Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Bonds.com Group, Inc.Financial_Report.xls
EX-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)). - Bonds.com Group, Inc.ex32_1.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (RULE 13A-14(A)). - Bonds.com Group, Inc.ex31_1.htm
EX-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)). - Bonds.com Group, Inc.ex32_2.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 (RULE 13A-14(A)) - Bonds.com Group, Inc.ex31_2.htm

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

OR

 

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 S No £

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes S No £

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

  Large accelerated filer £   Accelerated filer £
           
  Non-accelerated filer £   Smaller reporting company S
  (Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No S

 

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: 96,771,340 shares of common stock, par value $0.0001 per share, outstanding as of November 14, 2012.

  

 
 

 

BONDS.COM GROUP, INC.

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Statements made in this Form 10-Q 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 “Securities 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, and words or phrases with similar meaning, such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate”, “approximate”, “plan” or “continue”, or the negative thereof. Forward-looking statements include statements about our anticipated or future business and operations, our business plan and the prospects or outlook for our future business and financial performance. Bonds.com Group, Inc. (“we”, “us”, “our” or 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 current expectations and assumptions. However, forward-looking statements, and such expectations and assumptions, 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 presently anticipated or projected. These factors include adverse economic conditions, entry of new and stronger competitors, inadequate capital, unexpected costs and the other risks, uncertainties and factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our other filings with the Securities and Exchange Commission. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

  

 
 

  

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

BONDS.COM GROUP, INC.

 CONDENSED CONSOLIDATED BALANCE SHEETS

 

  

September 30,  2012

   December 31, 2011 
   (unaudited)     
Assets        
         
Current assets        
Cash  $83,707   $2,405,162 
Receivable from clearing organizations   7,153,325    5,904,030 
Prepaid expenses and other assets   215,568    185,757 
Total current assets   7,452,600    8,494,949 
           
Property and equipment, net   517,001    159,439 
Intangible assets, net   1,349,150    908,850 
Other assets   133,308    60,267 
Total assets  $9,452,059   $9,623,505 
           
Liabilities and Stockholders’ Deficit          
           
Current liabilities          
Accounts payable and accrued expenses  $4,054,893   $5,015,622 
Notes payable, related parties       100,000 
Convertible notes payable, related parties       1,740,636 
Other liabilities   18,261    107,032 
Liability under derivative financial instruments   6,595,429    7,479,000 
Total current liabilities   10,668,583    14,442,290 
Long-term liabilities          
Convertible notes payable, other, net of debt discount   395,309    391,038 
Deferred rent   62,930    25,899 
Total liabilities   11,126,822    14,859,227 
Commitments and contingencies          
Stockholders’ Deficit          
Preferred stock Series A $0.0001 par value; 508,000 authorized; 85,835 and 85,835 issued and outstanding, respectively (aggregate liquidation value of $858 and $858, respectively)   8    8 
Convertible preferred stock Series B $0.0001 par value; 20,000 authorized, 0 and 0 issued and outstanding, respectively (aggregate liquidation value of $0 and $0, respectively)        
Convertible preferred stock Series B-1 $0.0001 par value; 6,000 authorized, 0 and 0 issued and outstanding, respectively (aggregate liquidation value of $0 and $0, respectively)        
Convertible preferred stock Series C $0.0001 par value;10,000 authorized, 10,000 and 10,000 issued and outstanding, respectively (aggregate liquidation value of $6,500,000 and $6,500,000, respectively)   1    1 
Convertible preferred stock Series D $0.0001 par value; 14,500 authorized, 0 and 0 issued and outstanding, respectively (aggregate liquidation value of $0 and $0, respectively)        
Convertible preferred stock Series D-1 $0.0001 par value; 1,500 authorized, 0 and 0 issued and outstanding, respectively (aggregate liquidation value of $0 and $0, respectively)        
Convertible preferred stock Series E $0.0001 par value; 12,000 authorized, 11,831 and 11,831 issued and outstanding, respectively (aggregate liquidation value of $24,439,929 and $23,729,420 respectively)   1    1 
Convertible preferred stock Series E-1 $0.0001 par value; 1,400 authorized, 1,334 and 1,334 issued and outstanding, respectively (aggregate liquidation value of $2,755,715 and $2,675,602 respectively)        
Convertible preferred stock Series E-2 $0.0001 par value; 20,000 authorized, 17,000 and 10,000 issued and outstanding, respectively (aggregate liquidation value of $34,841,381 and $20,056,986, respectively)   2    1 
Common stock $0.0001 par value; 1,500,000,000 authorized; 104,354,190 and 104,354,190 issued and outstanding, respectively   10,435    10,435 
Additional paid-in capital   49,014,272    39,628,080 
Accumulated deficit   (50,699,482)   (44,874,248)
Total stockholders’ deficit   (1,674,763)   (5,235,722)
Total liabilities and stockholders’ deficit  $9,452,059   $9,623,505 

 

See the accompanying notes to the condensed consolidated financial statements.

  

 
 

 

 BONDS.COM GROUP, INC.

