amount		Capital			(Deficit)			(Deficit)
Balances at December 31, 2010		89,335	$	8		103,694,139	$	10,369	$	21,464,512		$	(28,595,251	)	$	(7,120,362	)

Issuance of series C convertible preferred stock for the acquisition of Beacon's assets		10,000		1		—		—		1,071,999			—			1,072,000

Issuance of convertible preferred series D shares of Unit sale, net issuance cost of $271,962		6,900		1		—		—		6,628,037			—			6,628,038

Fair value of common stock warrants issued in conjunction with February, and March 2011 Unit sales		—		—		—		—		(483,000	)		—			(483,000	)

February 2011 Exchange Offer - issuance of convertible preferred series D shares (2,250) for series B (2,250) and convertible preferred series D-1 (1,250) for series B-1 (1,250) resulting in preferred stock dividend		—		—		—		—		708,336			(930,001	)		(221,665	)

Fair value of common stock warrants issued in conjunction with February 2011 Exchange Offer, classified as derivative financial instruments		—		—		—		—		(23,335	)		—			(23,335	)
Stock-based compensation expense		—		—		—		—		283,913			—			283,913
Common stock associated with the exchange offer		—		—		660,051		66		46,138			—			46,204
Issuance of common stock warrants for consulting services		—		—		—		—		135,800			—			135,800
Dividends to preferred shareholders		—		—		—		—		—			(128,063	)		(128,063	)
Net loss		—		—		—		—		—			(3,126,689	)		(3,126,689	)
Balances at March 31, 2011 - (unaudited)		106,235	$	10		104,354,190	$	10,435	$	29,832,400		$	(32,780,004	)	$	(2,937,159	)

See the accompanying notes to the condensed consolidated financial statements.

BONDS.COM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,
	2011			2010
	(unaudited) (RESTATED)			(unaudited)
Cash Flows From Operating Activities
Net loss	$	(3,126,689	)	$	(6,578,575	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		127,864			—
Depreciation		14,362			23,698
Amortization		39,488			42,722
Share-based compensation		555,166			1,742,894
Gain on settled derivatives		(465,952	)		—
Change in value of derivative financial instruments		(14,286	)		2,351,446
Amortization of debt discount		3,252			147,671
Exchange offer financing		46,138			—
Consulting services for warrants		135,801			—
Changes in operating assets and liabilities:
Deposit with clearing organization		(3,519,519	)		60,994

Prepaid expenses and other assets		(15,996	)		(37,609	)

Accounts payable and accrued expenses		(560,443	)		(458,015	)
Deferred rent		(3,902	)		(686	)
Net cash used in operating activities		(6,784,716	)		(2,705,460	)
Cash Flows From Investing Activities
Purchase of property and equipment		(2,043	)		(7,601	)
Purchase of intangible assets		—			6,988
Net cash used in investing activities		(2,043	)		(613	)
Cash Flows From Financing Activities
Proceeds received from issuance of common stock		—			655,500
Proceeds received from issuance of preferred stock, net		6,628,037			1,542,000
Proceeds received from notes payable		—			20,000
Repayments of notes payable, other		(82,000	)		—
Repayments of notes payable, related parties		(200,000	)		—
Principal payments on obligations under capital leases		—			(1,006,953	)
Net cash provided by financing activities		6,346,037			1,210,547
Net decrease in cash		(440,722	)		(1,495,526	)
Cash, beginning of year		548,030			2,672,230
Cash, end of year	$	107,308		$	1,176,704

Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	48,706		$	264,263
Debt discount on convertible notes payable	$	3,252		$	140,288
Warrants issued in connection with unit sales	$	483,000		$	—
Debt discount on warrants issued with notes payable - related party	$	—		$	7,383
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
Warrants issued at Exchange offer	$	23,335		$	—
Issuance of preferred stock for asset acquisition	$	1,072,000		$	—

See the accompanying notes to the condensed consolidated financial statements.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

1.	Description of Business Summary 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, 2010. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

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, 2010 as filed on May 2, 2011.

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. (“Pedestal”), an existing FINRA registered broker dealer entity and was subsequently renamed Bonds.com, Inc. Bonds.com, Inc., offers corporate bonds, agency bonds, emerging market fixed income securities, mortgage and asset backed securities and U.S. Treasuries to potential customers via Bonds.com Holdings, Inc.’s software and website, www.bonds.com. After final testing of its software and fully staffing its back office operations, Bonds.com Holdings, Inc. commenced initial operations during December 2007.

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.

The Company, through its wholly-owned broker dealer subsidiary, Bonds.com, Inc., operates electronic trading platforms and BondsPRO.

During the year, based on its strategic plan, the Company gradually reduced and discontinued its support and use of BondStation and began implementing BondsPRO. The Company rolled out BondsPRO during 2010. This platform offers professional traders and large institutional investors an alternative trading system to trade odd-lot fixed income securities. 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(s), and user portfolio specific market views. These securities include corporate bonds including emerging market debt. The BondsPRO platform provides users 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, our model allows us to generate revenue through mark-ups or mark-downs on secondary market securities.

BondsPRO provides a direct channel between institutional clients and the trading desks at our participating broker-dealers. We expect this will reduce sales and marketing costs, and eliminate layers of intermediaries between dealers and end investors.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

On February 2, 2011, the Company, through Bonds MBS, Inc., (“Bonds MBS”) an indirect wholly-owned subsidiary of the Company, entered into an asset purchase Agreement with Beacon Capital Strategies, Inc., a broker-dealer (“Beacon”), acquiring Beacon’s electronic platform. The Beacon electronic platform integrates full function trading capability for all classes of asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), and commercial mortgage-backed securities (“CMBS”).

We are registered as an ATS (Alternative Trading System) with the United States Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”).

2.	Summary of Significant Accounting Policies

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”.

Reclassifications

Certain reclassifications have been made to the accompanying consolidated financial statements as of December 31, 2010. These reclassifications had no impact on the Company’s financial position or results of operations.

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.

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.

Revenue Recognition

In accordance with ASC 940-20-25, revenues generated from securities transactions and the related commissions are recorded on a trade date basis.

Fair Value Financial Instruments

The Company defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the valuation techniques used in fair value calculations. The three levels of inputs are defined as Level 1 (unadjusted quoted prices for identical assets or liabilities in active markets), Level 2 (inputs that are observable in the marketplace other than those inputs classified in Level 1) and Level 3 (inputs that are unobservable in the marketplace). The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of investment securities and derivative financial instruments. See Note 5 – Fair Value of Financial Instruments - for further details.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

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.

Category	Lives
Leased property under capital leases	3 years
Computer equipment	3 years
Furniture and fixtures	5 years
Office equipment	5 years
Leasehold improvements	5.25 years

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.

Category	Lives
Software	3 years
Capitalized website development costs	3 years
Technology	5 years
Customer relations	10 years
Trade name	10 years

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 March 31, 2011.

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. The Company’s policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The Company’s 2008, 2009, and 2010 tax year remains subject to examination by taxing authorities. The Company has determined that it does not have any significant uncertain tax positions at March 31, 2011.

Marketing and Advertising Costs

Marketing and advertising costs are expensed as incurred. Marketing and advertising expenses for the three months ended March 31, 2011 and 2010, were $25,000 and $115,237, 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

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

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.

Recent Issued Accounting Pronouncements

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 March 31, 2011.

In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations”. The objective of this ASU is to address diversity in practice about the presentation of pro forma revenue and earnings disclosure requirements for business combinations, and specifies that a public entity that presents comparative financial statements should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This ASU is effective prospectively for business combinations on or after January 1, 2011. We adopted this standard in the first quarter of 2011. See note 9.

In December, 2010, the FASB issued ASU 2010-28, “Intangibles—Goodwill and Other (Topic 350) When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. The objective of this ASU is to address diversity in practice in the application of goodwill impairment testing by entities with reporting units with zero or negative carrying amounts, eliminating an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. This ASU is effective for interim periods after January 1, 2011. The adoption of this ASU may require the Company to report goodwill impairment charges sooner than under prior practice

3.	Restatement

The following tables contain restated quarterly financial data for the three months ended March 31, 2011. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future periods.

The restated net loss, net loss attributable to common stockholders and loss per share - basic and diluted, for the quarter has been restated to correct for the sale and exchange of preferred stock with warrants due to improper allocations between the warrants and the preferred stock (see Note 13) , the valuation methodology used for determining the fair value of the underlying common stock (utilized in the valuation of warrants, stock-based compensation and certain derivative liabilities) has been corrected by utilizing an independent valuation (see Note 5), the use of the valuation methodology for derivative liabilities has been corrected by utilizing a Binomial Lattice pricing model, corrections of the recording of stock-based compensation for the related changes in the fair value of the common stock and for the timing and recognition of certain other compensation and consulting expenses.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Effect on Condensed Consolidated Balance Sheet March 31, 2011

	As Previously Reported			Adjustments			Restated
Total assets	$	6,267,407		$	—		$	6,267,407

Accounts payable and accrued expenses		4,137,093			442,476			4,579,569
Preferred stock dividend payable		129,315			(1,252	)		128,063
Liability under derivative financial instruments		3,248,490			(2,534,776	)		713,714
Total current liabilities		7,539,772			(2,093,552	)		5,446,220
Total liabilities		11,298,118			(2,093,552	)		9,204,566

Stockholders’ deficit:
Additional paid-in capital		36,505,656			(6,673,256	)		29,832,400
Accumulated deficit		(41,546,812	)		8,766,808			(32,780,004	)
Total stockholders' deficit		(5,030,711	)		2,093,552			(2,937,159	)
Total liabilities and stockholders’ deficit	$	6,267,407		$	—		$	6,267,407

Effect on Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2011
	As Previously Reported			Adjustments			Restated
Payroll and related costs	$	3,364,639		$	(1,506,750	)	$	1,857,889
Professional fees		2,078,951			(881,900	)		1,197,051
Total operating expenses		6,640,277			(2,388,650	)		4,251,627
Loss from operations		(5,819,531	)		2,388,650			(3,430,881	)

Interest expense		(107,449	)		(2,355	)		(109,804	)
Gain on settled derivatives		(1,395,400	)		1,861,352			465,952
Change in fair value of derivative financial instruments		1,671,731			(1,657,445	)		14,286
Other income (expense), net		(38,378	)		101,000			61,622
Total other income (expenses)		130,504			(301,552	)		432,056
Loss before income tax expense		(5,689,027	)		2,690,202			(2,998,825	)
Net loss		(5,816,891	)		2,690,202			(3,126,689	)
Preferred stock dividends		(7,134,670	)		6,076,606			(1,058,064	)
Net loss applicable to common shareholders	$	(12,951,561	)	$	8,766,808		$	(4,184,753	)

Net loss per common share - basic and diluted	$	(0.12	)	$	0.08		$	(0.04	)
Weighted average number of shares of common stock outstanding		104,354,190			104,354,190			104,354,190

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Effect on Condensed Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 2011

	As Previously Reported			Adjustments			Restated

Net Loss	$	(12,951,561	)	$	9,824,872		$	(3,126,689	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		11,976			2,386			14,362
Amortization		39,448			40			39,488
Share-based compensation		2,331,887			(1,776,721	)		555,166
Preferred stock dividend		7,134,672			(7,134,672	)		—
Gain on settled derivatives		1,395,400			(1,861,352	)		(465,952	)
Change in value of derivative financial instruments		(1,671,731	)		1,657,445			(14,286	)
Exchange offer financing		46,206			(68	)		46,138
Consulting services for warrants		1,017,701			(881,900	)		135,801
Changes in operating assets & liabilities
Account payable and accrued expenses		(730,414	)		169,971			(560,443	)
Net cash used in operating activities	$	(6,784,717	)	$	1		$	(6,784,716	)

4.	Going Concern

Since its inception, the Company has generated limited revenues and has incurred a cumulative net loss of $32,780,004. As of March 31, 2011, the Company has a working capital deficit of $1,335,736, including approximately $25,000 of outstanding convertible notes payable within the next twelve months. Management commenced operations in December of 2007 and utilized capital raised throughout the years ended December 31, 2009, 2008 and 2007. Operations during the year ended December 31, 2010 and the three months ended March 31, 2011 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 and preferred stock as sources of funds. 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.

