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EXCEL - IDEA: XBRL DOCUMENT - Bonds.com Group, Inc.Financial_Report.xls


U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

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)   
 
 
529 Fifth Avenue, 8th Floor, New York, NY 10017
 
(Address of principal executive offices)
 
 
(212) 946-3998
 
(Registrant’s telephone number, including area code)
 
 
1515 South Federal Highway, Suite 212, Boca Raton, FL 33432
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x   No  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  o   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 $0.001 per share, outstanding as of August 10, 2011.
  
 
 

 


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.

 
2

 

PART I – FINANCIAL INFORMATION
 
 Item 1.  Financial Statements.
 Bonds.com Group, Inc.
Condensed Consolidated Balance Sheet
 
   
June 30,
2011
   
December 31, 2010
 
Assets
 
(unaudited)
       
             
Currents assets
           
Cash and cash equivalents
 
$
38,308
   
$
548,030
 
Investment securities
   
1,984
     
2,527
 
Deposits with clearing organizations
   
3,447,312
     
373,128
 
Deferred tax asset
   
2,306
     
2,306
 
Prepaid expenses and other assets
   
121,398
     
89,700
 
Total current assets
   
3,611,308
     
1,015,691
 
                 
Property and equipment, net
   
89,488
     
83,167
 
Intangible assets, net
   
1,826,772
     
939,759
 
Goodwill
   
99,000
     
-
 
Other assets
   
75,981
     
66,983
 
Deferred tax asset
   
10,040
     
172,614
 
Total assets
 
$
5,712,589
   
$
2,278,214
 
                 
Liabilities and Stockholders' Deficit
               
                 
Current liabilities
               
Accounts payable and accrued expenses
 
$
3,779,631
   
$
4,867,861
 
Notes payable, other
   
-
     
82,000
 
Convertible notes payable, other, net of debt discounts
   
650,000
     
24,243
 
Preferred stock dividend payable
   
336,745
     
-
 
Liability under derivative financial instruments
   
3,488,242
     
464,844
 
Total current liabilities
   
8,254,618
     
5,438,948
 
                 
Long-term liabilities
               
Notes payable, related parties
   
100,000
     
300,000
 
Convertible notes payable, other, net of debt discount
   
1,232,472
     
1,227,486
 
Convertible notes payable, related parties
   
1,740,636
     
2,390,636
 
Deferred rent
   
33,702
     
41,506
 
Total liabilities
   
11,361,428
     
9,398,576
 
                 
Commitments and contingencies
               
                 
Stockholders' Deficit
               
Preferred stock Series A $0.0001 par value; 1,000,000 authorized;
         
85,835 and 46,939 issued and outstanding, respectively
   
8
     
5
 
Convertible preferred stock Series B $0.0001 par value; 20,000 authorized, 0 and 20,000 issued and outstanding, respectively
   
-
     
2
 
Convertible preferred stock Series B-1 $0.0001 par value; 6,000 authorized, 0 and 6,000 issued and outstanding, respectively
   
-
     
1
 
Convertible preferred stock Series C $0.0001 par value; 10,000 authorized, 10,000 and 0 issued and outstanding, respectively
   
1
     
-
 
Convertible preferred stock Series D $0.0001 par value; 14,500 authorized, 11,150 and 0 issued and outstanding, respectively
   
1
     
-
 
Convertible preferred stock Series D-1 $0.0001 par value; 1,500 authorized, 1,250 and 0 issued and outstanding, respectively
   
-
     
-
 
Common stock $0.0001 par value; 300,000,000 authorized;
               
104,354,190 and 103,694,139 issued and outstanding, respectively
   
10,435
     
10,369
 
Additional paid-in capital
   
40,149,766
     
21,464,512
 
Accumulated deficit
   
(45,809,050
)
   
(28,595,251
)
                 
Stockholders' Deficit
   
(5,648,839
)
   
(7,120,362
)
                 
Total liabilities and stockholders' deficit
 
$
5,712,589
   
$
2,278,214
 


 
3

 

Bonds.com Group, Inc.
Condensed Consolidated Statements of Operations
 
   
Three Months Ended June 30
   
Six Months Ended June 30
 
   
2011
   
2010
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
                             
                             
Revenue
 
$
931,675
   
$
779,939
   
$
1,752,421
   
$
1,414,090
 
                                 
Cost of sales
   
41,726
     
99,253
     
194,999
     
178,580
 
                                 
Gross Margin
   
889,949
     
680,686
     
1,557,422
     
1,235,510
 
                                 
Operating expenses
                               
Payroll and related costs
   
1,193,135
     
1,890,530
     
2,325,887
     
4,769,508
 
Share based compensation
   
-
     
-
     
2,231,887
     
-
 
Technology and communications
   
785,432
     
670,133
     
1,436,786
     
1,349,988
 
Rent and occupancy
   
137,206
     
165,614
     
269,717
     
307,202
 
Professional fees
   
604,096
     
351,142
     
2,683,047
     
763,158
 
Marketing and advertising
   
31,103
     
97,968
     
56,103
     
213,205
 
Other operating expenses
   
103,877
     
81,111
     
287,002
     
200,040
 
Depreciation
   
12,229
     
30,361
     
24,205
     
54,059
 
Amortization
   
46,539
     
36,321
     
85,987
     
79,043
 
Total operating expenses
   
2,913,617
     
3,323,180
     
9,400,621
     
7,736,203
 
                                 
Loss from operations
   
(2,023,668
)
   
(2,642,494
)
   
(7,843,199
)
   
(6,500,693
)
                                 
Other income (expense)
                               
Interest expense
   
(95,050
)
   
(245,899
)
   
(202,499
)
   
(614,828
)
Realized loss on derivative financial instruments
   
(15,508
)
   