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2012
(unaudited)
   2011
(RESTATED)
(unaudited)
   2012
(unaudited)
   2011
(RESTATED)
(unaudited)
 
                 
Revenue  $1,792,694   $1,091,041   $5,748,238   $2,843,462 
                     
Operating expenses                    
Payroll and related costs   2,335,587    1,830,422    5,810,785    5,043,338 
Technology and communications   716,770    706,483    2,155,330    2,253,461 
Rent and occupancy   66,100    184,547    244,334    454,264 
Professional and consulting fees   164,076    423,712    2,027,987    2,224,859 
Marketing and advertising   2,791    26,130    73,651    82,233 
Other operating expenses   347,800    179,067    887,487    466,069 
Clearing and executing cost   189,979    168,229    659,200    363,228 
Total operating expenses   3,823,103    3,518,590    11,858,774    10,887,452 
Loss from operations   (2,030,409)   (2,427,549)   (6,110,536)   (8,043,990)
                     
Other income (expense)                    
Interest expense, net   (8,318)   (94,384)   (55,008)   (299,238)
Gain on settled derivatives               465,952 
Loss on retirement of fixed assets           (18,427)    
Gain on extinguishment of debt           237,857     
Change in value of derivative financial instruments   110,571    (3,330,249)   42,857    (3,243,270)
Other income (expense), net   (4,764)   (99,875)   78,023    9,626 
Total other income (expense)   97,489    (3,524,508)   285,302    (3,066,930)
Loss before income tax benefit   (1,932,920)   (5,952,057)   (5,825,234)   (11,110,920)
Income tax (expense) benefit       12,015        (150,559)
Net loss   (1,932,920)   (5,940,042)   (5,825,234)   (11,261,479)
Preferred stock dividend   (473,133)   (266,697)   (1,411,888)   (1,532,190)
Net loss applicable to common stockholders  $(2,406,053)  $(6,206,739)  $(7,237,122)  $(12,793,669)
Net loss per common share - basic and diluted  $(0.02)  $(0.06)  $(0.07)  $(0.12)
Weighted average number of shares of common stock outstanding   104,354,190    104,354,190    104,354,190    104,354,190 

 

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   Additional Paid-In   Accumulated   Total Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   (Deficit)   (Deficit) 
                             
Balances at December 31, 2011   119,000   $11    104,354,190   $10,435   $39,628,080   $(44,874,248)  $(5,235,722)
Sale of convertible preferred Series E-2 shares, net of offering costs of $ 33,293   7,000    1            6,966,706        6,966,707 
Fair value of Common Stock warrants issued in conjunction with sale of convertible preferred Series E-2 shares                   (2,517,000)       (2,517,000)
Equity compensation expense                   1,300,772        1,300,772 
Issuance of options in settlement of liability for directors fees                   278,000        278,000 
Derivative liability related to warrants whose down round protection expired                    3,357,714        3,357,714 
Net loss                       (5,825,234)   (5,825,234)
                                    
Balances at September 30, 2012 (unaudited)   126,000   $12    104,354,190   $10,435   $49,014,272   $(50,699,482)  $(1,674,763)

  

See the accompanying notes to the condensed consolidated financial statements. 

 

 
 

  

BONDS.COM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   For the Nine Months Ended
September 30,
 
   2012
(unaudited)
   2011
(RESTATED)
(unaudited)
 
Cash Flows From Operating Activities          
Net loss  $(5,825,234)  $(11,261,479)
Adjustments to reconcile net loss to net cash used in operating activities:          
Deferred income taxes       150,558 
Depreciation   115,521    38,317 
Amortization   5,175    132,519 
Share-based compensation   1,300,772    1,233,422 
Gain on settled derivatives       (465,952)
Change in value of derivative financial instruments   (42,857)   3,243,270 
Amortization of debt discount   4,271    7,862 
Exchange offer financing       46,203 
Consulting services for warrants   73,809    140,562 
Gain on extinguishment of debt   (237,857)    
Gain on settlement of common stock due to note holders   (88,771)    
Deferred rent income       (11,429)
Loss on retirement of fixed assets   18,426     
Changes in operating assets and liabilities:          
Receivable from clearing organizations   (1,249,295)   (1,344,908)
Prepaid expenses and other assets   (103,620)   (14,536)
Other assets   (73,041)   6,716 
Accounts payable and accrued expenses   (444,872)   (966,052)
Other liabilities       348,908 
Deferred rent   37,031    (11,705)
           
Net cash used in operating activities   (6,510,542)   (8,727,724)
           
Cash Flows From Investing Activities           
Purchase of property and equipment   (491,509)   (32,209)
Software development costs   (445,475)    
           
Net cash used in investing activities   (936,984)   (32,209)
           
Cash Flows From Financing Activities           
Proceeds received from issuance of preferred stock, net    6,966,707    8,561,375 
Repayments of convertible notes payable, other net   (1,740,636)   (25,000)
Repayments of notes payable, related parties   (100,000)   (200,000)
Repayments of notes payable, other       (82,000)
           
Net cash provided by financing activities   5,126,071    8,254,375 
           
Net decrease in cash   (2,321,455)   (505,558)
Cash, beginning of year   2,405,162    548,030 
           
Cash, end of year  $83,707   $42,472 
           
Supplemental Disclosure of Cash Flow Information           
Cash paid for interest  $409,364   $53,356 
Warrants issued in connection with unit sales  $2,517,000   $ 
Warrants issued at Exchange offer  $   $23,335 
Issuance of  preferred stock for assets acquisition offer  $   $1,072,000 
Settlement of derivative in connection with unit sale and exchange units  $3,357,714   $ 
Accrual of preferred stock dividend (undeclared)  $1,411,888   $ 
 Issuance of  options in settlement of liability for directors fees  $278,000   $ 

 

See the accompanying notes to the condensed consolidated financial statements.

  

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 - Description of Business Summary

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Bonds.com Group, Inc. (a Delaware Corporation), Bonds.com Holdings, Inc. (a Delaware Corporation), Bonds.com, Inc. (a Delaware Corporation), Bonds MBS, Inc. (an inactive Delaware Corporation), and Bonds.com, LLC (an inactive Delaware Limited Liability Company). These entities are collectively referred to as the “Company,” “we,” “us,” and “our”.

 

All material intercompany transactions have been eliminated in consolidation.

 

Basis of Presentation

 

In the opinion of management of the Company, the accompanying unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2012 and the results of its operations and cash flows for the three and nine months ended September 30, 2012 and 2011. The December 31, 2011 condensed consolidated balance sheet was derived from audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for such interim periods are not necessarily indicative of the operating results for the full fiscal year.