5.	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.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

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. The Company considered the market for other types of financial instruments, including certain derivative financial instruments, to be inactive as of March 31, 2011. 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 March 31, 2011 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 and preferred stock that contain “down round” protection to the holders. These derivatives are valued with pricing models using inputs that are generally observable. The Company considers these models to involve significant judgment on the part of management. The fair values of the Company’s derivative financial instruments are considered to be in Level 3 of the fair value hierarchy. The Company estimates the fair value of derivatives utilizing the Binomial Lattice pricing model. This model is dependent upon several variables such as the expected instruments term, expected strike price, expected risk-free interest rate over the expected instrument term, the expected dividend yield rate over the expected instrument 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 instruments granted are expected to be outstanding. The expected strike price is based upon a weighted average probability analysis of the strike price changes expected during the term as a result of the down round protection. 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. During the year ended December 31, 2010, 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 since the Company had determined in 2009 that the historical prices of its publicly-traded common stock no longer was the best proxy to estimate the Company’s volatility.

Commencing with the quarter ended March 31, 2011, the Company changed its methodology for measuring the fair value of its common stock which was previously based on its over-the-counter market trading price. The Company determined that the historical prices and trading volume of its publicly-traded common stock were no longer sufficient to determine the readily determinable fair value of the Company’s stock. Since the over-the-counter market has not been active and private sales of the Company’s shares sold are significantly lower than the historical trading price, the Company bases the fair market value of its common stock on an independent valuation for determining the fair value of its common stock.

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.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Fair values of assets measured on a recurring basis at March 31, 2011 and December 31, 2010 are as follows:

			Quoted Prices
			in Active
			Markets for		Significant
			Identical		Other		Significant
			Assets /		Observable		Unobservable
			Liabilities		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31 , 2011
Assets
Investment securities	$	2,527	$	—		—	$	2,527
Total assets measured at fair value on a recurring basis	$	2,527	$	—	$	—	$	2,527

Liabilities
Derivative financial instruments	$	713,714	$	—		—	$	713,714
Total liabilities measured at fair value on a recurring basis	$	713,714	$	—	$	—	$	713,714

December 31, 2010
Assets
Investment securities	$	2,527	$	—		—	$	2,527
Total assets measured at fair value on a recurring basis	$	2,527	$	—	$	—	$	2,527

Liabilities
Derivative financial instruments	$	464,844	$	—	$	—	$	464,844
Total liabilities measured at fair value on a recurring basis	$	464,844	$	—	$	—	$	464,844

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 liabilities measured at fair value on a recurring basis for the period ended March 31, 2011:

	Fair Value of Derivative Financial Instruments
Balance - December 31, 2010	$	464,844
Changes in fair value included in operations		(14,286	)
Issuances and settlements		263,156
Balance - March 31, 2011	$	713,714

The change in value of derivative financial instruments included in March 31, 2011 and 2010 statements of operation are related to Level 3 instruments held.

Quantitative information about Level 3 Fair Value Measurements

	Fair Value at 3/31/11		Valuation Technique	Unobservable Inputs	Range		(Weighted Average)
Derivative liability		713,714	Binomial lattice pricing model	Fair value of common stock	$	0.02	$	0.02
				Probability strike price	$	0.03 - 0.07	$	0.0610
				Expected term/life (years)		4.84 - 4.93		4.84
				Dividend yield		0.00%		0.00%
				Expected volatility		66.00%		66.00%
				Risk-free rate for expected life		2.24%		2.24%

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

The weighted-average fair value of warrants outstanding for the three months ended March 31, 2011 was $0.0048.

6.	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.

7.	Property and Equipment

Property and equipment consisted of the following at March 31, 2011 and December 31, 2010:

	March 31,			December 31,
	2011			2010
Leased property under capital leases	$	209,757		$	209,757
Computer equipment		218,519			216,476
Furniture and fixtures		46,904			46,904
Office equipment		111,177			111,177
Leasehold improvements		10,372			10,372
Total property and equipment		596,729			594,686
Less: accumulated depreciation and amortization		(523,495	)		(511,519	)
Property and equipment, net	$	73,234		$	83,167

Depreciation expenses for the three months ended March 31, 2011 and 2010 were $11,976 and $23,698, respectively.

8.	Intangible Assets

Intangible assets consisted of the following at March 31, 2011:

	March 31, 2011
	Gross		Accumulated Amortization			Net
Non-amortizing intangible assets and goodwill:
Domain name (www.bonds.com)	$	850,000				$	850,000
Broker-dealer license		50,000					50,000
Goodwill		99,000					99,000
		999,000					999,000

Amortizing Intangible assets:
Software		431,996		(422,948	)		9,048
Capitalized website development costs		196,965		(179,159	)		17,806
Other		979,529		(33,427	)		946,102
		1,608,490		(635,534	)		972,956
	$	2,607,490	$	(635,534	)	$	1,971,956

Amortization expenses for the three months ended March 31, 2011 and 2010 were $39,448 and $42,722, respectively.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

The following is a schedule of estimated future amortization expense of intangible assets as of March 31, 2011:

Year Ending December 31,
2011 (remaining 9 months)	$	139,045
2012		167,408
2013		164,218
2014		161,388
2015		161,388
Thereafter		179,509
	$	972,956

9.	Business Acquisition

On February 2, 2011, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) by and among the Company, Bonds MBS, Inc., an indirect wholly-owned subsidiary of the Company (“Bonds MBS”), and Beacon Capital Strategies, Inc. (“Beacon”). Oak Investment Partners XII, LP, a significant stockholder of the Company, was a significant stockholder of Beacon. Pursuant to the Asset Purchase Agreement, among other things, on February 2, 2011, the Company (through Bonds MBS) purchased substantially all of Beacon’s assets. Beacon previously was engaged in the development and offering of an electronic trading platform for trades in fixed income securities (the “Beacon Business”). As consideration for the purchase of the Beacon assets pursuant to the Asset Purchase Agreement, the Company, among other things, (a) issued to Beacon 10,000 shares of Series C Convertible Preferred Stock, and (b) assumed certain limited liabilities of Beacon. Subject to the same Conversion Restriction as the shares of Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock, the shares of Series C Convertible Preferred Stock issued to Beacon are convertible into shares of the Company’s Common Stock and carry a preference (junior to our Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock and on par with the liquidation preference of our Series A Participating Preferred) upon any liquidation, dissolution or winding up of the Company (including certain changes of control which are deemed to be a liquidation). The number of shares of Common Stock for which the Series C Convertible Preferred Stock may be converted is contingent, and will be determined based on the future performance of the Beacon Business (as described in more detail below), with the number of such shares ranging from zero shares to a maximum of 100,000,000 shares (subject to increase in the event the conversion price of the Series C Convertible Preferred Stock is reduced pursuant to the anti-dilution provisions thereof). The amount of the liquidation preference of the Series C Convertible Preferred Stock also is contingent, and will be determined based on the future performance of the Beacon Business (as described in more detail below), but in no event will such liquidation preference be less than $4,000,000.

In connection with the acquisition of the Beacon assets, the Company, Bonds MBS and Beacon entered into an Agreement with Respect to Conversion, dated as of February 2, 2011 (the “Determination Agreement”). The Determination Agreement, among other things, sets forth the provisions and procedures for determining the contingent number of shares of Common Stock issuable upon conversion of the Series C Convertible Preferred Stock and the contingent liquidation preference of the shares of Series C Convertible Preferred Stock. Such contingent number of shares and contingent liquidation preference will be determined based on the gross revenue of the Beacon Business during a trailing eighteen-month period measured from a date (the “Determination Date”) to occur during the 30-month period following the date of the Asset Purchase Agreement. The Determination Date shall be a date determined by Beacon by notice to the Company during such 30-month period; provided that the Determination Date may be triggered by certain events and will in no event be after the last day of such 30-month period. In the event gross revenues of the Beacon Business for such trailing 18-month period as of the Determination Date equal or exceed $3,333,333, then the shares of Series C Convertible Preferred Stock shall be convertible into the maximum number of contingent conversion shares and shall carry the maximum liquidation preference. To the extent gross revenues of the Beacon business for such trailing 18-month period as of the Determination Date are less than $3,333,333, then the number of conversion shares and the amount of the contingent liquidation preference will be reduced.

Additionally, pursuant to the Determination Agreement, the Company is required to use commercially reasonable efforts to support the operations of the Beacon Business and to maximize the gross revenue of the Beacon Business and the number of contingent conversion shares and the amount of the contingent liquidation preference. This support requirement includes the requirement to provide working capital to the Beacon Business until the Determination Date of up to $2,000,000, with such working capital expenditures to be consistent with a budget agreed to among the parties, which amount the Company is required to set aside and which may be applied consistent with such budget by the management of the Beacon Business (subject to the discretion of the Strategy Committee discussed below). The Company is also required to continue to fund the Beacon Business’ operations in excess of $2,000,000 if and when it is cash-flow positive. Any changes in the Company’s or its affiliates budgets that negatively impact the Company’s ability to fund the foregoing $2,000,000 commitment shall require the approval of a “Strategy Committee,” which shall be comprised of the Company’s Chief Executive Officer and a person designated by Oak Investment Partners XII, LP.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

The Determination Agreement further provides that if the Company materially breaches any of its support obligations, then the number of conversion shares and liquidation preference to which the shares of Series C Convertible Preferred Stock are entitled shall be the maximum amounts thereof.

The asset acquisition of Beacon will require a comprehensive review of the consideration given and the asset and liabilities acquired including an evaluation of the integration of Beacon. As previously discussed the consideration for the asset acquisition was 10,000 shares of Series C Convertible Preferred Stock. The preliminary fair value of the Series C Convertible Preferred Stock was determined to be $1,072,000. The final determination is subject to the completion of a comprehensive independent valuation of the assets acquired and liabilities assumed. The Company is in the process of an independent valuation and expects to have this valuation completed by the end of the second quarter of 2011.