-
     
(1,410,908
)
   
-
 
Unrealized gain on derivative financial
                               
instruments and investment securities
   
1,847,691
     
3,276,289
     
3,519,422
     
924,843
 
Other income (expense), net
   
49,146
     
(905,000
)
   
10,768
     
(905,000
)
                                 
Total other income (expense)
   
1,786,279
     
2,125,390
     
1,916,783
     
(594,985
)
                                 
Loss before income tax
 
$
(237,389
)
 
$
(517,104
)
 
$
(5,926,416
)
 
(7,095,678
)
                                 
Income tax expense
   
(34,710
)
   
(342,386
)
   
(162,574
)
   
(342,386
)
                                 
Net loss
   
(272,099
)
   
(859,490
)
   
(6,088,990
)
   
(7,438,064
)
                                 
Preferred stock dividends
   
(3,990,139
)
   
-
     
(11,124,809
)
   
-
 
                                 
Net loss applicable to common stockholders
 
$
(4,262,238
)
 
$
(859,490
)
 
(17,213,799
)
 
$
(7,438,064
)
                                 
Net loss earnings per common share - basic and diluted
 
$
(0.04
)
 
$
(0.01
)
 
$
(0.016
)
 
$
(0.10
)
                                 
Weighted average shares outstanding - basic and diluted
   
104,354,190
     
76,593,154
     
104,354,190
     
76,038,427
 
    

 
4

 

Bonds.com Group, Inc.
Condensed Consolidated Statement of Changes in Stockholders’ Equity
 
                           
Total
 
               
Additional
         
Stockholders'
 
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Accumulated
   
Equity
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
(Deficit)
   
(Deficit)
 
                                           
Balances at January 1, 2010
   
-
   
$
-
     
74,727,257
   
$
7,472
   
$
12,453,689
   
$
(16,080,505
)
 
$
(3,619,344
)
                                                         
Issuance of preferred series "A" shares from purchase agreement, net of issuance costs
   
46,939
     
5
     
-
     
-
     
1,541,995
     
-
     
1,542,000
 
                                                         
Issuance of common stock from purchase agreement, net of issuance costs
   
-
     
-
     
1,840,230
     
184
     
655,316
     
-
     
655,500
 
                                                         
Issuance of common stock for consulting services
   
-
     
-
     
25,667
     
3
     
9,622
     
-
     
9,625
 
                                                         
Recognition of option grant relating to litigation settlement
   
-
     
-
     
-
     
-
     
174,093
     
-
     
174,093
 
                                                         
Recognition of compensation expense on date of grant relating to stock options
   
-
     
-
     
-
     
-
     
888,700
     
-
     
888,700
 
                                                         
Amortization of deferred compensation
   
-
     
-
     
-
     
-
     
245,792
     
-
     
245,792
 
                                                         
Fair value of common stock warrants issued in conjunction with purchase agreement, net of applicable deferred taxes
   
-
     
-
     
-
     
-
     
(1,222,846
)
   
-
     
(1,222,846
)
                                                         
Fair value of common stock warrants issued in conjunction with financing agreement
   
-
     
-
     
-
     
-
     
41,547
     
-
     
41,547
 
                                                         
Fair value of common stock warrants issued in conjunction with 2010 May financing, net of applicable deferred taxes
   
-
     
-
     
-
     
-
     
(36,029
)
   
-
     
(36,029
)
                                                         
Fair value of common stock warrants issued in conjunction with 2010 October Exchange Offer
                   
27,100,985
     
2,710
     
1,894,359
             
1,897,069
 
                                                         
Issuance of convertible preferred series B shares from purchase agreement, net of issuance costs
   
20,000
     
2
     
-
     
-
     
1,217,974
     
-
     
1,217,976
 
                                                         
Issuance of convertible preferred series B-1 shares from purchase agreement, net of issuance costs
   
6,000
     
1
     
-
     
-
     
2,192,357
     
-
     
2,192,358
 
                                                         
 
 
5

 
 
Recognition of severed executives share based compensation
                                   
1,407,943
             
1,407,943
 
                                                         
Net (loss)
   
-
     
-
     
-
     
-
     
-
     
(12,514,746
)
   
(12,514,746
)
                                                         
Balances at December 31, 2010
   
72,939
   
$
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
   
8,900
     
1
     
-
     
-
     
8,561,374
     
-
     
8,561,375
 
Beneficial conversion feature related to the Unit sale of the convertible preferred series D
   
-
             
-
     
-
     
5,085,714
     
-
     
5,085,714
 
Fair value of common stock warrants issued in conjunction with February, March and June 2011 Unit sale
   
-
     
-
     
-
     
-
     
(2,358,718
)
   
-
     
(2,358,718
)
Preferred stock dividend as a result of the February 2011 Exchange Offer for convertible preferred series B shares for series D and convertible preferred series B-1 for series D-1
   
(22,500
)
   
(3
)
   
-
     
-
     
1,062,503
     
-
     
1,062,500
 
Beneficial conversion feature related to the February 2011 Exchange Offer for convertible preferred series B shares for series D and convertible preferred series B-1 for series D-1
   
-
     
-
     
-
     
-
     
1,999,998
     
-
     
1,999,998
 
Fair value of common stock warrants issued in conjunction with February 2011 Exchange Offer
   
-
     
-
     
-
     
-
     
(574,601
)
   