 

On April 2, 2012, the Company filed a Form 8-K after determining that the Company’s unaudited, condensed consolidated financial statements for the interim periods ended March 31, June 30 and September 30, 2011, which were included in the Company’s Quarterly Reports on Form 10-Q for such periods, should no longer be relied upon due to accounting errors contained in such financial statements. The Company filed a Form 10 Q/A for each of these quarters on October 12, 2012. The financial information for the interim period ended September 30, 2011 included herein, reflects those adjustments.  

 

Description of Business

 

Bonds.com, Inc. a Financial Industry Regulatory Authority (“FINRA”) registered broker-dealer, offers corporate bonds, through its proprietary electronic trading platforms, via its www.Bondpro.com website, and other electronic interfaces.

    

Bonds.com, Inc., commenced trading on it BondsPRO electronic platform during 2010 as it reduced and discontinued its support and use of BondStation, its prior trading platform. 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, the Company’s model allows us to generate revenue through mark-ups or mark-downs on secondary market securities.

   

Note 2 - Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Revenue Recognition

 

The Company executes transactions between its clients and liquidity providers.  It acts as an intermediary (riskless-principal) in these transactions by serving as a trading counterparty to both the buyer and the seller in matching back-to-back trades, which are then settled through its clearing firm.  Securities transactions and the related revenues and expenses are recorded on a trade-date basis.  Interest income is recorded on the accrual basis.

 

 Software Development Costs

 

Costs for software developed for internal use are accounted for through the capitalization of certain costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheet. Capitalized software development costs are amortized over three years.

 

Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. At September 30, 2012, the Company had $441,366 in capitalized software development of which $269,719 was capitalized during the quarter. The recently capitalized software will be placed in service in stages beginning in 2014 and the Company will begin amortizing over the software’s estimated economic life. For the three and nine months ended September 30, 2012, amortization expense for recently capitalized software development was zero.

 

Fair Value Financial Instruments

 

The carrying values of the Company’s cash and cash equivalents, accounts payable and accrued expenses approximate their fair values based on the short-term nature of such items. The carrying values of notes payable approximate their fair values based on applicable market interest rates. Investments and the liability under derivative instruments are carried at fair value as described in Note 4.

 

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 carry forwards 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 records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. 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 2009, 2010, and 2011 tax year remains subject to examination by taxing authorities. The Company has determined that it does not have any significant uncertain tax positions at September 30, 2012.

 

Recent Issued Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a significant effect on the accompanying financial statements.

 

Note 3 - Going Concern

 

Since its inception, the Company has generated limited revenues and has an accumulated deficit of approximately $50,699,000 at September 30, 2012, used approximately $6,511,000 of cash in operations for the nine months ended September 30, 2012 and at September 30, 2012 had a stockholders’ deficiency of approximately $1,675,000 and a working capital deficiency of approximately $3,216,000. Operations have been funded using proceeds received from the issuance of common and preferred stock and the issuance of notes to related and unrelated parties.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company raised $17,000,000 of new capital funded in December 2011 ($10,000,000), January 2012 ($300,000) and June 2012 ($6,700,000). The Company plans to continue to grow its operations through the implementation of the business plan and when necessary through raising additional capital.

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the resolution of this contingency.

 

Note 4 - Fair Value of Financial Instruments

 

Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements.

 

The fair value hierarchy 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, dealers, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

 

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

   

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 value 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.  Previously, 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 determined that the historical prices of its publicly-traded common stock no longer was the best proxy to estimate the Company’s volatility.  Commencing in the quarter ended September 30, 2011, the Company determined that the prior methodology for measuring volatility of its common stock was no longer the best estimate of volatility. The Company began to measure volatility using a blended weighted average of the volatility rates for a number of similar publicly-traded companies along with the Company’s historical volatility.

 

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.

 

 
 

   

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On August 2, 2012 and September 4, 2012, an 18 month down-round protection provision expired in certain Common Stock Warrants to purchase an aggregate of 130,714,289 shares of the Company’s common stock. As a result, the Company revalued such warrants on the expiration date and recorded a gain of $40,357 on the derivative liability which is included in changes in value of derivative financial instruments, in the accompanying consolidated statement of operation.  The warrants were reclassified to equity, fair valued of $2,954,143 (see note 10).

 

Also, on August 2, 2012, an 18 month down-round protection provision expired in certain Series A Participating Preferred Warrants. These warrants convert to 17,857,143 shares of the Company’s common stock.  As a result, the Company revalued such warrants on the expiration date and recorded a gain of $5,357 on derivative liability which is included in changes in value of derivative financial instruments, in the accompanying consolidated statement of operation.  The warrants were reclassified to equity, fair valued of $403,571 (see note 10).

 

Level 3 Assets and Liabilities

 

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

  

Fair values of assets measured on a recurring basis at September 30, 2012 and December 31, 2011 are as follows:

 

       Quoted Prices in Active Markets for Identical Assets / Liabilities   Significant Other Observable Inputs   Significant Unobservable Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
September 30, 2012                
                 
Liabilities                
Derivative financial instruments  $6,595,429   $   $   $6,595,429 
Total liabilities measured at fair value on a recurring basis  $6,595,429   $   $   $6,595,429 
                     
December 31, 2011                    
                     
Liabilities                    
Derivative financial instruments  $7,479,000   $       $7,479,000 
Total liabilities measured at fair value on a recurring basis  $7,479,000   $   $   $7,479,000 

 

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 September 30, 2012:

 

   Fair Value of Derivative Liabilities 
Balance – December 31, 2011  $7,479,000 
Changes in fair value included in operations   (42,857)
Expiration of down round provision   (3,357,714)
Issuances   2,517,000 
Balance - September 30, 2012  $6,595,429 

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The change in value of derivative financial instruments included in the September 30, 2012 and 2011 statements of operation are related to Level 3 instruments held.