The following table summarizes management’s estimates of the fair values of the assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price is subject to refinement for final determination of fair value.

Assets acquired:
Intangible Assets
Trade Name / Trademarks	$	10,000
Technology		641,000
Customer Relationships		322,000
Goodwill		99,000
Total assets acquired	$	1,072,000
Liabilities assumed:
Accrued expenses and other liabilities		—
Total liabilities assumed		—
Total net assets acquired	$	1,072,000

The following unaudited pro forma consolidated results of operations for the quarters ended March 31, 2011 and 2010 have been prepared as if the acquisition of Beacon had occurred at January 1, 2010 and January 1, 2011, respectively, for each quarter:

	Three Months Ended
	March 31,
	2011			2010
Revenue	$	820,746		$	640,097

Net loss applicable to common stockholders	$	(4,384,753	)	$	(7,344,145	)

Net loss per common share—basic and diluted	$	(0.04	)	$	(0.10	)

The unaudited pro forma consolidated results of operations do not purport to be indicative of the results that would have been obtained if the above acquisition had actually occurred as of the dates indicated or of those results that may be obtained in the future. These unaudited pro forma consolidated results of operations were derived, in part, from the historical consolidated financial statements of Beacon and other available information and assumptions believed to be reasonable under the circumstances.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

10.	Notes Payable, Related Parties

The following is a summary of related party notes payable at March 31, 2011 and December 31, 2010:

	March 31,		December 31,
	2011		2010

$200,000 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.	$	—	$	200,000
$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 October 12, 2013, secured by the Company’s Bonds.com domain name.		100,000		100,000
Total	$	100,000	$	300,000
Less: current portion		—		—
Long-term portion	$	100,000	$	300,000

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).

On April 1, 2010, the Company paid, pursuant to the Valhalla Note, consisting of $100,000 in principal repayment and $11,325 in accrued interest.

On July 1, 2010, the Company paid, pursuant to the Valhalla Note, consisting of $100,000 in principal repayment and $4,550 in accrued interest.

On October 19, 2010, the Company entered into an Amendment No. 2 to Convertible Secured Promissory Notes with the holder of a majority in principal amount of our Convertible Secured Promissory Notes issued on September 24, 2008, an Amendment No. 1 to Convertible Secured Promissory Note with the holder of our Convertible Secured Promissory Note issued on April 30, 2009 and an Amendment No. 1 to Convertible Secured Promissory Notes with the holders of our Convertible Secured Promissory Notes issued on June 8, 2009 (collectively, the “Note Amendments”). The Note Amendments restructure approximately $2,990,636 of our outstanding Convertible Secured Promissory Notes (the “Subject Notes”) as follows:

●	The maturity date of each of the Subject Notes was extended until October 12, 2013; provided, however, that from and after April 12, 2012, the holders of the Subject Notes may make a written demand to the Company for the payment of the entire unpaid principal balance thereof together with all accrued but unpaid interest thereon and the Company shall be required to repay such outstanding principal and interest within ninety (90) days of its receipt of such demand.

●	The conversion price of the Subject Notes was fixed at $0.24 per share (which was the then current conversion price of the Subject Notes as a result of adjustments based on the price per share of Common Stock issued in the Company’s recently completed warrant exchange offer). Such conversion price is subject to further adjustment on the occurrence of certain events described below. However, except as set forth below, the “full-ratchet” adjustment provision of the Subject Notes was eliminated.

●	In the event the Company sold securities pursuant to the then pending private offering at an effective price per common share of less than $0.24, then the conversion price of the Subject Notes shall be reduced to such lower price. After the completion of such Offering, the Subject Notes will not have any “full-ratchet” adjustment. On February 2, 2011, the Company sold securities pursuant to such offering at an effective price per share of $0.07. Accordingly, all of the subject Notes now have a conversion price of $0.07 per share.

●	Holders of the Subject Notes shall have the right to receive up to 12,460,983 shares of our Common Stock if we fail to meet certain performance targets (the “Noteholder Performance Shares”).

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

On February 2, 2011, the Company paid in full John Barry III principal and accrued interest of $200,000 and $39,028, respectively.

Interest expense recognized on related party notes payable for the three months ended March 31, 2011 and 2010 was $5,000 and $16,125, respectively.

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

The following is a summary of related party and non-related party convertible notes payable at March 31, 2011 and December 31, 2010:

	March 31,			December 31,
	2011			2010
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
$650,000 secured promissory note, May 2010 financing		650,000			650,000
Total Related Parties		2,390,636			2,390,636
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
Total		1,275,000			1,275,000
Less: unamortized debt discount		(20,021	)		(23,271	)
Total Non-Related Parties		1,254,979			1,251,729
Total		3,645,615			3,642,365
Less: current portion		(24,874	)		(24,243	)
Long-term portion	$	3,620,741		$	3,618,122

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 October 12, 2013 (the “Maturity Date”); interest accrues at a rate of 10% per annum, with unpaid interest payable, in full, upon the earlier of the conversion of the Convertible Notes or 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 by the Company, in generally 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.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

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 13) 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.

The Company has accounted for the warrants issued in conjunction with the Convertible Notes in accordance with the provisions of ASC 470-20, Debt with Conversion and Other Options. 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 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 ASC 815, the conversion option is classified as a derivative liability and 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 months ended March 31, 2011 and 2010, the Company recognized $3,251 and $140,290 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, respectively.

During the three months year ended March 31, 2011 and 2010, the Company also recognized $90,016 and $75,391 in interest expense on the outstanding related party and non-related party Convertible Notes, respectively.

12. Notes Payable, Other

The following is a summary of outstanding principal due on unrelated third party notes payable at March 31, 2011 and December 31, 2010:

	March 31,		December 31,
	2011		2010
$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 being due on March 15, 2010, June 15, 2010, September 15, 2010 and December 15, 2010.	$	—	$	82,000
Total				82,000
Less: current portion		—		82,000
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 could be accelerated in the event that the Company raised certain amounts of capital, (iii) monthly principal payments of $7,500 were 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.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

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 contained provisions customary for a financing of this type, including customary representations and warranties by the Company to the investor.

The March 2009 Note, accrued interest at the rate of 15% per annum and had a maturity date of March 31, 2010. Accrued and unpaid interest was due in a single payment on the maturity date. The March 2009 Note contained 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 was 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 Chief Executive Officer and one of the Company’s directors, secured the Note by pledging 4,500,000 shares of the Company’s common stock.

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.

The Company has accounted for the warrants issued in conjunction with the Term Loan Agreement in accordance with the provisions of ASC 470-20, Debt with Conversion and Other Options. Accordingly, the warrants were 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 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 $32,934, and is being amortized to interest expense over the expected term of the Convertible Notes.

On March 12, 2010, the Company entered into a Second Amendment to the Promissory Note related to the $250,000 note with the investment firm, where there Company was required to pay 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 19, 2010, the Company repaid the principal balance of the $1,000,000 indebtedness to MBRO Capital, LLC, along with all accrued interest.

Amendments to Certain Convertible Secured Promissory Notes

On October 19, 2010, the Company entered into an Amendment No. 2 to Convertible Secured Promissory Notes with the holder of a majority in principal amount of our Convertible Secured Promissory Notes issued on September 24, 2008, an Amendment No. 1 to Convertible Secured Promissory Note with the holder of our Convertible Secured Promissory Note issued on April 30, 2009 and an Amendment No. 1 to Convertible Secured Promissory Notes with the holders of the Company’s Convertible Secured Promissory Notes issued on June 8, 2009 (collectively, the “Note Amendments”). The Note Amendments restructure approximately $2,990,636 of the outstanding Convertible Secured Promissory Notes (the “Subject Notes”) as follows:

●	The maturity date of each of the Subject Notes was extended until October 12, 2013; provided, however, that from and after April 12, 2012, the holders of the Subject Notes may make a written demand to the Company for the payment of the entire unpaid principal balance thereof together with all accrued but unpaid interest thereon and the Company shall be required to repay such outstanding principal and interest within ninety (90) days of its receipt of such demand.

●	The conversion price of the Subject Notes was fixed at $0.24 per share (which was the then current conversion price of the Subject Notes as a result of adjustments based on the price per share of Common Stock issued in the Company’s recently completed warrant exchange offer). Such conversion price is subject to further adjustment on the occurrence of certain events described below. However, except as set forth below, the “full-ratchet” adjustment provision of the Subject Notes was eliminated.

●	In the event the Company sells securities pursuant to the Offering at an effective price per common share of less than $0.24, then the conversion price of the Subject Notes shall be reduced to such lower price. After the completion of the Offering, the Subject Notes will not have any “full-ratchet” adjustment.

●

Holders of the Subject Notes shall have the right to receive up to 12,460,983 shares of the Company’s Common Stock based on the same performance thresholds and calculations as the Performance Shares issuable to Bonds MX and Series A Performance Shares issuable to UBS Americas (the “Noteholder Performance Shares”).

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

●	If additional securities are issued to UBS Americas and Bonds MX or adjustments are made to the terms of the securities previously issued to them pursuant to the adjustment provisions summarized above, the holders of the Subject Notes would receive the same proportionate adjustment.

On February 2, 2011, the Company paid in full, the Keating Investments Note, consisting of $82,000 in principal repayment and $9,678 in accrued interest.

Interest expense recognized on third party notes payable for the three months ended March 31, 2011 and 2010 was $4,249 and $44,068, respectively.

13. 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 March 31, 2011:

Year Ending December 31,
2011	$	494,637
2012		238,511
2013 and thereafter		—
Total minimum payments required	$	733,148

The Company sublet the 10,293 square foot office that was its former headquarters located at 1515 South Federal Highway, Boca Raton, Florida. The lease provides for a base annual rent of approximately $201,000 plus taxes for the year beginning January 1, 2011; and base annual rent of approximately $211,000 plus taxes for the year beginning January 1, 2012. On March 15, 2011 the Company entered into a sub-lease for this space providing for total rental income of $180,000 through December 31, 2012, when the original lease expires. The rental income the Company anticipates receiving under the sublease agreement is $65,000 and $115,000 in the years 2011 and 2012, respectively. The rental income the Company anticipates receiving under the sublease will not fully satisfy the Company’s remaining obligations under the lease.

Rent expense for all operating leases for the three months ended March 31, 2011 and 2010 was $132,511 and $141,588, 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.

Employment agreements

On February 2, 2011, our Board of Directors appointed George O’Krepkie as the Company’s President and John Ryan as the Company’s Chief Administrative Officer. The Company entered into compensatory arrangements with both Mr. O’Krepkie and Mr. Ryan in connection with their appointment, which are summarized below.