-
     
(574,601
)
Amortization of deferred compensation
   
-
     
-
     
-
     
-
     
609,238
     
-
     
609,238
 
Equity compensation expense
   
-
     
-
     
-
     
-
     
1,622,647
     
-
     
1,622,647
 
Fair value modification of equity options
   
-
     
-
     
-
     
-
     
100,000
     
-
     
100,000
 
Common stock associated with the exchange offer
   
-
     
-
     
660,051
     
66
     
46,138
     
-
     
46,204
 
Series A preferred stock associated with the exchange offer
   
38,896
     
3
     
-
     
-
     
-
     
-
     
3
 
Issuance of common stock warrants for consulting services
   
-
     
-
     
-
     
-
     
1,017,700
     
-
     
1,017,700
 
Conversion price reduction related to convertible notes
   
-
     
-
     
-
     
-
     
441,262
     
-
     
441,262
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(17,213,799
)
   
(17,213,799
)
                                                         
Balances at June 30, 2011 (unaudited)
   
108,235
   
$
10
     
104,354,190
   
$
10,435
   
$
40,149,766
   
$
(45,809,050
)
 
$
(5,648,839
)

 
6

 
 
Bonds.com Group, Inc.
Condensed Consolidated Statement of Cash Flows
 
   
Six Months Ended June 30,
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
Cash Flows From Operating Activities
           
Net loss
 
$
(17,213,799
)
 
$
(7,438,064
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Deferred income taxes
   
162,574
     
342,386
 
Depreciation
   
24,205
     
54,058
 
Amortization
   
85,987
     
79,043
 
Share-based compensation
   
2,331,885
     
2,102,757
 
Other Share-based compensation
   
-
     
183,718
 
Preferred stock dividends
   
8,148,215
     
-
 
Realized loss on derivative financial instruments
   
1,410,908
     
-
 
Unrealized (gain)  on derivative financial instruments
   
(879,567
)
   
(924,843
Amortization of debt discount
   
5,744
     
289,478
 
Exchange Offer Financing
   
46,204
     
-
 
Consulting services
   
1,017,700
     
-
 
Deferred rent income
   
 (15,715
   
 -
 
Changes in operating assets and liabilities:
               
Deposit with clearing organization
   
(3,074,184
)
   
664,071
 
Prepaid expenses and other assets
   
(31,698
)
   
84,607
 
Security deposit
   
6,717
     
-
 
Accounts payable and accrued expenses
   
(1,088,230
)
   
297,942
 
Deferred rent
   
(7,805
)
   
(1,371
)
Preferred stock dividends payable
   
336,745
     
-
 
Net cash used in operating activities
   
(8,734,114
)
   
(4,266,218
)
                 
Cash Flows From Investing Activities
               
Purchases of property and equipment
   
(30,526
)
   
(7,601
)
Purchases of intangible assets
   
-
     
(16,976
)
Proceeds from sale of investment securities
   
543
     
6,995
 
Net cash used in investing activities
   
(29,983
)
   
(17,582
)
                 
Cash Flows From Financing Activities
               
Proceeds received from issuance of common stock
   
-
     
655,500
 
Proceeds received from issuance of preferred stock
   
8,561,375
     
1,542,000
 
Proceeds from convertible notes payable
   
-
     
650,000
 
Proceeds from notes payable
   
-
     
20,000
 
Repayments of notes payable, other
   
(82,000
)
   
(1,147,953
Repayments of notes payable, related parties
   
(200,000
)
   
-
 
Repayment of convertible notes payable, other
   
(25,000
)
   
-
 
Net cash provided by financing activities
   
8,254,375
     
1,719,547
 
                 
Net decrease in cash
   
(509,722
)
   
(2,564,253
)
Cash and cash equivalents, beginning of period
   
548,030
     
2,672,230
 
                 
Cash and cash equivalents, end of period
 
$
38,308
   
$
107,977
 
                 
Supplemental Disclosure of Cash Flow Information
               
Cash paid for interest
 
$
53,356
   
$
280,772
 
Debt discount on convertible notes payable
 
$
-
   
$
9,919
 
Debt discount on warrants issued with notes payable
 
$
-
   
$
7,243
 
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
 
$
574,601
   
$
-
 
Assets acquisition
 
$
973,000
   
$
-
 
Conversion price reduction related to convertible notes
 
$
441,262
   
$
-
 
Goodwill
 
$
99,000
   
$
-
 
 
 
7

 
 
1.
Description of Business and Summary of Significant Accounting Policies

Basis of Presentation

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

These results have been determined on the basis of Generally Accepted Accounting Principles (“GAAP”) and practices applied consistently with those used in the preparation of the Company’s condensed consolidated financial statements for the year ended December 31, 2010.  Operating results for the three and six months ended June 30, 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.   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 including BondsPRO.

During 2010, 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.
 
 
8

 

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., Bonds.com, LLC and Bonds MBS, Inc. These entities are collectively referred to as the “Company”.

Reclassification

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

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 4 – Fair Value of Financial Instruments - for further details.

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.
 
 
9

 
 
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 six months ended June 30, 2011 and 2010.

Income Taxes

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

Marketing and Advertising Costs

Marketing and advertising costs are expensed as incurred. Marketing and advertising expenses for the three months ended June 30, 2011 and 2010, were $31,103 and $97,968, respectively. Marketing and advertising expenses for the six months ended June 30, 2011 and 2010, were $56,103 and $213,205, respectively.  
 
Operating Leases

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

Share-Based Compensation

The Company accounts for its share-based awards associated with share-based compensation arrangements with employees and directors at fair value.  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.

 
10

 

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASU”) No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends the Fair Value Measurements and Disclosures Topic to require additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose additional information regarding assets and liabilities that are transferred between levels of the fair value hierarchy. Entities are also required to disclose information in the Level 3 rollforward about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, ASU 2010-06 clarifies existing guidance pertaining to the level of disaggregation at which fair value disclosures should be made and the requirements to disclose information about the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The guidance in ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to separately disclose purchases, sales, issuances and settlements in the Level 3 rollforward, which becomes effective for fiscal years (and for interim periods within those fiscal years) beginning after December 15, 2010. The Company’s adoption of ASU 2010-06, effective January 1, 2010, did not have a material impact on its condensed consolidated financial position, results of operations or cash flows during the six months ended June 30, 2011.