 

 Quantitative information about Level 3 Fair Value Measurements

    Fair Value at 9/30/12   Valuation Technique   Unobservable Inputs   Range     (Weighted Average)    
                           
Derivative liability   $ 6,595,429   Binomial lattice pricing model   Market price   $0.03     $0.03    
               Probability strike price   $0.03 - $0.07     $0.0635    
              Expected term/life (years)     3.73 - 4.69       4.32    
              Dividend yield     0.00%       0.00%    
               Expected volatility     182.40% - 189.24%       186.47%    
              Risk-free rate for expected life     0.47% - 0.62%       0.52%    
                                 
The weighted-average fair value of warrants outstanding for the nine months ended September 30, 2012 was $0.024.  
                                   

Note 5 - Intangible Assets

 

Intangible assets consisted of the following at September 30, 2012: 

 

   September 30, 2012 
   Gross   Accumulated Amortization   Net 
Non-amortizing intangible assets:            
Domain name (www.bonds.com)  $850,000        $850,000 
Broker dealer license   50,000         50,000 
    900,000         900,000 
Amortizing intangible assets:               
Software   428,606    (420,822)   7,784 
Capitalized software development costs   441,366        441,366 
Capitalized website development costs   196,965    (196,965)   —  
Other   6,529    (6,529)   —  
Retirement of intangible assets   (611,016)   611,016    —  
Total intangible assets   462,450    (13,300)   449,150 
Intangible assets, net  $1,362,450   $(13,300)  $1,349,150 

 

Amortization expense for the three and nine months ended September 30, 2012 was $1,757 and $5,175, respectively, and for the three and nine months ended September 30, 2011 was $46,532 and $132,519, respectively.  

 

Intangible assets of $924,061 resulting from the acquisition of Beacon Capital Strategies, Inc. in February 2011, of which $99,000 is goodwill, net of amortization of $147,939, were abandoned and charged to operations in the fourth quarter of 2011.

 

During the quarter, the Company retired $611,016 of software, capitalized website devleopment costs and other intangibles that were fully amortized and no longer in use.

 

The following is a schedule of estimated future amortization expense of intangible assets as of September 30, 2012:

 

Year Ending December 31,      
2012 (remaining three months)   $ 1,758  
2013     4,198  
2014     89,652  
2015     88,744  
2016 and after     264,798  
    $ 449,150  

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 6 - Notes Payable, Related Parties

 

The following is a summary of related party notes payable at September 30, 2012 and December 31, 2011:

 

   2012   2011 
Note payable held by Receiver  $   $100,000 
Total       100,000 
Less: current portion       (100,000)
Long-term portion  $   $ 

 

Note payable held by Receiver

 

Interest expense recognized on related party notes payable for the three months ended September 30, 2012 and 2011 was $0 and $2,300, respectively, and for the nine months ended September 30, 2012 and 2011 was $2,725 and $9,575, respectively.

 

Note 7 - 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 September 30, 2012 and December 31, 2011:

 

Related Parties  2012   2011 
Convertible promissory note held by the Receiver  $   $1,740,636 
Total Related Parties       1,740,636 
           
Non-Related Parties          
Convertible promissory notes payable   400,000    400,000 
Less: unamortized debt discount   (4,691)   (8,962)
Total Non-Related Parties   395,309    391,038 
           
Total   395,309    2,131,674 
Less: current portion       (1,740,636)
Long-term portion  $395,309   $391,038 

 

The convertible promissory notes are secured by all of the assets of Bonds.com Group, Inc. and Bonds.com Holdings. Inc. pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008, between the Company and the holders of such notes, as amended on February 3, 2009, and as amended on May 28, 2010 (the “Security Agreement”).

 

On April 18, 2012, the Company paid the Receiver an aggregate of $2,250,000 in full settlement of the termination of any rights related to the contingent performance shares (approximately 3,257,578 shares of Common Stock) and carrying amount of the convertible note ($1,740,636) and notes payable ($100,000) plus accrued interest ($647,221) which resulted in the Company recording a gain of $237,857 on the extinguishment of the debt which is included in other income (expense), in the accompanying consolidated statement of operations.  In addition, the Company had an obligation to pay the Receiver $5,000 in consideration for the repurchase of 7,582,850 shares of common stock at such time as it may lawfully repurchase such shares. This repurchase was completed on October 10, 2012.

 

During the three months ended September 30, 2012 and 2011, the Company recognized $1,426 and $2,115 in interest expense related to the amortization of the debt discount associated with the warrants, respectively; and during the nine months ended September 30, 2012 and 2011, the Company recognized $4,271 and $7,862, respectively.

 

During the three months ended September 30, 2012 and 2011, the Company also recognized $10,222 and $91,377 in interest expense on the Convertible Promissory Notes held by related parties and non-related parties, respectively; and during the nine months ended September 30, 2012 and 2011, the Company also recognized $83,147 and $271,979, respectively.

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 8 - Commitments and Contingencies

 

Operating Leases

 

The Company leases office facilities (in New York, N.Y.), 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 September 30, 2012:

 

Year Ending December 31,      
2012 (remainder of year)     325,781  
2013     387,284  
2014     239,671  
2015     21,674  
Total minimum payments required   $ 974,410  

  

The Company had an office in Florida, which has been closed, but the Company is still obligated to pay rent through December 31, 2012.  The full amount due under this lease was charged to operations in 2011 and payments of approximately $348,000 in 2012, under the lease, are not included in rent expense for 2012.

 

Rent expense for all operating leases for the three months ended September 30, 2012 and 2011 was $66,100 and $184,547, respectively and for the nine months ended September 30, 2012 and 2011 was $244,334 and $454,264, 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 the Company 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.