Mr. O’Krepkie has been employed by the Company since December 2009, and prior to being appointed our President, was our Head of Sales. Prior to joining the Company, Mr. O’Krepkie was Director of Fixed Income for BTIG LLC, an institutional brokerage and fund services company that provides order execution, ECN services, outsource trading and brokerage services, from January 2009 to December 2009. From July 1999 until September 2008, Mr. O’Krepkie was employed with MarketAxess Holdings, Inc., which operates an electronic trading platform, most recently as its Head of Dealer Relationship Management.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Mr. Ryan has been employed by the Company in various capacities since approximately January 2010. Prior to joining the Company, Mr. Ryan was the Business Administration Director at Shortridge Academy Ltd., a co-educational therapeutic boarding school in New Hampshire, for approximately five years. Mr. Ryan continues to be a member of Shortridge Academy’s Board of Directors and its part-time CFO. From 2002 to 2003, Mr. Ryan was a Managing Director, CFO and CAO of Zurich Capital Markets, Inc. While at Zurich Capital Markets, Mr. Ryan served as a Director and Chair of the Audit Committee of Zurich Bank (Ireland). Prior to Zurich Mr. Ryan was CFO of Greenwich Capital Markets Inc.

On February 2, 2011, our Board of Directors appointed Patricia Kemp and Eugene Lockhart to our Board of Directors. Ms. Kemp and Mr. Lockhart were appointed to our Board of Directors pursuant to the Stockholders Agreement described above and as a condition to the consummation of the transactions contemplated by the Unit Purchase Agreement. In connection with their appointment to the Board of Directors, the Company entered into Indemnification Agreements with each of Ms. Kemp and Mr. Lockhart. The Indemnification Agreements expand upon and clarify certain procedural and other matters with respect to the rights to indemnification and advancement of expenses provided to directors of the Company pursuant to applicable Delaware law and the Company’s Bylaws.

On February 2, 2011, the Company adopted a 2011 Equity Plan. Pursuant to the 2011 Equity Plan, the Company may issue stock options and stock purchase rights for up to an aggregate of 72,850,000 shares of the Company’s Common Stock to officers, directors and consultants of the Company.

On February 2, 2011, the Company entered into Employment Agreements with Michael O. Sanderson, the Company’s Chief Executive Officer, George O’Krepkie, the Company’s newly-appointed President, Jeffrey M. Chertoff, the Company’s Chief Financial Officer, and John Ryan, the Company’s newly-appointed Chief Administrative Officer. The principal terms of those Employment Agreements are described below.

Mr. Sanderson’s Employment Agreement provides that he shall be Chief Executive Officer of the Company, serving under the direction and supervision of the Company’s Board of Directors. The term of the Employment Agreement is indefinite. Pursuant to his Employment Agreement, for 2011, or until such later future year when the Company first achieves four consecutive quarters of positive EBITDA and a minimum EBITDA of $5,000,000, Mr. Sanderson will be eligible for an annual bonus opportunity up to 100% of his base salary at the discretion of the Company’s Compensation Committee based on its evaluation of his performance and taking into account the Company’s financial strength and cash flow position. Commencing for the year after the Company first achieves four consecutive quarters of positive EBITDA and a minimum EBITDA of $5,000,000 (and from that year forward), Mr. Sanderson will be eligible for a performance bonus equal to 5% of EBITDA. Any earned performance bonus will be paid during the following year within 30 days after the Company’s receipt of its audited financial statements for such year, but in any event no later than the end of such year.

Mr. Sanderson’s Employment Agreement provides him with the following severance benefits:

	●	Upon a termination for death or disability, Mr. Sanderson shall be entitled to (a) payment of his base salary through the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), and (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies;

	●	Upon an involuntary termination without “cause,” or a voluntary termination with “good reason” (each as defined in the Employment Agreement), Mr. Sanderson shall be entitled to (a) payment of his base salary for a period of 18 months from and after the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies, and (d) reimbursement of his COBRA premiums for continued health insurance coverage for the him and his dependents through the end of the 18-month severance period; and

	●	Upon an involuntary termination for “cause” or a voluntary termination without “good reason,” Mr. Sanderson shall be entitled to payment of his base salary through the termination date plus reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies.

Mr. Sanderson’s Employment Agreement contains confidentiality and invention assignment provisions, a 12-month post-employment non-compete and customer and employee non-solicit covering North America and any other country in which the Company does business; provided, however, such non-competition and non-solicitation covenants do not limit or restrict Mr. Sanderson from (a) engaging in a business that is not primarily engaged in electronic fixed income trading or (b) soliciting clients, former clients or prospective clients for services that do not directly compete with the services provided by the Company.

Additionally, pursuant to his Employment Agreement, the Company has agreed to grant Mr. Sanderson two options to purchase shares of the Company’s Common Stock: (a) an option to purchase 18,575,000 shares of the Company’s Common Stock at a purchase price of $0.07 per share for a period of 7 years, half of which was vested at grant and the balance of which shall vest quarterly over a period of one year from the

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

date of grant, and (b) an option to purchase 18,575,000 shares of the Company’s Common Stock at a purchase price of $0.105 per share for a period of 7 years, which shall vest quarterly over a period of two years after the option described above is fully vested; provided, however, that the Company shall not be required to grant such options until such time as the number of its authorized shares of Common Stock are increased from 300,000,000 shares to 1,000,000,000 shares.

Mr. O’Krepkie’s Employment Agreement provides that he shall be President of the Company, serving under the direction and supervision of the Company’s CEO and, indirectly, its Board of Directors. The term of the Employment Agreement is indefinite. Mr. O’Krepkie’s base salary under the Employment Agreement is $240,000 per year, and he is eligible for an annual performance bonus based on a percentage of “Qualifying Company Revenue,” which the Employment Agreement defines as the Company’s revenue net of clearing charges recognized from the operations of all lines of business directly supervised by Mr. O’Krepkie, minus non-cash revenue items otherwise included in such revenue (determined in accordance with GAAP on a consolidated basis). Under the Employment Agreement, Mr. O’Krepkie’s performance bonus shall be (a) 10% of Qualifying Company Revenue up to $50,000,000 of Qualifying Company Revenue per year; (b) 7.5% of Qualifying Company Revenue from $50,000,001 to $100,000,000 of Company Qualifying Revenue per year; and (c) 5% of Company Qualifying Revenue greater than $100,000,000 per year.

Mr. O’Krepkie’s Employment Agreement provides him with the following severance benefits:

	●	Upon a termination for death or disability, Mr. O’Krepkie shall be entitled to (a) payment of his base salary through the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), (c) payment of a portion of the performance bonus for the quarter in which the termination occurs, calculated based solely on Qualifying Company Revenue recognized during the portion of the quarter prior to the termination date (paid at the same time it would otherwise have been paid), and (d) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies;

	●	Upon an involuntary termination without “cause,” or a voluntary termination with “good reason” (each as defined in the Employment Agreement), Mr. O’Krepkie shall be entitled to (a) payment of his base salary for a period of 18 months from and after the termination date, (b) payment of a performance bonus on the same terms in place on the termination date through the end of the 18-month severance period (paid at the same time it would otherwise have been paid), (c) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), (d) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies, and (e) reimbursement of his COBRA premiums for continued health insurance coverage for him and his dependents through the end of the 18-month severance period; and

●

Upon an involuntary termination for “cause” or a voluntary termination without “good reason,” Mr. O’Krepkie shall be entitled to payment of his base salary through the termination date plus reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies.

In the event the performance bonus amounts payable to Mr. O’Krepkie as severance cause the Company’s EBITDA on a rolling four-quarter basis after accrual of such amounts to be negative, payment of the portion of the performance bonus amounts that would cause such EBITDA to be negative will be extended until the first quarter when such four-quarter EBITDA would not be negative; provided, however, that any payments so delayed shall accrue interest at the prime rate compounded quarterly and the applicable interest payments shall be paid at the same time as the principal amount is paid. Once the Company’s EBITDA on a rolling four-quarter basis exceeds $5 million, this limitation will terminate.

Mr. O’Krepkie’s Employment Agreement contains confidentiality and invention assignment provisions, a 12-month post-employment non-compete and customer and employee non-solicit covering North America and any other country in which the Company does business; provided, however, such non-competition and non-solicitation covenants do not limit or restrict Mr. O’Krepkie from (a) engaging in a business that is not primarily engaged in electronic fixed income trading or (b) soliciting clients, former clients or prospective clients for services that do not directly compete with the services provided by the Company.

Additionally, pursuant to his Employment Agreement, on February 2, 2011, the Company granted to Mr. O’Krepkie two options to purchase shares of the Company’s Common Stock: (a) an option to purchase 18,575,000 shares of the Company’s Common Stock at a purchase price of $0.07 per share for a period of 7 years, all of which was vested at grant, and (b) an option to purchase 18,575,000 shares of the Company’s Common Stock at a purchase price of $0.105 per share for a period of 7 years, which shall vest quarterly over a period of three years.

Mr. Chertoff’s Employment Agreement provides that he shall be Chief Financial Officer of the Company, serving under the direction and supervision of the Company’s Chief Executive Officer. The term of the Employment Agreement is indefinite. Pursuant to his Employment Agreement, for 2011, or until such later future year when the Company first achieves four consecutive quarters of positive EBITDA and a minimum EBITDA of $5,000,000, Mr. Chertoff will be eligible for an annual bonus opportunity up to 50% of his base salary at the discretion

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

of the Company’s Compensation Committee based on its evaluation of his performance and taking into account the Company’s financial strength and cash flow position. Commencing for the year after the Company first achieves four consecutive quarters of positive EBITDA and a minimum EBITDA of $5,000,000 (and from that year forward), Mr. Chertoff will be eligible for a performance bonus equal to 1% of EBITDA. Any earned performance bonus will be paid during the following year within 30 days after the Company’s receipt of its audited financial statements for such year, but in any event no later than the end of such year.

Mr. Chertoff’s Employment Agreement provides him with the following severance benefits:

	●	Upon a termination for death or disability, Mr. Chertoff shall be entitled to (a) payment of his base salary through the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), and (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies;

	●	Upon an involuntary termination without “cause,” or a voluntary termination with “good reason” (each as defined in the Employment Agreement), Mr. Chertoff shall be entitled to (a) payment of his base salary for a period of 12 months from and after the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies, and (d) reimbursement of his COBRA premiums for continued health insurance coverage for the him and his dependents through the end of the 12-month severance period; and

●

Upon an involuntary termination for “cause” or a voluntary termination without “good reason,” Mr. Chertoff shall be entitled to payment of his base salary through the termination date plus reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies.

Mr. Chertoff’s Employment Agreement contains confidentiality and invention assignment provisions, a 12-month post-employment non-compete and customer and employee non-solicit covering North America and any other country in which the Company does business; provided, however, such non-competition and non-solicitation covenants do not limit or restrict Mr. Chertoff from (a) engaging in a business that is not primarily engaged in electronic fixed income trading or (b) soliciting clients, former clients or prospective clients for services that do not directly compete with the services provided by the Company.