In December 2010, the 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 8.

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.
Going Concern

Since its inception, the Company has generated limited revenues and has incurred a cumulative net loss of $45,809,050.  As of June 30, 2011, the Company has a working capital deficit of $4,643,310, including approximately $650,000 of outstanding convertible note plus interest 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 six months ended June 30, 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.

4.
Fair Value of Financial Instruments

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.
   
 
 
11

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

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

Recurring Fair Value Measurement Valuation Techniques

The fair value for certain financial instruments is derived using pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available will generally have a higher degree of price transparency than financial instruments that are thinly traded or not quoted. In accordance with FASB ASC 820, the criteria used to determine whether the market for a financial instrument is active or inactive is based on the particular asset or liability. The Company considered the market for other types of financial instruments, including certain derivative financial instruments, to be inactive as of June 30, 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 June 30, 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 stock and preferred shares that contain “down round” protection to the holders.  These derivatives are valued with pricing models commonly used by the financial services industry using inputs generally observable in the financial services industry. The Company considers these models to involve significant judgment on the part of management, including the inputs utilized in its pricing models.  The majority of the Company’s derivative financial instruments are categorized in Level 3 of the fair value hierarchy. The Company estimates the fair value of derivatives utilizing the Black-Scholes option pricing model, as the derivatives held by the Company are comprised of options to convert outstanding promissory notes payable into shares of the Company’s stock, at the note holder’s option and warrants that contain “down round” protection features.  This model is dependent upon several variables such as the expected option term, expected risk-free interest rate over the expected option term, the expected dividend yield rate over the expected option term and the expected volatility of the Company’s stock price over the expected term. The expected term represents the period of time that the options granted are expected to be outstanding. The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected terms of the options at the date of issuance.  Expected dividend yield is based on historical trends. For the year ended December 31, 2008, the Company estimated the volatility of its common stock utilizing its daily average closing price since December 21, 2007, when it began actively trading under the symbol Bonds.com Group, Inc. Commencing with the quarter ended March 31, 2009, the Company changed its methodology to estimate 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. The Company determined that the historical prices of its publicly trade 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 market price of its stock which was based on it’s over-the-counter market trading price. The Company determined that the historical prices of its publicly traded common stock were no longer sufficient as a single measurement to determine the readily determinable fair value of the Company’s stock. The over-the-counter market has not been active and private sales of the Company’s shares sold are significantly lower and needed to be included in the measurment to determine the market price. The relevant observable inputs were the prices and volume of trading activity for both the over-the-counter market and private sales using a Volume-Weighted Average Price (‘VWAP’) method over a twelve month period time based on management’s judgment.  

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.

 
12

 
 
Fair values of assets measured on a recurring basis at June 30, 2011 and December 31, 2010 are as follows:
 
         
Quoted Prices
             
         
in Active
             
         
Markets for
   
Significant
       
         
Identical
   
Other
       
         
Assets /
   
Observable
   
Significant
 
         
Liabilities
   
Inputs
   
Unobservable
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
Inputs (Level 3)
 
June 30, 2011
                       
Assets
                       
Investment securities
 
$
1,984
   
$
   
$
1,984
   
$
 
Total assets measured at fair value on a recurring basis
 
$
1,984
   
$
   
$
1,984
   
$
 
                                 
Liabilities
                               
Derivative financial instruments
 
$
3,488,242
   
$
     
— 
   
$
3,488,242
 
Total liabilities measured at fair value on a recurring basis
 
$
3,488,242
   
$
   
 
$
   
$
3,488,242
 
                                 
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 assets and liabilities measured at fair value on a recurring basis for the six months ended June 30, 2011:
 
   
Fair Value of
 
   
Derivative
 
   
Financial
 
   
Instruments
 
       
January 1, 2011
 
$
464,844
 
Included in Earnings
   
(2,108,514
)
Included in Other Comprehensive Income
   
 
Total
   
(1,643,670
)
Purchases, Sales, Other Settlements and Issuances, Net
   
5,131,912
 
Net Transfers In and/or (Out) of Level 3
   
 
June 30, 2011
 
$
3,488,242
 

The majority of total unrealized loss were related to Level 3 instruments held during 2011.

 
13

 
 
5.
Credit Risk

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

6.
Property and Equipment

Property and equipment consisted of the following at June 30, 2011 and December 31, 2010:
 
             
   
June 30,
   
December 31,
 
   
2011
   
2010
 
Leased property under capital leases
 
$
209,757
   
$
209,757
 
Computer equipment
   
247,002
     
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
   
625,212
     
594,686
 
Less: accumulated depreciation and amortization
   
(535,724
)
   
(511,519
)
Property and equipment, net
 
$
89,488
   
$
83,167
 
 
Depreciation expenses for the three and six months ended June 30, 2011 was $12,229 and $24,205, respectively. Depreciation expenses for the three and six months ended June 30, 2010 was $30,361 and $54,059, respectively. 
 
7.
Intangible Assets

Intangible assets consisted of the following at June 30, 2011 and December 31, 2010: 
 
   
June 30,
   
December 31,
 
   
2011
   
2010
 
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
               
Technology
   
641,000
     
 
Software
   
431,996
     
431,996
 
Customer Relationships
   
322,000
     
 
Capitalized website development costs
   
196,965
     
196,965
 
Trade Name / Trademarks
   
10,000
     
 
Other
   
6,529
     
6,529
 
Total intangible assets
   
2,508,490
     
1,535,490
 
Less: accumulated amortization
   
(681,718
)
   
(595,731
)
Intangible assets, net
 
$
1,826,772
   
$
939,759
 

Amortization expenses for the three and six months ended June 30, 2011 was $46,539 and $85,987, respectively. Amortization expenses for the three and six months ended June 30, 2010 was $36,321 and $79,043, respectively.