 

 Litigation

  

On January 12, 2009, the Company learned that Duncan-Williams, Inc. (“Duncan-Williams”) filed a complaint against the Company in United States District Court for the Western District of Tennessee, Western Division, under an alleged breach of contract.  Duncan-Williams is seeking monetary damages, a declaration of ownership relating to certain intellectual property and accounting of income earned by the company.  The Company filed a motion to dismiss the complaint.  The Court granted in part the Company’s motion and entered an order staying the action pending arbitration between the parties.   Subsequently, on October 11, 2012, the Company and Duncan-Williams settled this dispute and signed a Settlement Agreement and Release. The settlement amount was deemed immaterial by Management of the Company.

 

Note 9 - Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Management believes the financial risks associated with this financial instrument is 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.

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 10 - Stockholders’ Equity

 

Description of Authorized Capital

 

Preferred Stock activity for the nine months ended September 30, 2012 is as follows (there were no shares of Series B, B-1, D and D-1 outstanding):

 

    Series A     Series C     Series E     Series E-1     Series E-2  
Balance at December 31, 2011     85,835       10,000       11,831       1,334       10,000  
Issued       —         —         —         —       7,000  
Balance at September 30, 2012     85,835       10,000       11,831       1,334       17,000  

  

Issuances

 

On January 24, 2012, the Company sold an aggregate of 3 units for a total purchase price of $300,000, with each unit comprised of (a) warrants to purchase 1,428,572 shares of Common Stock and (b) 100 shares of Series E-2 Preferred.   The Company allocated $105,000 and $195,000 of its proceeds to the warrants and Series E-2 Preferred, respectively, using the residual method.  Such warrants contain down-round protection provisions for the holders and are therefore considered a derivative liability.  Such warrants have been valued using a Binomial Lattice Model.  The value of each warrant was estimated to be $0.0245 per warrant utilizing the following assumptions, expected volatility of 167.79%, risk-free interest rate of 0.92%, expected term of 5 years, weighted average probability strike price of $0.0635 and a market price of $0.03.  The Company analyzed the effective conversion feature of the Series E-2 Preferred and determined that there was no beneficial conversion features upon the issuance.

 

On June 8, 2012, the Company sold an aggregate of 67 units for a total purchase price of $6,700,000, with each unit comprised of (a) warrants to purchase 1,428,572 shares of Common Stock and (b) 100 shares of Series E-2 Preferred.   The Company allocated $2,412,000 and $4,288,000 of its proceeds to the warrants and Series E-2 Preferred, respectively, using the residual method.  Such warrants contain down-round protection provisions for the holders and are therefore considered a derivative liability.  Such warrants have been valued using a Binomial Lattice Model.  The value of each warrant was estimated to be $0.0252 per warrant utilizing the following assumptions, expected volatility of 180.74%, risk-free interest rate of 0.71%, expected term of 5 years, weighted average probability strike price of $0.0635 and a market price of $0.03.  The Company analyzed the effective conversion feature of the Series E-2 Preferred and determined that there was no beneficial conversion features upon the issuance.

 

Common Stock Purchase Warrants

 

Warrant activity for the nine months ended September 30, 2012 is as follows:

 

   Numbers of Warrants   Weighted-Average Exercise Price 
Outstanding at December 31, 2011   358,436,977   $0.08 
Issued   100,000,001    0.06 
Cancelled or expired        
Exercised        
Outstanding at September 30, 2012   458,436,978   $0.08 
           
Weighted average grant date fair value of warrants granted during the nine months ended September 30, 2012       $0.025 

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

There were no consulting expenses for the three months ended September 30, 2012 and 2011. For the nine months ended September 30, 2012 and 2011, the Company recognized $73,809 and $221,514 in consulting expenses relating to the warrants awarded, respectively.

 

On August 2, 2012 and September 4, 2012, the 18 month down round protection of the warrants expired, which resulted in the reset of the exercise price of the warrants to the base floor price of $0.07.  The Company revalued the warrants on the expiration dates using a Binomial Lattice Model.  The value of each warrant was estimated to be $0.0226 per warrant utilizing the following assumptions, expected volatility of ranging from 188.58% to 189.02%, risk-free interest rate ranging from 0.46% to 0.47%, expected term of 3.5 years, strike price of $0.07 and a market price of $0.03.  As a result, the warrants were reclassified as equity within the Company’s consolidated financial statements, at an aggregate fair value of $2,954,143.  In addition, the Company and recorded a gain of $40,357 on the derivative liability which is included in changes in value of derivative financial instruments, in the accompanying consolidated statement of operations.

 

Series A Participating Preferred Warrants

 

Series A Preferred warrant activity for the nine months ended September 30, 2012 is as follows:

 

   Numbers of Series A Preferred Warrants   Weighted-Average Exercise Price 
Outstanding at December 31, 2011   178,575   $6.10 
Issued        
Cancelled or expired        
Exercised        
Outstanding at September 30, 2012   178,575   $7.00 
           
Weighted average fair value granted during the nine months ended September 30, 2012       $ 

 

On August 2, 2012, the 18 month down round protection of the Series A Preferred warrants expired, which resulted in the reset of the exercise price of the Series A Preferred warrants to the base floor price of $7.00 ($0.07 in common stock equivalent).  The Company revalued the warrants on the expiration dates using a Binomial Lattice Model.  The value of each warrant was estimated to be $0.0226 per warrant utilizing the following assumptions, expected volatility of 188.58%, risk-free interest of 0.46%, expected term of 3.5 years, strike price of $0.07 and a market price of $0.03.  As a result, the warrants were reclassified as equity within the Company’s consolidated financial statements, at an aggregate fair value of $403,571.  In addition, the Company and recorded a gain of $5,357 on the derivative liability which is included in changes in value of derivative financial instruments, in the accompanying consolidated statement of operations.