Additionally, pursuant to his Employment Agreement, the Company has agreed to grant Mr. Chertoff two options to purchase shares of the Company’s Common Stock: (a) an option to purchase 4,000,000 shares of the Company’s Common Stock at a purchase price of $0.07 per share for a period of 7 years, half of which was vested at grant and the balance of which shall vest quarterly over a period of one year from the date of grant, and (b) an option to purchase 4,000,000 shares of the Company’s Common Stock at a purchase price of $0.105 per share for a period of 7 years, which shall vest quarterly over a period of two years after the option described above is fully vested; provided, however, that the Company shall not be required to grant such options until such time as the number of its authorized shares of Common Stock are increased from 300,000,000 shares to 1,000,000,000 shares.

Mr. Ryan’s Employment Agreement provides that he shall be Chief Administrative Officer of the Company, serving under the direction and supervision of the Company’s Chief Executive Officer. The term of the Employment Agreement is indefinite. Pursuant to his Employment Agreement, for 2011, or until such later future year when the Company first achieves four consecutive quarters of positive EBITDA and a minimum EBITDA of $5,000,000, Mr. Ryan will be eligible for an annual bonus opportunity up to 50% of his base salary at the discretion of the Company’s Compensation Committee based on its evaluation of his performance and taking into account the Company’s financial strength and cash flow position. Commencing for the year after the Company first achieves four consecutive quarters of positive EBITDA and a minimum EBITDA of $5,000,000 (and from that year forward), Mr. Ryan will be eligible for a performance bonus equal to 1% of EBITDA. Any earned performance bonus will be paid during the following year within 30 days after the Company’s receipt of its audited financial statements for such year, but in any event no later than the end of such year.

Mr. Ryan’s Employment Agreement provides him with the following severance benefits:

	●	Upon a termination for death or disability, Mr. Ryan shall be entitled to (a) payment of his base salary through the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), and (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies;

	●	Upon an involuntary termination without “cause,” or a voluntary termination with “good reason” (each as defined in the Employment Agreement), Mr. Ryan shall be entitled to (a) payment of his base salary for a period of 12 months from and after the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies, and (d) reimbursement of his COBRA premiums for continued health insurance coverage for the him and his dependents through the end of the 12-month severance period; and

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

●

Upon an involuntary termination for “cause” or a voluntary termination without “good reason,” Mr. Ryan shall be entitled to payment of his base salary through the termination date plus reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies.

Mr. Ryan’s Employment Agreement contains confidentiality and invention assignment provisions, a 12-month post-employment non-compete and customer and employee non-solicit covering North America and any other country in which the Company does business; provided, however, such non-competition and non-solicitation covenants do not limit or restrict Mr. Ryan from (a) engaging in a business that is not primarily engaged in electronic fixed income trading or (b) soliciting clients, former clients or prospective clients for services that do not directly compete with the services provided by the Company.

Additionally, pursuant to his Employment Agreement, the Company has agreed to grant Mr. Ryan two options to purchase shares of the Company’s Common Stock: (a) an option to purchase 4,000,000 shares of the Company’s Common Stock at a purchase price of $0.07 per share for a period of 7 years, half of which was vested at grant and the balance of which shall vest quarterly over a period of one year from the date of grant, and (b) an option to purchase 4,000,000 shares of the Company’s Common Stock at a purchase price of $0.105 per share for a period of 7 years, which shall vest quarterly over a period of two years after the option described above is fully vested; provided, however, that the Company shall not be required to grant such options until such time as the number of its authorized shares of Common Stock are increased from 300,000,000 shares to 1,000,000,000 shares.

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 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.

On January 12, 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, under an alleged breach of contract arising from the Company’s previous relationship with Duncan-Williams. Duncan-Williams is seeking monetary damages for alleged breach of contract, a declaration of ownership relating to certain intellectual property and an accounting of income earned by the Company. It is the Company’s position that Duncan-Williams’ claims are without merit because, among other things, the Company did not breach any contract with Duncan-Williams and any alleged relationship that the Company had with Duncan-Williams was in fact terminated by the Company on account of Duncan-Williams’ breach and bad faith. The Company plans to defend against the claims accordingly. On February 20, 2009, the Company filed a motion to dismiss the complaint on the grounds that, among other reasons, the parties agreed to arbitration (of) their dispute. On October 23, 2009, the court granted in part the Company’s motion and entered an order staying the action pending arbitration between the parties. Such order does 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. may have, if any, to seek arbitration that, among other reasons, the parties agreed to arbitration (of) their dispute. On October 23, 2009, the court granted in part the Company’s motion and entered an order staying the action pending arbitration between the

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

parties. Such order does 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. may have, if any, to seek arbitration.

The Company received a letter dated June 18, 2010, from Duncan-Williams’ counsel requesting arbitration. On July 13, 2010, the Company responded in a letter to Duncan-Williams indicating that due to vacations and scheduling conflicts, the timeline offered to the Company was not acceptable. The Company further responded to Duncan-Williams that it did not agree with certain interpretations of Duncan-Williams relating to the arbitration procedure. The Company did not hear further from Duncan-Williams. until December 3, 2010, when Duncan-Williams filed a motion to lift the stay issued on October 23, 2009 and to litigate the dispute in the United States District Court for the Western District of Tennessee. On December 20, 2010, counsel for the Company filed a response to Duncan-Williams’ motion, objecting to litigating the dispute in court and supporting the Company’s claims that it is prepared to arbitrate. On December 27, 2010, Duncan-Williams filed a reply to the Company’s response. On February 11, 2011 the United States District Court for the Western District of Tennessee issued an Order Denying Motion To Lift Stay and the Company on February 22, 2011 sent a letter to Duncan Williams counsel stating that the Company is prepared to move forward with the arbitration. As of the date of this report the Company has not received a response.

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.

The accompanying statement of operations does not include any charge related to the resolution of this matter.

14. Stockholders’ Equity

Description of Authorized Capital

Preferred stock activity for the three months ended March 31, 2011 is as follows:

	Series A		Series B			Series B-1			Series C		Series D		Series D-1
Balance at December 31, 2010		85,835		2,250			1,250			—		—		—
Issued		—		—			—			10,000		9,150		1,250
Cancelled/Exchanged		—		(2,250	)		(1,250	)		—		—		—
Balance at March 31, 2011		85,835		—			—			10,000		9,150		1,250

Series C Convertible Preferred Stock

On February 2, 2011, the Company amended its Certificate of Incorporation (the “Certificate of Incorporation”) and authorized the issuance of 10,000 shares of Series C Preferred.

The shares of Series C Preferred have the following rights, privileges and preferences, among others, as more fully set forth in the amended Certificate of Incorporation and the Agreement with Respect to Conversion dates as of February 2, 2011, between Beacon and Bonds.com Group (the “Determination Agreement”):

●

subject to the Conversion Restriction (as defined in the Certificate of Incorporation), are initially convertible (in full but not in part) at the option of the holders of a majority of such shares into such number of shares of Common Stock as equals the Conversion Value (as defined in the Certificate of Incorporation) which is the amount that is equal to the lesser of (a) $10,000,000, and (b) the trailing 18-month revenue of Beacon’s Business (as defined in the Determination Agreement) as of the Determination Date (as defined in the Certificate of Incorporation)) divided by the conversion price of $0.10 per share; provided that, for a period of 18 months following the date of the issuance of the Series C Preferred, if the Company issues shares of Common Stock (or is deemed to issue shares of Common Stock) for a price per share less than $0.10, then the conversion price of the Series C Preferred is to be reduced by a “weighted-average” anti-dilution formula (subject to certain exempted issuances);

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

●	subject to the Conversion Restriction, is mandatorily convertible into shares of our Common Stock upon certain milestones related to the trading of our Common Stock;

●	in the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, and upon certain changes, subject to the rights of holders shares of Series D Preferred (as defined below) and Series D-1 Preferred (as defined below), the holders shall be entitled to a liquidation preference;

●	prior to the Determination Date, holders have the right to vote with holders of Common Stock on the basis of 1,250 votes per share of Series C Preferred and, after the Determination Date, holders of Series C Preferred have the right to vote with holders of Common Stock on an as-converted basis.

Series D and D-1 Convertible Preferred Stock

On February 2, 2011, the Company amended the Certificate of Incorporation and authorized the issuance of 14,500 shares of Series D Convertible Preferred Stock, par value $0.0001 per share (the "Series D Preferred") and 1,500 shares of Series D-1 Convertible Preferred Stock (the "Series D-1 Preferred"), $0.0001 par value.

The shares of Series D Preferred and Series D-1 Preferred have the following rights, privileges and preferences, among others, as more fully set forth in the amended Certificate of Incorporation:

●	are initially convertible at the option of the holder into shares of Common Stock at a conversion price of $0.07 per share, for an initial conversion ratio of 14,286 shares of Common Stock for each share of Series D Preferred or Series D-1 Preferred as applicable; provided that, for a period of 18 months following the date of their issuance, if the Company issues shares of Common stock (or is deemed to issue shares of Common Stock) for a price per share less than $0.07, then the exercise price of the Series D Preferred and Series D-1 Preferred will be reduced by a “weighted-average” anti-dilution formula (subject to certain exempted issuances);

●	subject to certain restrictions, is mandatorily convertible into shares of Common Stock upon the achievement of certain milestones related to the trading of the Common Stock;

●	With respect to the Series D-1 Preferred, is mandatorily convertible into shares of our Series A Participative Preferred Stock, par value $0.0001 per shares (“Series A Preferred”)upon the same mandatory conversion events applicable to the Series D-1 Preferred;

●	dividends of 8% per annum shall accrue but are to be payable as, if and when declared by the Company’s Board of Directors, in connection with the conversion thereof (in which case payment shall be in-kind) or as part of the liquidation or change of control preference summarized below (this accruing dividend shall increase to 12% per annum if the Company fails to comply with its obligation with respect to the Authorized Share Increase as defined in the Certificate of Incorporation);

●	holders shall be entitled to a preferential payment (prior to any payment to holders of Series C Preferred, Series A Preferred or Common Stock) upon a liquidation or change of control, as applicable under certain circumstances; and

●	holders have the right to vote with holders of Common Stock on an as-converted basis (regardless of the Conversion Restriction).

Common Stock

On January 11, 2010, the Company amended the Certificate of Incorporation to increase the number of shares of Common Stock authorized to 300,000,000.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Series B Convertible Preferred Stock

On February 2, 2011, all of the shares of Series B Convertible Preferred Stock, par value $0.0001 per share (“Series B Preferred”) were exchanged for shares of Series D Preferred and are no longer outstanding. [Additionally, the right to receive the performance shares was terminated.]

Series B-1 Convertible Preferred Stock

On February 2, 2011, all of the shares of Series B-1 Convertible Preferred Stock (par value $0.0001 per share (“Series B-1 Preferred”) were exchanged for shares of Series D-1 Preferred and are no longer outstanding. Additionally, the right to receive the Series A-1 Performance Shares was terminated.

Series C Convertible Preferred Stock Issuance

On February 2, 2011, in conjunction with the Asset Purchase Agreement for the acquisition of the Beacon assets (see note 7), the Company issued 10,000 shares of Series C Preferred as consideration for the purchase price of such assets. The fair value of such shares was determined to be $1,072,000.