The following is a schedule of estimated future amortization expense of intangible assets as of June 30, 2011:
 
Year Ending December 31,
     
2011
 
$
106,310
 
2012
   
167,408
 
2013
   
164,218
 
2014
   
161,388
 
2015 and after
   
327,448
 
   
$
926,772
 

 
14

 
 
8.
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. 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 of 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.

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 third 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.
 
 
15

 
 
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 six months ended June 30, 2011 and 2010 have been prepared as if the acquisition of Beacon had occurred at January 1,
 
   
Six Months Ended
 
   
June 30,
 
   
2011
   
2010
 
Revenue
 
$
1,752,421
   
$
1,414,090
 
                 
Net loss applicable to common stockholders
 
$
(17,254,149
)
 
$
(7,735,693
)
                 
Net loss per common share—basic and diluted
 
$
(0.09
)
 
$
(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.

9.
Notes Payable, Related Parties

The following is a summary of related party notes payable at June 30, 2011 and December 31, 2010:
 
   
June 30,
   
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
 


 
16

 

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”).

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

Interest expense recognized on related party notes payable for the three months ended June 30, 2011 and 2010 was $2,275 and $14,030, respectively. Interest expense recognized on related party notes payable for the six months ended June 30, 2011 and 2010 was $7,275 and $30,155, respectively.  

 
17

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

The following is a summary of related party and non-related party convertible notes payable at June 30, 2011 and December 31, 2010: 
             
   
June 30,
   
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 October 12, 2013.
 
$
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 October 12, 2013
   
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 October 12, 2013.
   
250,000
     
250,000
 
                 
$650,000 secured promissory note, May 2010 financing, bearing interest at 9% per annum, principal and accrued interest is due at maturity on June 30, 2012.
   
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.
   
1,250,000
     
1,275,000
 
Total 
   
1,250,000
     
1,275,000
 
Less: unamortized debt discount
   
(17,528
)
   
(23,271
)
Total Non-Related Parties
   
1,232,472
     
1,251,729
 
                 
Total
   
3,623,108
     
3,642,365
 
Less: current portion
   
(650,000
)
   
(24,243
)
                 
Long-term portion
 
$
2,973,108
   
$
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 general all of the Company’s assets, pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008, as amended on February 3, 2009.
 
In connection with the execution of the convertible note and warrant purchase agreements, Moody, Valhalla and the third-party investors were granted warrants to purchase an aggregate of 1,627,114 shares of the Company’s common stock at an exercise price of $0.46875 per share and expiring on September 24, 2013.

 
18

 
 
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 June 30, 2011 and 2010, the Company recognized $2,493 and $141,802 in interest expense related to the amortization of the debt discount associated with the warrants and the debt discount associated with the beneficial conversion future, respectively.

During the six months ended June 30, 2011 and 2010, the Company recognized $5,744 and $282,092 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 ended June 30, 2011 and 2010, the Company also recognized $90,586 and $76,228 in interest expense on the outstanding related party and non-related party Convertible Notes, respectively.

During the six months ended June 30, 2011 and 2010, the Company also recognized $180,601 and $151,619 in interest expense on the outstanding related party and non-related party Convertible Notes, respectively.

11.
Notes Payable, Other

The following is a summary of outstanding principal due on unrelated third party notes payable at June 30, 2011 and December 31, 2010:
 
   
June 30,
   
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.

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.

 
19

 
 
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 the 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”).
 
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.
 
 
20

 

Interest expense recognized on third party notes payable for the three months ended June 30, 2011 and 2010 was $0 and $22,104, respectively. Interest expense recognized on third party notes payable for the six months ended June 30, 2011 and 2010 was $4,249 and $82,297, respectively.

12.
Commitments and Contingencies

Operating Leases

The Company leases office facilities and equipment and obtains data feeds under long-term operating lease agreements with various expiration dates and renewal options.  These data feeds and associated equipment provide information from financial markets that are essential to the Company’s business operations.  The following is a schedule of future minimum rental payments required under operating leases as of June 30, 2011:
 
Year Ending December 31,
     
2011
 
$
345,443
 
2012
   
238,511
 
2013 and thereafter
   
 
Total minimum payments required
 
$
583,954
 

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 June 30, 2011 and 2010 was $137,206 and $165,614, respectively. Rent expense for all operating leases for the six months ended June 30, 2011 and 2010 was $269,717 and $307,202, 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 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
 
 
21

 
 
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 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 three 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 will be 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
 
 
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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. 
 
 
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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 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 three 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. 

 
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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
 
 
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 three 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 former 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.
 
 
 
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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 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, except for an informal inquiry from an officer of Duncan-Williams seeking to initiate a discussion of the litigation.

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

13.
Stockholders’ Equity

Capital Structure

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

On December 31, 2009, our Board unanimously adopted resolutions approving an amendment to the Company’s Certificate of Incorporation to increase the number of shares of common stock the Company is authorized to issue from 150,000,000 to 300,000,000 (the “Charter Amendment”). On the same date, holders of a majority of the shares of our common stock acted by written consent in lieu of a special meeting of stockholders to approve the Charter Amendment. Pursuant to Rule 14c-2 under the Securities Exchange Act of 1934, as amended, the Charter Amendment and related increase in our authorized shares of common stock was not be effective until at least twenty calendar days after the mailing of a definitive Information Statement to our stockholders. On March 11, 2010, we filed the definitive Information Statement Securities and Exchange Commission and mailed it to our stockholders. On March 31, 2010, the Charter Amendment was filed with the Secretary of State of the State of Delaware and such Charter Amendment and the increase in our authorized shares of common stock from 150,000,000 to 300,000,000 became effective.
 