  

Note 11 - Loss Per Share

 

Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted 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 shares outstanding at September 30, 2012 and 2011, respectively, include the following numbers of common shares issuable under the instruments indicated 478,150,429 and 247,712,236 Common Stock and Series A Preferred warrants, 137,351,527 and 77,928,618 Common Stock underlying the Company’s stock options, 7,682,540 and 65,500,763 convertible notes payable and 488,898,138 and 294,120,251 shares of preferred stock all which have the ability to be converted to common stock.

 

At September 30, 2012 and December 31, 2011, the Company had undeclared cumulative dividends in arrears of approximately $1,412,000 and $130,000, respectively.

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 12 - Net Capital and Reserve Requirements

 

Bonds.com Inc. is subject to SEC Uniform Net Capital Rule 15c3-1.  Bonds.com Inc. computes its net capital under the basic method permitted by the rule, which requires that the minimum net capital be equal to the greater of $100,000 or 6-2/3% of aggregate indebtedness.

 

The Company is exempt from the SEC Rule 15c3-3 pursuant to the exemption provision under subparagraph (k)(2)(ii) thereof and, therefore, is not required to maintain a “Special Reserve Bank Account for Exclusive Benefit of Customers”.

 

Net capital positions of Bonds.com Inc. were as follows at September 30, 2012:

 

   2012 
Ratio of aggregate indebtedness to net capital   0.31 to 1 
Net capital  $5,443,810 
Required net capital  $112,200 

 

Bonds.com Inc. was examined by FINRA for the period September 2008 through June 2010.  In June 2011, FINRA issued its Examination Report that identified some exceptions.  Two of these exceptions were referred to FINRA Enforcement for further review.  They are: i) violations emanating from the expense-sharing agreement that the Company has with Bonds.com Inc., and related net capital issues;  and, ii) objections to a revenue-sharing agreement with another broker-dealer that raises mark-up issues.  As of the date of this report, Bonds.com Inc. is continuing to respond to requests from FINRA Enforcement.  The outcome of this matter is currently unknown and, therefore, there has been no accrual for any related liability pertaining to this matter as of September 30, 2012.

 

Bonds.com Inc. is currently undergoing an examination by FINRA for 2011. Bonds.com Inc. received an initial Examination Report from FINRA on September 12, 2012 to which a response was sent on October 17, 2012. As of the date of this report, the examination is ongoing.

 

Note 13 - Share-Based Compensation

 

The Company has two equity-based compensation plans, 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 from the date of its adoption. The 2006 Plan and 2011 Equity Plan provides for a total of 13,133,825 and 200,000,000 shares, respectively, to be allocated and reserved for the purposes of offering non-statutory stock options to employees, consultants and non-employee directors and incentive stock options to employees.   If any option expires, terminates or is terminated or canceled for any reason prior to exercise in full, the shares subject to the unexercised portion shall be available for future options granted under the Plan.  Options become exercisable over various vesting periods depending on the nature of the grant. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans). 

 

The exercise price of both incentive and non-statutory options may not be less than 100% of the fair market value of the Common Stock on 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 fair market value of the shares of Common Stock.  As of September 30, 2012, the Company had 35,750,158 shares of Common Stock available for the future grant of options under the 2011 Equity Plan, and 2,245,287 shares of Common Stock available for the future grant of options under the 2006 Plan.

 

Stock option activity related to options granted to employees and non-employees under the Plans and related information for the nine months ended September 30, 2012 is provided below:  

 

   Shares   Weighted-Average Exercise Price   Weighted-Average Remaining Contractual Term (Years)   Aggregate Intrinsic Value 
Outstanding at January 1, 2012   57,523,378   $0.12         
Granted   118,650,002    0.08         
Forfeited   (1,035,000)   0.08         
Exercised                
                     
Outstanding at September 30, 2012   175,138,380   $0.10    6.24     
                     
Vested or expected to vest   175,138,380   $0.10    6.24     
                     
Options exercisable at September 30, 2012   86,125,577   $0.11    6.32     

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Stock option activity related to options granted outside the Plans to both employees and non-employees and related information for the nine months ended September 30, 2012 is provided below:

 

   Shares   Weighted-Average Exercise Price   Weighted-Average Remaining Contractual Term (Years)   Aggregate Intrinsic Value 
Outstanding at January 1, 2012   58,965,534   $0.13         
Granted                
Forfeited                
Exercised                
                     
Outstanding at September 30, 2012   58,965,534   $0.13    5.65     
                     
Vested or expected to vest   58,965,534   $0.13    5.65     
                     
Options exercisable at September 30, 2012   51,225,951   $0.14    5.69     

 

The Company granted an aggregate of 58,965,534 options 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 and non-employee directors during the nine months ended September 30, 2012 and 2011 was $0.03 and $0.03, respectively.  Options granted to non-employee directors during the nine months ended September 30, 2012 with a fair value of $278,000 were for partial payment of previously accrued director’s compensation of $271,000 and $146,000 for the years ended December 31, 2011 and 2010, respectively, have a three-year life, and were fully vested at the grant date. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions:

 

     September 30
    2012     2011
Dividend yield            
Expected volatility     195.59% - 205.34%       66.00% - 168.16%  
Risk-free interest rate     0.27% - 0.79%       1.04% - 2.10%  
Expected life (in years)     2 - 5       4 - 5  
Fair value of common stock     $0.03       $0.03  

 

The weighted-average expected life for the options granted 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 prior to July 1, 2011 was based on historical volatility over the same number of years as the expected life, prior to the option grant date. Beginning July 1, 2011, expected volatility was based on an average of the Company’s volatility plus comparable companies over the same number of years as the expected life.

 

As of September 30, 2012, there was approximately $2,449,759 of unrecognized compensation cost related to options issued of which approximately $1,989,671 will be allocated to Bonds.com, Inc.  This amount is expected to be recognized over a weighted-average 2.66 years.

 

There were no options exercised during the nine months ended September 30, 2012.  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.