Series D Convertible Preferred Stock Issuance

On February 2, 2011, the Company entered into a Unit Purchase Agreement (the "Unit Purchase Agreement") with Oak Investment Partners XII, LP. (“Oak”) and GFINet Inc. ("GFI") and sold to Oak and GFI an aggregate of 65 units for a total purchase price of $6,500,000, before the deduction of transaction fees and expenses which amounted to $271,962. Each unit (each a "Unit" and collectively the Units) is comprised of (a) warrants to purchase 1,428,572 shares of Common stock, at an initial exercise price of $0.07 per share, and (b) 100 shares of Series D Preferred.

The Company determined that the Series D Preferred shares attached to the Units are classified as equity instruments. In addition, the Company assessed the terms of the related Common Stock warrants and concluded that, as a result of the down-round provision related to the exercise price, the Common Stock warrants should be classified as a derivative liability instrument.

The proceeds from the sale of the Units were allocated between the equity and derivative liability instruments utilizing the residual method, as follows: (a) the proceeds were first allocated to the fair value of such warrants deemed a derivative liability instrument equaling $455,000, and (b) the remaining balance of the proceeds was then allocated to the Series D Preferred, which as a result $6,045,000 of the proceeds was allocated to Series D Preferred. The Company analyzed the effective conversion feature of the Series D Preferred and determined that there was no beneficial conversion features upon the issuance.

Also, on February 2, 2011, in connection with and as a condition to, the transaction contemplated by the Unit Purchase Agreement, the Company entered into an Exchange Agreement, which with UBS Americas Inc., Bonds MX LLC,and Robert Jones (the "Exchange Agreement"). Pursuant to the Exchange Agreement, the Company (a) issued an aggregate of 22.5 Units of Series D Preferred in exchange for all the outstanding shares of Series B Preferred and certain outstanding warrants to purchase shares of the Common Stock. As a result of such exchange, the Company recorded $455,357 as preferred dividend expense for the market value of the additional Common Stock equivalent shares received by holder of Series B Preferred.

On March 7, 2011, the Company entered into two separate unit purchase agreements with two accredited investors pursuant to which, the Company sold 4 Units for an aggregate purchase price of $400,000. The Company allocated $28,000 and $372,000 of its proceeds to the Common Stock warrants and Series D Preferred, respectively, using the residual method. The Company analyzed the effective conversion feature of the Series D Preferred and determined that there was no beneficial conversion features upon the issuance.

Series D-1 Convertible Preferred Stock Issuance

On February 2, 2011, the Company issued 12.5 units, each comprised of (a) warrants to purchase 14,286 shares of Series A Preferred, with an initial exercise price of $7.00 per share (the "Series A Warrants") and (b) 100 shares of Series D-1 Preferred, in exchange for (a) all of the outstanding shares of Series B-1 Preferred and (b) certain outstanding warrants to purchase shares of the Series A Preferred. As a result of such exchange, the Company recorded $252,976 as preferred dividend expense for the market value of the additional Common Stock equivalent shares received by holders of Series B-1 Preferred.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Common Stock Issuance

On October 7, 2010, the Company issued approximately 27,000,000 shares of Common Stock in exchange for approximately 95,800,000 warrants to purchase shares of Common Stock, which represented approximately 85.64% of the shares of Common Stock issuable upon the exercise of all warrants. In connection with this exchange offer, the Company recorded a charge of approximately $1,900,000 to finance expense. In addition, the Company issued the remaining balance of 660,051 shares of Common Stock in January 2011.

Common Stock Purchase Warrants

Warrant activity for the three months ended March 31, 2011 is as follows:

	Numbers of Warrants			Weighted-Average Exercise Price
Outstanding at December 31, 2010	35,378,665		$	0.32
Issued	158,714,277			0.07
Cancelled or expired	(9,375,008	)		0.24
Exercised	—			—
Outstanding at March 31, 2011	184,717,934		$	0.11

Weighted average fair value granted during the three months ended March 31, 2011			$	0.0049

Warrants issued to Non-Employees

On February 2, 2011, the Company issued warrants to related parties to purchase an aggregate of 13,000,000 and 15,000,000 shares of Common Stock in connection with providing consulting services, which such warrants had an exercise price of $0.07 and $0.10, respectively, and contain a provision allowing for cashless exercise. The fair value of such warrants issued, amounting to $72,800 and $63,000, respectively, was determined using the Black-Scholes option pricing model ranging from $0.0042 to $0.0056 for both warrants utilizing the following assumptions: expected volatility of 66.00%, risk free interest rate of 2.10%, contractual term of five years and a fair value of the underlying common stock of $0.02. Such warrants were fully vested and as such the fair value of the warrants was charged to operations during the three months ended March 31, 2011.

The Company recorded $135,800 and $0 of consulting expense during the three months ended March 31, 2011 and 2010, respectively, relating to warrants awarded.

Warrants issued in connection with Series D Convertible Preferred Stock issuances

On February 2, 2011, the Company issued warrants pursuant to unit purchase agreements, which included provisions containing a cashless net exercise election and providing that, for a period of 18 months following the date of such unit purchase agreements, if the Company issues shares of Common Stock (or is deemed to issue shares of Common Stock) for a price per share less than $0.07, then the exercise price of the Common Stock warrants will be reduced by a “weighted-average” anti-dilution formula (subject to certain exempted issuances).

Due to the down-round provision included in such warrants, all such warrants are recognized as derivative liabilities at their respective fair values on each reporting date. The fair values of these warrants were estimated using a Binomial Lattice valuation model, 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.

The Company issued warrants exercisable for 92,857,143 shares of Common Stock in connection with such unit purchase agreements. Such warrants had an initial exercise price of $0.07 and a term of five years. The fair value of the warrants issued at grant date, which amounted to $455,000, was determined using a Binomial Lattice valuation model at $0.0049 per warrant utilizing the following assumptions: expected volatility of 66.00%, risk-free interest rate of 2.10%, expected term of five years, weighted average probability strike price of $0.0610 and a fair value of the underlying common stock of $0.02.

On March 7, 2011, the Company issued warrants exercisable for 5,714,286 shares of Common Stock in connection with unit purchase agreements executed as of such date. The fair value of such warrants issued at grant date, which amounted to $28,000, was determined using a

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Binomial Lattice valuation model at $0.0049 per warrant utilizing the following assumptions: expected volatility of 66.00%, risk-free interest rate of 2.19% ,expected term of five years, weighted average probability strike price of $0.0610 and a fair value of the underlying common stock of $0.02.

Warrants issued in connection with Exchange Agreements

On February 2, 2011, the Company issued warrants pursuant to the Exchange Agreement among the Company and the holders of Series B Preferred and Series B-1 Preferred (the “Exchange Agreement”), which included provisions containing a cashless net exercise election and providing that, for a period of 18 months following the date of the Exchange Agreement, if the Company issues shares of Common Stock (or is deemed to issue shares of Common Stock) for a price per share less than $0.07, then the exercise price of the Common Stock warrants will be reduced by a “weighted-average” anti-dilution formula (subject to certain exempted issuances).

Related to the exchange of the Series B Preferred for share of Series D Preferred, the Company issued warrants exercisable for 32,142,848 shares of Common Stock with a fair value at grant date of$157,500.

In connection with the Exchange Agreement, the Company cancelled warrants exercisable for 9,375,008 shares of Common Stock originally issued in connection with the Series B Preferred. In connection with this exchange, the Company recorded a charge of $142,499 to preferred dividend expense.

Series A Purchase Participating Preferred Warrants

Series A Preferred warrant activity for the three months ended March 31, 2011 is as follows:

	Numbers of Series A Preferred Warrants		Weighted-Average Exercise Price
Outstanding at December 31, 2010	52,084		$	24.00
Issued	178,575			6.10
Cancelled or expired	(52,084	)		24.00
Exercised	—			—
Outstanding at March 31, 2011	178,575		$	6.10
Weighted average fair value granted during the three months ended March 31, 2011			$	0.49

Series A Participating Preferred warrants issued in connection with Exchange Agreement

On February 2, 2011, the Company issued Series A Preferred warrants pursuant to the Exchange Agreement which included provisions containing a cashless net exercise election and providing that, for a period of 18 months following the date of the Exchange Agreement, if the Company issues shares of Common Stock (or is deemed to issue shares of Common Stock) for a price per share less than $0.07, then the exercise of the Series A Warrant will be reduced by a customary “weighted-average” anti-dilution formula (subject to certain exempted issuances).

Related to the exchange of the Series B-1 Preferred for shares of Series D-1 Preferred, the Company issued warrants exercisable for 178,575 shares of Series A Preferred. These warrants convert to 17,857,500 of Common Stock equivalents. The fair value of these warrants at grant date is $87,500.

In connection with the exchange, the Company cancelled warrants exercisable for 52,084 shares Series A Preferred originally issued in connection with the issuance of Series B-1 Preferred. In connection with this exchange, the Company recorded a charge of $79,166 to preferred dividend expense.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

15. 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.

No diluted loss per share has been computed since the effect of any potentially dilutive securities would be antidilutive. Potentially dilutive securities excluded from the calculation of weighted average Common Stock outstanding March 31, 2011 include 211,950,442 of both, Common Stock and Series A Preferred warrants, 43,762,496 Common Stock underlying the Company’s stock options, 63,453,003 shares issuable under convertible notes payable and 258,994,949 shares issuable under preferred stock all which have the ability to be converted to common stock.

16. 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 March 31, 2011:

	2011
Ratio of aggregate indebtedness to net capital	0.06 to 1
Net capital	$	3,714,661
Required net capital	$	100,000

17. Share-Based Corporation

The Company has two equity-based compensation plans which have not been approved by stockholders, the 2006 Equity Plan (the “2006 Plan”) and the 2011 Equity Plan (the “2011 Equity Plan”, and together with the 2006 Plan, each a “Plan” and together the “Plans”), each of which is effective for 10 years after the date of its adoption. The 2006 Plan and the 2011 Equity Plan provides for a total of 13,133,825 and 72,850,000 shares, respectively, 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 a 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 Plans).

The exercise price of both incentive and non-statutory stock options except when granted pursuant to a merger or other corporate transaction, may not be less than 100% of the closing price of the Common Stock on date of grant (or the last reporting closing price if there is no activity on the date of grant); provided, however, that the exercise price of an incentive stock option granted to a holder of at least ten percent (10%) of total issued and outstanding Common Stock shall not be less than 110% of the closing price of the share of Common Stock. As of March 31, 2011, the Company had options exercisable for 61,850,000 shares of Common Stock available to grant under the 2011 Equity Plan and options exercisable for 2,245,287 shares of Common Stock available to grant under the 2006 Plan.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Stock option activity related to options granted to employees under the Plans and related information for the three months ended March 31, 2011 is provided below:

	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		10,958,538		$	0.36		—		—
Granted		11,000,000			0.09
Forfeited		(70,000	)		0.33
Exercised		—			—
Outstanding at March 31, 2011		21,888,538		$	0.23		8.62		—
Vested or expected to vest		21,888,538		$	0.23		8.62		—
Options exercisable, March 31, 2011		14,139,579		$	0.30		8.00		—

Stock option activity related to options granted outside the Plans to both employees and non-employees and related information for the three months ended March 31, 2011 is provided below:

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		9,500,000	$	0.38		—		—
Granted during the first three months of 2011		37,150,000		0.09
Forfeited or expired during the first three months of 2011		—		—
Exercised during the first three months of 2011		—		—
Outstanding at March 31, 2011		46,650,000	$	0.12		7.11		—
Vested or expected to vest		46,650,000	$	0.12		7.11		—
Options exercisable, March 31, 2011		29,622,917	$	0.17		7.18		—

The Company granted options exercisable for an aggregate of 46,650,000 shares of Common Stock outside the Plans of which 9,500,000 was granted to non-employees.