 
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On January 11, 2010, the Company amended its Certificate of Incorporation by filing a Certificate of Designation of Series A Participating Preferred Stock (the “Certificate of Designation”) which authorized and created 200,000 shares of Series A Participating Preferred Stock. The shares of Series A Participating Preferred Stock (the “Series A Preferred) have the following rights, privileges and preferences, among others, as more fully set forth in the Certificate of Designation. Subject to the liquidation preference described below, the Series A Preferred ranks pari passu with the Company’s common stock with respect to dividends and distributions upon liquidation, winding-up and dissolution of the Company and junior to any class or series of capital stock that ranks senior to the Series A Preferred as to dividends or distributions upon liquidation, winding-up and dissolution of the Company that is created in accordance with the consent rights described below. The Company may not declare, pay or set aside any dividends on shares of its common stock unless the holders of the Series A Preferred then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred in an amount at least equal to a rate per share of Series A Preferred determined by multiplying the amount of the dividend payable on each share of common stock by one hundred (100) (subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization with respect to the Series A Preferred if there is no proportionate action taken with respect to the common stock). In the event of any liquidation, dissolution or winding up of the Company (including certain changes of control that are deemed a liquidation), subject to the rights of any series of preferred stock which may from time to time come into existence, the holders of Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock or the holders of any series of preferred stock expressly made junior to the Series A Preferred, an amount per share equal to $0.01 (subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization with respect to the Series A Preferred). Thereafter, subject to the rights of any series of preferred stock which may from time to time come into existence, the remaining assets of the Company available for distribution to its stockholders are required to be distributed among the holders of shares of Series A Preferred and common stock, pro rata based on the number of shares held by each such holder, treating for this purpose each such share of Series A Preferred as if it had been converted into one hundred (100) shares of common stock (subject to appropriate adjustment in the event of any stock split, stock dividend, combination or other similar recapitalization with respect to the Series A Preferred if there is no proportionate action taken with respect to the common stock) immediately prior to such liquidation (including a deemed liquidation), dissolution or winding up of the Company. The Series A Preferred is non-voting capital stock of the Company, except as may otherwise be required by applicable law and except that the holders thereof have certain limited approval rights, including.

On October 19, 2010 the Company amended its Certificate of Incorporation by filing (a) a Certificate of Increase of Series A Participating Preferred Stock, which increased the authorized shares of the Company’s Series A Preferred from 200,000 to 450,000 shares, and (b) a Certificate of Designation of Series B Convertible Preferred Stock and B-1 Convertible Preferred Stock (the “Series B/B-1 Certificate of Designation”) which authorized and created 20,000 shares of Series B Convertible Preferred Stock and 6,000 shares of Series B-1 Convertible Preferred Stock.

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

Equity Transactions

As discussed in Note 11, in connection with the execution of convertible note and warrant purchase agreements, the Company issued warrants to purchase an aggregate of 1,627,114 shares of the Company’s common stock at an exercise price of $0.46875 per share and expiring on September 24, 2013 to various related and non-related parties.  The fair value of the warrants at the time of issuance was $218,731, which was recorded as additional paid in capital in the accompanying condensed consolidated financial statements.  In addition, the fair value of the beneficial conversion feature associated with the notes was $609,862, which is recorded as a derivative financial instrument in the accompanying condensed consolidated financial statements.

On August 28, 2009, the Company entered into a Unit Purchase Agreement with Fund Holdings, LLC (“Fund Holdings”). This Unit Purchase Agreement (the “Fund Holdings UPA”) provided for a financing of up to $5,000,000 through the sale of up to 5,000 Units. Each Unit consisted of: (a) 2,667 shares of the Company’s common stock; and (b) the right, within three years of the applicable closing date upon which such Unit is purchased, to purchase an additional 9,597 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share (the “Ordinary Purchase Rights”).  Additionally, in connection with this transaction, the Company issued Fund Holdings the unvested right to purchase up to 26,893,580 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share (the “Additional Purchase Rights”). The Additional Purchase Rights will vest in the future only to the extent and in such amount as is equal to the number of shares of common stock, up to 26,893,580, that the Company actually issues in the future on account of convertible notes, warrants and options in existence as of the initial closing of this transaction. The Ordinary Purchase Rights are exercisable by the purchaser generally at any time within three years of the date of the closing in which the applicable Unit was purchased. The Additional Purchase Rights are exercisable by the purchaser at any time within three years of the date that the applicable Additional Purchase Rights vest. In addition, pursuant to the Fund Holdings UPA, the Company issued Fund Holdings an additional right (the “Special Purchase Rights”) to purchase 1,000,000 (as equitably adjusted for stock splits, combinations and the like) shares of common stock at $0.375 per share. Fund Holdings has the right to exercise the Special Purchase Rights at any time during the three year period following the initial closing under the Unit Purchase Agreement.
 
 
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On December 31, 2009, the Company and Fund Holdings consummated the final closing under the Fund Holdings UPA, with Fund Holdings investing an aggregate of $3,700,000 in connection with all closings (before deduction of fees and expenses payable or reimbursable by the Company pursuant to the Fund Holdings Purchase Agreement) for the purchase of 3,690 Units consisting of an aggregate of 9,841,230 shares of the Company’s common stock and 37,767,000 Ordinary Purchase Rights. In connection with the final closing under the Fund Holdings UPA, on December 31, 2009, the Company entered into a Unit Purchase Agreement (the “LVPIII UPA”) with Laidlaw Venture Partners III, LLC (“Laidlaw Venture Partners III”). Pursuant to the LVPIII UPA and at closings that occurred on December 31, 2009 and January 13, 2010, Laidlaw Venture Partners III invested $2,000,000 (before deduction of fees and expenses payable or reimbursable by the Company pursuant to the LVPIII UPA) and purchased 2,000 of Units of the Company, with each Unit consisting of 2,667 shares of the Company’s common stock and rights to purchase 7,200 additional shares the Company’s common stock (the “Laidlaw Ordinary Purchase Rights”). The Laidlaw Ordinary Purchase Rights are exercisable for a period of three years from the date of issuance at an exercise price of $0.375 per share.