 

 
 

 

BONDS.COM GROUP, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three months ended September 30, 2012 and 2011 the non-cash compensation expense relating to option grants amounted to $283,415 and $584,113, respectively and for the nine months ended September 30, 2012 and 2011, at $1,300,772 and $1,233,422, respectively.

 

Note 14 - 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.

 

In accordance with certain provisions of the Tax Reform Act of 1986 a change in ownership of greater than fifty percent (50%) of a corporation within a three (3) year period will place an annual limitation on the corporation’s ability to utilize its existing tax carryforward losses. The Company’s management has not performed this analysis, but based on the various issuances of equity during the last two fiscal years, the Company believes that the utilization of its net operating loss carryforwards will be limited under Section 382 of the Internal Revenue Code.

 

Note 15 - Related Parties Transactions

 

In the nine months ended September 30, 2012 and 2011, one customer, who is also an investor in the Company, represented approximately 8.4% and 13.3%, respectively, 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 Company’s financial condition and results of operations, as well as our liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

 

Executive Overview

  

The Company, through its indirect, wholly-owned subsidiary Bonds.com, Inc. (“Bonds.com”) operates an electronic trading platform under the name BondsPRO. This platform offers large institutional investors an alternative trading system to trade odd-lot fixed-income securities. Our customers 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, API based order submission, and user portfolio specific market views. The platform supports investment grade and high yield corporate bonds and 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. As a registered broker-dealer, Bonds.com acts as riskless principal on all trades which allows our customers to trade anonymously on the platform. Our customer base includes major corporate bond dealers in the odd-lot market and all market makers and liquidity providers are eligible to participate on our platform for free. 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 on those aggressing on the platform. BondsPRO provides a direct connection between our institutional customers and the trading desks at our participating broker-dealers, which we expect will reduce sales and marketing costs, and eliminate layers of intermediaries between dealers and end investors.

 

The Company has been executing its current business plan for over two years. The rate of growth of new customers has contributed to the significant year over year growth in trades and revenues. The acceptance of our business model has been strong and we continue to be encouraged by our growth and path towards profitability. We are focused on the demands of the marketplace as a result of the changing economic, regulatory and technology climate with a view to providing a trading platform that meets these demands. Our goal is to provide our institutional customers a state of the art technology platform, easily accessible and customizable to their technology infrastructure and that allows them efficient access to our large pool of liquidity.

 

Technology

 

We rely on a Third Party for the technology and hardware that operate our BondsPRO trading platform. Disruptions in the services provided by third parties to us, including their inability or unwillingness to continue to license products that are critical to the success of our business at favorable terms or at all, could have a material adverse effect on our business, financial condition and results of operations.

 

The electronic fixed income trading market is experiencing a period of both rapid growth and wide exposure.  The advances made in the electronic equity markets have attracted the attention of fixed income market participants, technologists and opportunistic investors for many years.  As our operation continues to grow, we are faced with the need to develop new businesses and enhance existing offerings. We will be required to stay ahead of the curve with hardware, software development, and networking capabilities, both internally and through vendor relationships.  This will require expenditures on all fronts, including on internal development, and the potential to outsource needs or license technology.

 

Furthermore, as the electronic fixed income market evolves, we will be faced with increasingly complicated solution requirements, which will require more sophisticated technology solutions.  Key to capturing, maintaining and growing market share will be the Company’s ability to deliver advanced technology solutions to our growing customer base in a cost efficient and timely manner.  As a result, we are committed to allocating the appropriate financial resources to this endeavor.

 

Our biggest investment is in our people and relationships we build with our customers. We seek to attract high caliber professionals by offering competitive compensation packages that include share based compensation aligning their interests with that of the Company.

 

Financial Results of Operations

 

Earnings Overview

 

As the Company continues on its growth path and implements its business plan we continue to incur operating losses. For three months ended September 30, 2012, we incurred a net loss of $1.9 million, which was $4.0 million less than the net loss of $5.9 million incurred for the period ended September 30, 2011. The change was due to an increase in gross revenues, offset by fluctuations within the Company’s operating expense, primarily increases in payroll and related costs and decreases in professional and consulting fees. Additionally, there was a difference of $3.2m in the unrealized change in value of the Company’s derivative financial instruments.

 

 
 

 

For nine months ended September 30, 2012, we incurred a net loss of $5.8 million, which was $5.4 million less than the net loss of $11.2 million incurred for the period ended September 30, 2011. The change was due to an increase in gross revenues, offset by fluctuations within the Company’s operating expense, primarily increases in payroll and related costs and other operating expenses and decreases in technology and communications and professional and consulting fees. Additionally, there was a difference of $3.2 million in the unrealized change in value of the Company’s derivative financial instruments.

 

Revenue

 

The Company generates substantially all of its revenue through its riskless principal trading activity. Customers who initiate trades 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 64% to approximately $1.8 million from $1.1 million for the three months ended September 30, 2012 compared to the same period in 2011. 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.

 

Total revenue increased by 102% to approximately $5.7 million from $2.8 million for the nine months ended September 30, 2012 compared to the same period in 2011. 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, clearing costs, and professional and consulting fees. Payroll expenses in 2012 and 2011 include salaries, sales commissions, bonuses and employee benefits and payroll taxes. In addition there are share based compensation expenses 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 sales, marketing and other consulting related costs.

 

Operating expenses increased 9%, or approximately $0.3 million to $3.8 million from $3.5 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. The increase was due to fluctuations in expense of i) $0.5 million increase in payroll and related costs due mainly to increased salary and benefits associated with added headcount across the Company, 35 as of September 2012 compared to 27 for the same period in 2011, increase in annual performance bonus, offset by a decrease in deferred equity compensation and ii) $0.3 million decrease in professional and consulting fees pertaining to a decline in legal and investment banking fees.