The weighted-average grant date fair value of options granted to employees during the three months ended March 31, 2011 and 2010 was $0.01 and $0.20, respectively. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model and using the following weighted-average assumptions:

	March 30,
	2011		2010
Dividend yield		—		—
Expected volatility		66.00%		66.00%
Risk-free interest rate		1.61% - 2.10%		3.16% - 3.61%
Expected life (in years)		4 - 5		7 - 10
Fair Value of common stock	$	0.03	$	0.26 - $0.28

The weighted-average expected life for the options granted in during the three months ended March 31, 2011 of 4.00 years reflects the alternative simplified method permitted by authoritative guidance, which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. Expected volatility for the 2011 option grants was based on historical volatility over the same number of years as the expected life, prior to the option grant date.

As of March 31, 2011, there was approximately $253,000 of unrecognized compensation cost related to options issued of which approximately $210,000 will be allocated to Bonds.com, Inc. This amount is expected to be recognized over the remaining estimated life of the options, which on a weighted-average basis is approximately 2.92 years.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

There were no options exercised during the three months ended March 31, 2011 and 2010. Tax benefits related to option exercises were not deemed to be realized as net operating loss carryforwards are available to offset taxable income computed without giving effect to the deductions related to option exercises.

Non-cash compensation expense relating to stock options was calculated by using the Black-Scholes option pricing model, amortizing the value calculated over the vesting period and applying a zero forfeiture percentage as estimated by the Company's management, using historical information. The Company has elected to recognize compensation cost for option awards that have graded vesting schedules on a straight-line basis over the requisite service period for the entire award. For the three months ended March 31, 2011 and 2010, the non-cash compensation expense relating to option grants amounted to $555,166 and $1,727,765, respectively, of which $231,964 and $487,204 respectively, were allocated to Bonds.com, Inc.

18. 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 other expense.

As described below, on September 29, 2010, the Employment Agreement, dated July 7, 2009, between the Bonds.com Group, Inc. (“we,” “us,” “our” and the “Company”) and Christopher Loughlin, our former Chief Operating Officer and Secretary, and the Employment Agreement, dated July 7, 2009, between the Company and Joseph Nikolson, our former Executive Vice President and former President of our Bonds.com, Inc. broker-dealer subsidiary, were terminated.

Nikolson and Loughlin Separation Agreements

Under the Loughlin Separation Agreement, the company has agreed to pay approximately $775,000 in severance and benefits. In addition, the Company issued fully-vested options to purchase 5 million shares of common stock at $0.375 per share.

Under the Nikolson Separation Agreement, the company has agreed to pay approximately $500,000 in severance. In addition, the company extended the maturity of his fully vested options to purchase 1,190,313 shares.

Amendment and Release Agreements with John J. Barry III and John J. Barry IV

On October 19, 2010, the Company entered into an Amendment and Release with John J. Barry III (the “JB III Amendment and Release”) and an Amendment and Release with John J. Barry IV (the “JB IV Amendment and Release”).

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

The JB III Amendment and Release sets forth the following terms and conditions, among others:

●

The Company agreed to make the following payments to John J. Barry III pursuant to the outstanding Grid Promissory Note, dated January 29, 2008, issued by the Company to John J. Barry III in the principal amount of $250,000 (the “Grid Note”): (a) at such time as the aggregate gross proceeds to the Company from the Offering equal a minimum of $2,000,000 (inclusive of the conversion or cancellation of outstanding indebtedness), the Company shall make a $50,000 payment to John J. Barry III (the “Initial JBIII Payment”), (b) at such time as such gross proceeds equal at least $4,000,000, the Company shall pay an additional $100,000 to John J. Barry III, and (c) at such time as such proceeds equal at least $10,000,000, the Company shall pay off the balance of the Grid Note.

●

Effective upon the Company’s payment of the Initial JBIII Payment, John J. Barry III and certain of his affiliates released the Company and its affiliates from any and all claims that he may have against them, and the Company released John J. Barry III and certain of his affiliates from any and all claims it may have against them.

●

To the extent permitted by applicable law, the Company agreed to indemnify John J. Barry III from any claims that any third parties (a) may at any time have against him as a result of, relating to, or arising out of the Offering or any similar or related financing or transaction and/or (b) have ever had or may at any time have as a result of, relating to, or arising from John J. Barry III’s relationship (whether by statute, contract, or otherwise) with the Company.

●

From the date of the JBIII Amendment and Release until December 31, 2010, John J. Barry III shall not require any payment of principal or interest or other amounts under the Grid Note except as and to the extent summarized above. After December 31, 2010, John J. Barry III shall be permitted to seek to enforce the Grid Note in accordance with the provisions thereof.

The JBIV Amendment and Release sets forth the following terms and conditions, among others:

●	The Company agreed to make the following outstanding and accelerated payments to John J. Barry IV pursuant to the letter agreement, dated February 26, 2010 (which provides for the payment to John J. Barry IV of approximately $1,200,000 over a period of three years, some of which has previously been paid) (the “Letter Agreement”): (a) at such time as the aggregate gross proceeds to the Company from the Offering equal a minimum of $2,000,000 (inclusive of the conversion or cancellation of outstanding indebtedness), the Company shall make a $50,000 payment to John J. Barry IV (the “Initial JBIV Payment”), (b) at such time as such gross proceeds equal at least $4,000,000, the Company shall pay an additional $100,000 to John J. Barry IV, (c) at such time as such proceeds equal at least $6,000,000, the Company shall pay an additional $240,000, (d) at such time as such proceeds equal at least $8,000,000, the Company shall pay an additional $240,000, and (e) at such time as such proceeds equal at least $10,000,000, the Company shall pay the balance of the future payments due under the Letter Agreement (which would equal an additional $340,000).
●	Effective upon the Company’s payment of the Initial JBIV Payment, John J. Barry IV and certain of his affiliates released the Company and its affiliates from any and all claims that he may have against them, and the Company released John J. Barry IV and certain of his affiliates from any and all claims it may have against them.
●	To the extent permitted by applicable law, the Company agreed to indemnify John J. Barry IV from any claims that any third parties (a) may at any time have against him as a result of, relating to, or arising out of the Offering or any similar or related financing or transaction and/or (b) have ever had or may at any time have as a result of, relating to, or arising from John J. Barry IV’s relationship (whether by statute, contract, or otherwise) with the Company.
●	From the date of the JBIV Amendment and Release until December 31, 2010, John J. Barry IV shall not require any payment of principal or interest or other amounts under the Letter Agreement except as and to the extent summarized above. After December 31, 2010, John J. Barry IV shall be permitted to seek to enforce the Letter Agreement in accordance with the provisions thereof.

On October 19, 2010, the Company paid the Initial JBIII Payment and Initial JBIV Payment.

The Company repaid the outstanding indebtedness in the amount of $239,000, and related interest to John J. Barry, III pursuant to the Amendment and Release dated October 19, 2010.

The Company agreed to pay $925,000 to satisfy the Company’s obligation to John J. Barry IV pursuant to the Amendment and Release dated October 19, 2010.

BONDS.COM GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011

Termination of Revenue Sharing Arrangement; Additional Agreements

On October 19, 2010, the Company and Radnor Research and Trading Company, LLC terminated the Restated Revenue Sharing Agreement dated November 13, 2009 (the “Revenue Sharing Agreement”). Prior to its termination, the Revenue Sharing Agreement required the Company to pay Radnor Research and Trading Company, LLC an amount equal to between 14% and 35% of all revenue (net of clearing costs and other allocated costs) generated by transactions on the Bonds.com platform by persons or entities referred to the Company by Radnor Research and Trading Company, LLC. UBS Securities and other potentially large users of the Bonds.com platform were referred to the Company by Radnor Research and Trading Company, LLC, and the future amounts payable under the Revenue Sharing Agreement were potentially very significant.

In order to secure the termination of the Revenue Sharing Agreement and in cancellation of an additional contractual obligation in the potential amount of $432,000, on October 19, 2010, the Company entered into a Termination and Release Agreement with Mark G. Hollo, The Fund LLC and Black-II Trust (the “Termination and Release Agreement”). Pursuant to the Termination and Release Agreement, among other things, the Company (a) issued to Black-II Trust a warrant to purchase 10,000,000 shares of Common Stock at a purchase price of $0.24 per share, and (b) agreed to pay Black-II Trust an aggregate of $250,000 in four equal installments at such time, if ever, as the gross proceeds from the Offering (including the conversion of indebtedness) exceeds $5,000,000. In exchange, Mark G. Hollo provided his required consent to the termination of the Revenue Sharing Agreement, and The Fund LLC agreed to terminate the above-referenced contractual obligation. The foregoing warrant contains, among other things, a single demand registration right on Form S-3 at such time, if ever, as the Company is eligible to use Form S-3 and “piggy back” registration rights with respect to certain registration statements filed by the Company for its own sale of shares of Common Stock or resales of shares of Common Stock by other stockholders.

On February 2, 2011, the Company issued three warrants to related parties or their affiliates or related parties: (a) a warrant to purchase 6,500,000 shares of the Company’s Common Stock at a purchase price of $0.07 per share for a period of 5 years, which was issued to Edwin L. Knetzger, III for prior services rendered (in addition to his services as a director of the Company), (b) a warrant to purchase 6,500,000 shares of the Company’s Common Stock at a purchase price of $0.07 per share for a period of 5 years, which was issued to Tully Capital Partners, LLC, a member of Bonds MX, LLC, for prior services rendered, and (c) a warrant to purchase 15,000,000 shares of the Company’s Common Stock at a purchase price of $0.10 per share for a period of 5 years, which was issued to Laidlaw & Co (UK), Inc., a related party of Laidlaw Venture Partners III, LLC.

See notes 10, 11 and 14 with respect to Notes Payable, Related Parties and Convertible Notes Payable, Related Parties, Stockholders Equity

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

During the three months ended March 31, 2011, one customer, who is also an investor in the Company, represented approximately 15% of total revenue. The loss of that client could have a material adverse effect on our business.

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 Amendment No. 1 to 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, 2010.

Overview

The Company, through its indirect wholly owned broker dealer subsidiaries Bonds.com, Inc. and Bonds MBS, Inc., operates electronic trading platforms for trading in fixed-income securities.