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

All Ordinary Purchase Rights, Laidlaw Ordinary Purchase Rights, Special Purchase Rights, Additional Purchase Rights and Preferred Stock Purchase Rights have the right to be exercised through a “cashless exercise” feature in which the right to purchase shares representing the in-the-money value, if any, of the purchase right is surrendered to the Company in satisfaction of the exercise price and a net number of shares are issued to the holder. Additionally, the foregoing purchase rights associated include provisions that protects the purchasers from certain declines in the Company’s stock price (or “down-round” provisions). Down-round provisions reduce the exercise price of the warrants if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new convertible instruments that have a lower exercise price. Due to the down-round provision and in accordance with the Contracts in Entity’s Own Equity Topic of FASB ASC 815-40-15, all warrants issued are recognized as liabilities at their respective fair values on each reporting date. The fair values of these securities were estimated using a Black-Scholes valuation model.
 
Capital Raising October 2010

On October 19, 2010, the Company consummated a financing transaction pursuant to which, among other things, the Company issued equity securities for aggregate consideration equal to $1,950,000, comprised of $750,000 in cash and $1,200,000 through the cancellation of indebtedness owed by Holdings. As part of this financing transaction, the investors committed to purchase an additional $1,300,000 of the Companys equity securities, subject to certain conditions. In connection with these financing transactions, the Company entered into a series of related material agreements, as discussed in detail below.

Unit Purchase Agreement with Bonds MX LLC.

On October 19, 2010, the Company entered into a Unit Purchase Agreement with Bonds MX LLC (the “Bonds MX Purchase Agreement”). On October 19, 2010, pursuant to the Bonds MX Purchase Agreement, among other things, the Company sold to Bonds MX LLC (“Bonds MX”) 12 “units” (each a “Series B Unit”), with each such Series B Unit comprised of (a) 100 shares of our newly-created Series B Convertible Preferred Stock, (b) a warrant to purchase 416,667 shares of Common Stock at a purchase price of $0.24 per share, and (c) the right to receive up to 416,667 shares of Common Stock if the Company fails to meet certain performance targets (“Performance Shares”). The purchase price for each Series B Unit was $100,000, and the aggregate purchase price for the 12 Series B Units sold on October 19, 2010 was $1,200,000. Bonds MX paid this purchase price through the cancellation of the Amended 15% Promissory Note, dated August 20, 2010, in the principal amount of $1,200,000 issued by Holdings to Bonds MX (the “Bonds MX Note”).

 Additionally, pursuant to the Bonds MX Purchase Agreement, Bonds MX agreed to purchase an additional 8 Series B Units for an aggregate purchase price of $800,000 pursuant to closings on November 1 and December 1, 2010. Pursuant to the Bonds MX Purchase Agreement, Bonds MX is required to purchase, and the Company is required to sell Bonds MX, 4 Series B Units for a purchase price of $400,000 at each of the November 1 and December 1, 2010 closings. Bonds MX’s obligation to purchase such additional Series B Units is subject to significant conditions, including the conditions that (a) UBS Securities LLC (“UBS Securities”) and its affiliates shall be continuing to perform under the Licensing and Services Agreement, dated January 11, 2010 (the “UBS Commercial Agreement”), by and among the Company, Bonds.com, Inc. and UBS Securities, in a manner substantially consistent with their current performance thereunder, (b) the UBS Commercial Agreement shall not have been terminated or modified in any manner adverse to the Company, and (c) the representations and warranties of the Company in the Bonds MX Purchase Agreement shall be true and correct in all material respects as of the date when made and as of the date of such additional closing.
 
 
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Pursuant to the Bonds MX Purchase Agreement, the Company will be required to issue Performance Shares to Bonds MX if and to the extent that it generates less than $7,500,000 in revenue during the 12-month period following the final closing of the Offering. If the Company generates at least $7,500,000 in revenue during such period, then it is not required to issue any Performance Shares. If the Company generates zero revenue during such period, then it is required to issue all Performance Shares. If the Company generates less than $7,500,000 but more than zero in revenue during such period, the Company is required to issue a pro rata portion of the Performance Shares.

The 12 Series B Units sold to Bonds MX on October 19, 2010 constitute, in the aggregate, (a) 1,200 shares of our Series B Convertible Preferred Stock, (b) warrants to purchase 5,000,000 shares of our Common Stock, and (c) the right to receive up to 5,000,000 Performance Shares. As discussed in more detail below, the Series B Convertible Preferred Stock has a stated value of $1,000 per share and is convertible, at the option of the holder, into shares of our Common Stock at a conversion price of $0.24 per share. Accordingly, the 1,200 shares of our Series B Convertible Preferred Stock issued at the October 19, 2010 closing are convertible for up to 5,000,000 shares of Common Stock. 

If the additional 8 Series B Units are sold pursuant to the Bonds MX Purchase Agreement, a total of 20 Series B Units will have been sold. Those 20 Series B Units would constitute, in the aggregate, (b) 2,000 shares of our Series B Convertible Preferred Stock, which would be convertible for up to 8,333,333 shares of Common Stock, (b) warrants to purchase 8,333,333 shares of Common Stock, and (c) the right to receive up to 8,333,333 Performance Shares.