 

Operating expenses increased 9%, or approximately $1.0 million, to $11.9 million from $10.9 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. The increase was due to fluctuations in expense of i) $0.8 million increase in payroll and related costs due mainly to increased salary and benefits associated with added headcount across the Company, 35 as of September 2012 compared to 27 for the same period in 2011, increase in annual performance bonus, and increase in deferred equity compensation, ii) $0.3 million increase in clearing and executing costs due to increased trading activity, iii) $0.2 million increase in travel and entertainment within other operating expenses due to the increased sales effort, iv) $0.1 increase in settlement fees within other operating expenses, v) $0.2 million decrease in professional and consulting fees pertaining to a decline in legal and investment banking fees, vi) decrease of $0.2 million in rent and occupancy due to closure of the Company’s former Boca Raton, Florida office, and vii) $0.1 million decrease in technology and communications.

  

Other Income and (Loss)

 

For the three months ended September 30, 2012, the Company’s other income amounted to $0.1 million compared to other loss of $3.5 million for the three months ended September 30, 2011. The change is primarily due to the difference of $3.4 million in the unrealized change in value of the Company’s derivative financial instruments.

 

For the nine months ended September 30, 2012, the Company’s other income amounted to $0.3 million compared to other loss of $3.3 million for the nine months ended September 30, 2011. The change is primarily due to the difference of $3.2 million in the unrealized change in value of the Company’s derivative financial instruments.

 

 
 

 

 Liquidity and Capital Resources

 

The Company continues to rely on investor capital to fund its growing business. As of September 30, 2012, the Company had total current assets of approximately $7.5 million, comprised of cash and cash equivalents ($0.1 million), receivables from clearing organizations ($7.2 million), and prepaid expenses and other assets ($0.2 million). This compares with current assets of approximately $8.5 million as of December 31, 2011, comprised of cash and cash equivalents ($2.4 million), receivables from clearing organizations ($5.9 million), and prepaid expenses and other assets ($0.2 million). This decrease of $1.0 million in current assets between such dates was primarily due to utilization of cash used in ongoing operations.

 

The Company’s current liabilities as of September 30, 2012 totaled approximately $10.7 million, comprised primarily of accounts payable and accrued expenses ($4.1 million), and liabilities under derivative financial instruments ($6.6 million).  By comparison current liabilities at December 31, 2011 were approximately $14.4 million, comprised primarily of accounts payable and accrued expenses ($5.0 million), liabilities under derivative financial instruments ($7.5 million), and convertible notes payable to related parties ($1.7 million).  

 

The working capital deficiency decreased approximately 46%, or $2.7 million to $3.2 million at September 30, 2012 from $5.9 million at December 31, 2011.

 

During the nine months ended September 30, 2012, the Company raised additional equity capital, net of issuance costs, by the issuance preferred stock and common stock warrants in the aggregate amount of $7.0 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 anticipate that 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 nine months ended September 30, 2012 and 2011 (in 000’s):

 

   Nine Months Ended
September 30, 2012
   Nine Months Ended
September 30, 2011
 
Net cash (used) in operating activities  $(6,510)  $(8,728)
Net cash (used in) investing activities  $(937)  $(32)
Net cash provided by financing activities  $5,126   $8,254 
Net (decrease) in cash  $(2,321)  $(506)

 

Operating Activities - Cash used in operations for the nine months ended September 30, 2012 amounted to approximately $6.5 million, consisting primarily of a net loss of approximately $5.8 million adjusted for non-cash related items of $1.2 million, and a reduction in cash at our clearing organization in the amount of $1.3 million and payments to reduce our accounts payable and accrued expenses of $0.6 million.

 

Investing Activities – Cash used in investing activities of $0.9 million for the nine months ended September 30, 2012, primarily consisted of leasehold improvements associated with our new headquarters and capitalized software costs associated with the development of the new platform.

 

Financing Activities - Net cash provided by financing activities of $5.1 million for the nine months ended September 30 2012, primarily consisted of net proceeds from the issuance of preferred stock and common stock warrants of $6.9 million offset by the repayment of certain promissory notes payable of $1.8 million.

 

Recent Financing Activities

 

In December 2011, we sold units of convertible preferred stock and common stock warrants in the amount of $10.0 million to two existing and one new institutional investor. This investor group committed to additional funding of $6.6 million conditioned upon the achievement of certain performance metrics by the Company in the first half of 2012. This additional funding was closed and received in June 2012, after the investors waived the performance metrics condition. This cash was raised primarily for the purpose of covering general operating costs of the Company.

 

 
 

 

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, 2011 and 2010, 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 $3.2 million, an accumulated deficit of approximately $50.7 million and a stockholders deficiency of approximately $1.7 million at September 30, 2012, which together raises doubt about the Company’s ability to continue as a going concern. Our ability to continue as a going concern will be determined by our ability to sustain a successful level of operations and to continue to raise capital from debt, equity and other sources.

  

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 Financial Statements contained in this Quarterly Report certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the financial statements.

 

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 September 30, 2012 and 2011, 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.

  

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 promissory 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 such 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

 

None, other than leases.

 

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

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls were not operating effectively to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (a) recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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, 2011 filed with the Securities and Exchange Commission on May 21, 2012 (Item 9A. Controls and Procedures)), 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 control over financial reporting in the quarter ending September 30, 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

 
 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

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 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 may have, if any, to seek arbitration.

 

On December 3, 2010, 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 based on the Company’s alleged failure to move forward with arbitration. On December 20, 2010, 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. Subsequently, on October 11, 2012, the Company and Duncan-Williams settled this dispute and signed a Settlement Agreement and Release. The settlement amount was deemed immaterial by Management of the Company.

 

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, 2011, as filed with the Securities and Exchange Commission on May 21, 2012, for a detailed discussion of risk factors applicable to us.

 

 
 

  

Item 2. 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)).
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 
 

 

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: November 14, 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)