BondsPRO

During 2010, we began operating our BondsPRO electronic trading platform and ceased operating BondStation. The BondsPRO platform offers professional traders and large institutional investors an alternative trading system to trade odd-lot fixed-income securities. 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(s), and user portfolio specific market views. The BondsPRO platform provides users 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, our model allows us to generate revenue through mark-ups or mark-downs on secondary market securities.

Beacon

On February 2, 2011, the Company, through our indirect wholly owned subsidiary Bonds MBS, Inc., acquired the assets of Beacon Capital Strategies, Inc., a broker-dealer (“Beacon”). The Beacon electronic platform integrates full function trading capability for all classes of asset-backed securities (“ABS”), mortgage-backed securities (“MBS”), and commercial mortgage-backed securities (“CMBS”).

We are registered as an ATS (Alternative Trading System) with the United States Securities and Exchange Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”).

Earnings Overview

As the Company continues on its growth path and implements its business plan, we continue to incur operating losses. For the three months ended March 31, 2011, we incurred a net loss of $3.1 million, which was $3.5 million less than the net loss of $6.6 million incurred for the period ended March 31, 2010. The change was due primarily to a number of offsetting factors: reductions in share based compensation and preferred stock dividend expenses offset by increased expenses for professional fees and a gain on settled derivative financial instruments.

Revenue

The Company generates all of its revenue through its riskless principal trading activity. Customers who aggress on our platform pay a mark-up/mark-down on each trade based on the trade’s size and maturity. All trades, once matched on the platform, settle at our clearing firm and the net proceeds are credited to our account.

Total revenue increased by approximately 30% to $0.8 million from $0.6 million for the three months ended March 31, 2011 compared to the same period in 2010. The increase was due to the continued growth in our customer base and increased trading volumes. Our revenue is measured as a function of the aggregate value of the securities traded, therefore revenue varies based on the size of the applicable trade.

Operating Expenses

The primary operating expenses of the Company are compensation, technology and professional and consulting fees. Payroll expenses in 2011 and 2010 include salaries, bonuses and employee benefits and payroll taxes. In the three months ended March 31, 2011, the payroll expenses include sales commissions. In addition, there is share based compensation expense associated with the issuance of stock options under the Company’s employee equity plans. Our technology costs include license and other fees to our technology vendor, market data services and other communication and technology costs. The professional and consulting fees are primarily corporate and regulatory counsel fees, audit and accounting services fees and marketing and other consulting related costs.

Operating expenses decreased slightly to $4.3 million from $4.5 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The decrease was driven primarily by decreases of $1.0 million in payroll related costs due to closing of the Florida office and a reduction in share based compensation offset by an increase of $0.8 million in professional and consulting fees and an increase of $0.2 million in other operating expenses.

Other Income and Expense

For the three months ended March 31, 2011, the Company's other income amounted to approximately $0.4 million compared to other expenses of $2.7 million for the three months ended March 31, 2010. The comparative decrease of approximately $3.1 million is primarily due a reduction in the expense related to the settlement of derivative financial instruments of approximately $2.4 million in the three months ended March 31, 2011, offset by an increase in the gain on settled derivative financial transaction of $0.5 million in the three months ended March 31, 2011, and an reduction of interest expense of $0.2 million.

Liquidity and Capital Resources

The Company continues to rely on investor capital to fund its growing business. As of March 31, 2011, the Company had total current assets of approximately $4.1 million comprised of cash and cash equivalents, deposits with a clearing organization ($3.9 million), and prepaid expenses and other assets ($0.1 million). This compares with current assets of approximately $1.0 million, comprised of cash and cash equivalents ($0.5 million), a deposit with a clearing organization ($0.4 million), and prepaid expenses and other assets ($0.1 million), all as of December 31, 2010. This increase of $3.1 million in current assets between such dates was primarily due to the proceeds received from the issuance of preferred stock in February and March 2011 offset by cash used in operations and the repayment of certain promissory notes.

The Company’s current liabilities as of March 31, 2011 totaled approximately $5.4 million, comprised primarily of accounts payable and accrued expenses ($4.6 million), and liabilities under derivative financial instruments ($0.7 million). By comparison, current liabilities at December 31, 2010 were approximately $5.4 million, comprised primarily of accounts payable and accrued expenses ($4.9 million), liabilities under derivative financial instruments ($0.5 million), and convertible notes payable to related parties ($0.1 million).

The working capital deficiency at March 31, 2011 was $1.3 million, which decreased by approximately $3.1 million compared to the balance at December 31, 2011 of $4.4 million.

During the three months ended March 31, 2011, the Company raised additional equity capital, net of issuance costs, by the issuance of preferred stock and Common Stock warrants in the aggregate amount of $6.6 million.

Our business is dependent upon the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs primarily through equity and debt financing. Our ability to continue operations and grow our business depends on our continued ability to raise additional funds and generate our targeted revenues. We will need to raise additional funds to satisfy our working capital needs.

The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the three months ended March 31, 2011 and 2010 (in 000’s):

	Three Months Ended March 31, 2011			Three Months Ended March 31, 2010
Net cash (used) in operating activities	$	(6,785	)	$	(2,705	)
Net cash (used in) investing activities	$	(2	)	$	(1	)
Net cash provided by financing activities	$	6,346		$	1,210
Net (decrease) in cash	$	(441	)	$	(1,496	)

Operating Activities - Cash used in operations for the three months ended March 31, 2011 amounted to approximately $6.8 million, consisting primarily of a net loss of approximately $3.1 million, and operating cash used for the transfer of net deposits as a result of capital raised, to our clearing organization in the amount of $3.5 million and payments to reduce our accounts payable and accrued expenses of $ 0.6 million.

Investing Activities - There were no significant changes in net cash provided by, or used in, investment activities for the three months ended March 31, 2011 and 2010. The Company continues to expand and fund its operations primarily through financing activities and revenue generation.

Financing Activities - Net cash provided by financing activities of $6.3 million for the three months ended March 31, 2011, primarily consisted of net proceeds from the issuance of preferred stock and Common Stock warrants of $6.6 million offset by the repayment of certain promissory notes in the amount of $0.3.

Recent Financing Activities

See Note 15 in respect to recent financing.

Going Concern

Our independent auditors have added an emphasis paragraph to their audit opinion issued in connection with the consolidated financial statements of Bonds.com Group, Inc. for the years ended December 31, 2010 and 2009, with respect to the significant doubt that exists regarding our ability to continue as a going concern due to our recurring losses from operations, a working capital deficiency, and our accumulated deficit. We have a history of operating losses since our inception in 2005, and have a working capital deficiency of approximately $1.3 million, an accumulated deficit of approximately $32.8 million and a stockholders deficiency of approximately $2.9 million at March 31, 2011, which together raises substantial 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.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") 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 condensed consolidated financial statements contained in this Amendment No. 1 to the Quarterly Report certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of such financial statements.

Income Taxes

We recognize deferred income taxes for the temporary timing differences between U.S. GAAP and tax basis taxable income. 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. We evaluate and determine on a periodic basis the amount of the valuation allowance required and adjust the valuation allowance as needed. As of December 31, 2010 and 2009, a valuation allowance was established for the full amount of deferred tax assets due to the uncertainty of its realization.

Share-Based Compensation

We measure equity-based compensation awards at the grant date (based upon an estimate of the fair value of the compensation granted) and record to expense over the requisite service period, which generally is the vesting period. Accordingly, we estimate the value of employee stock options using a Black-Scholes option pricing model, where the assumptions necessary for the calculation of fair value include expected term and expected volatility, which are subjective and represent management’s best estimate based on the characteristics of the options granted.

Convertible Promissory Notes and Warrants

We recognize warrants issued in conjunction with convertible promissory notes as a debt discount, which is amortized to interest expense over the expected term of the convertible promissory notes. Accordingly, the warrants are valued using a Black-Scholes option pricing model, where the assumptions necessary for the calculation of fair value include expected term and expected volatility, which are subjective and represent management’s best estimate based on the characteristics of the warrants issued in conjunction with the convertible promissory notes.

Fair Value of Financial Instruments

Under U.S. GAAP, fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.U.S. GAAP establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as Level 1 (unadjusted quoted prices for

identical assets or liabilities in active markets), Level 2 (inputs that are observable in the marketplace other than those inputs classified in Level 1) and Level 3 (inputs that are unobservable in the marketplace). The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of its investment securities and derivative financial instruments.

“Down-Round” Provisions with Rights (Warrants and Conversion Options)

Purchase rights (warrants) associated with certain of our financings include provisions that protect the purchaser from certain declines in the Company’s stock price (or “down-round” provisions). Down-round provisions reduce the exercise price of the warrants (and conversion rate of the convertible notes) 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, all warrants issued are recognized as liabilities at their respective fair values on each reporting date and are marked-to-market on a monthly basis. Changes in value are recorded on our condensed consolidated statement of operations as a gain or loss on derivative financial instruments and investment securities in other income (expense). The fair values of these securities are estimated using a Binomial lattice valuation model.

Revenue Recognition

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

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 4.

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 quarterly 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 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.

Based on the controls evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report, our disclosure controls were not operating effectively to provide reasonable assurance that information required to be disclosed in our periodic reports filed with the SEC 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 and Chief Financial Officer, particularly during the period when our periodic reports are being prepared.

The basis for the determination that our disclosure controls and procedures are not operating effectively at the reasonable assurance level are that (a) we have material weaknesses in our internal control over financial reporting (as disclosed in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the Securities and Exchange Commission on May 5, 2011 (Item 9A. Controls and Procedures) and including the additional material weaknesses disclosed in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission on May 21, 2012), such material weaknesses resulted in the restatement of the Quarterly Reports on Form 10-Q/A for each of the quarterly periods in 2011, and (b) our historical periodic filings have not always been completed on a timely basis.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended March 31, 2011 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.

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 January 12, 2009, the Company learned that Duncan-Williams, Inc. (“Duncan-Williams”) filed a complaint against the Company and its subsidiaries in the United States District Court for the Western District of Tennessee, Western Division, under an alleged breach of contract arising from the Company’s previous relationship with Duncan-Williams. Duncan-Williams is seeking monetary damages for alleged breach of contract, a declaration of ownership relating to certain intellectual property and an accounting of income earned by the Company. It is the Company’s position that Duncan-Williams’ claims are without merit because, among other things, the Company did not breach any contract with Duncan-Williams and any alleged relationship that the Company had with Duncan-Williams was in fact terminated by the Company on account of Duncan-Williams’ breach and bad faith. The Company plans to defend against the claims accordingly. On February 20, 2009, the Company filed a motion to dismiss the complaint on the grounds that, among other reasons, the parties agreed to arbitrate the dispute. On October 23, 2009, the court granted in part the Company’s motion and entered an order staying the action pending arbitration between the

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 May 2, 2011, 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 Financial 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: October __, 2012	BONDS.COM GROUP, INC.

	By:	/s/ John Ryan
	Name:	John Ryan
	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/A - October 12, 2012

Attached files

Bonds.com Group, Inc. Reports