Additionally, the Bonds MX Purchase Agreement contains provisions pursuant to which significant adjustments may be made to the terms and amount of securities issued to Bonds MX pursuant to this transaction. Those adjustment provisions are discussed in more detail below.

Edwin L. Knetzger, III, Co-Chairman and a member of our Board of Directors, provided Bonds MX with $800,000 of the $1,000,000 it loaned Holdings pursuant to the Bonds MX Note, is a significant equity owner in Bonds MX and, pursuant to the Bonds MX Purchase Agreement, agreed to fund $200,000 of the funds Bonds MX consummated the additional closings of the 8 units on November 1 and December 1, 2010.

Unit Purchase Agreement with UBS Americas Inc.

On October 19, 2010, concurrent with the Bonds MX Purchase Agreement, entered into a Unit Purchase Agreement with UBS Americas Inc. (the “UBS Purchase Agreement”). On October 19, 2010, pursuant to the UBS Purchase Agreement, among other things, the Company sold to UBS Americas Inc. (“UBS Americas”) 7.5 “units” (each a “Series B-1 Unit”), with each such Series B-1 Unit comprised of (a) 100 shares of newly-created Series B-1 Convertible Preferred Stock, (b) a warrant to purchase 4,166.67 shares of Series A Participating Preferred Stock (the “Series A Preferred”) at a purchase price of $24.00 per share, and (c) the right to receive up to 4,166.67 shares of Series A Preferred if the Company fails to meet certain performance targets (“Series A Performance Shares”). The purchase price for each Series B-1 Unit was $100,000, and the aggregate purchase price for the 7.5 Series B-1 Units sold on October 19, 2010 was $750,000 in cash.

Additionally, pursuant to the UBS Purchase Agreement, UBS Americas agreed to purchase an additional 5 Series B-1 Units for an aggregate purchase price of $500,000. UBS America’s obligation to purchase such additional Series B-1 Units is subject to significant conditions, including the conditions that (a) the corresponding additional closing under the Bonds MX Purchase Agreement shall have occurred and Bonds MX shall have purchased at least 4 units at such corresponding closing, (b) the Company shall not have taken steps to seek protection pursuant to any bankruptcy law, and (c) the representations and warranties of the Company in the UBS Purchase Agreement shall be true and correct in all material respects as of the date when made and as of the date of such additional closing.

Pursuant to the UBS Purchase Agreement, the Company will be required to issue Series A Performance Shares to UBS Americas if and to the extent that it generates less than $7,500,000 in revenue during the 12-month period following the final closing of the Offering. If the Company generates at least $7,500,000 in revenue during such period, then it is not required to issue any Series A Performance Shares. If the Company generates zero revenue during such period, then it is required to issue all Series A Performance Shares. If the Company generates less than $7,500,000 but more than zero in revenue during such period, the Company is required to issue a pro rata portion of the Series A Performance Shares.

The 7.5 Series B-1 Units sold to UBS Americas on October 19, 2010 constitute, in the aggregate, (a) 750 shares of Series B-1 Convertible Preferred Stock, (b) warrants to purchase 31,250 shares of Series A Preferred, and (c) the right to receive up to 31,250 Series A Performance Shares. As discussed in more detail below, the Series B-1 Convertible Preferred Stock has a stated value of $1,000 per share and is convertible, at the option of the holder, into shares of Common Stock at a conversion price of $0.24 per share. Accordingly, the 750 shares of Series B-1 Convertible Preferred Stock issued at the October 19, 2010 closing are convertible for up to 3,125,000 shares of Common Stock. As further discussed below, the Series B-1 Convertible Preferred Stock may also be mandatorily converted to shares of Series A Preferred at a conversion price of $24.00 per share (and using the same $1,000 stated value).
 
 
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On November 1, 2010, the additional 5 Series B-1 Units were sold pursuant to the UBS Purchase Agreement, giving UBS a total of 12.5 Series B-1 Units. Those 12.5 Series B-1 Units constitute, in the aggregate, (b) 1,250 shares of our Series B-1 Convertible Preferred Stock, which would be convertible for up to 5,208,333 shares of Common Stock or mandatorily convertible into 52,083 shares of Series A Preferred, (b) warrants to purchase 52,083 shares of Series A Preferred, and (c) the right to receive up to 52,083 Series A Performance Shares.

The Bonds MX and UBS Purchase Agreements contained provisions which called for significant adjustments to the terms and amount of the securities issued to Bonds MX and UBS Americas pursuant to the financing transactions summarized above. 

These adjustments were contingent upon the occurrence of future sales of securities at more favorable terms than provided to Bonds MX and UBS and/or the inability of the Company to raise an aggregate of $8,000,000 by a specified date.

The adjustment provisions in the Bonds MX Purchase Agreement and UBS Purchase Agreement were subject to the limitation that if and to the extent the issuance of any additional shares of capital stock or other securities pursuant to such provisions would result in the Company exceeding its authorized shares of Common Stock or Preferred Stock, then the application of such adjustment provision shall be limited to the extent necessary so that such issuance does not cause the Company to exceed its authorized capital.

Series B Stockholders Agreement

As a requirement of UBS America’s investment, on October 19, 2010, the Company, UBS Americas and Bonds MX entered into a Series B Stockholders’ Agreement setting forth certain agreements among and between the Company and such stockholders (the “Stockholders’ Agreement”).

Pursuant to the Stockholders’ Agreement, in the event that Bonds MX seeks to sell its shares of Series B Convertible Preferred Stock, warrants or shares of Common Stock, UBS Americas shall have the right to sell a pro rata portion of its similar securities along with Bonds MX. Alternatively, the Company, at its option, may redeem the applicable securities from UBS Americas and Bonds MX would be permitted to sell its shares free of such obligation. The foregoing obligations do not apply to transfers to certain permitted transferees, bona fide pledges and pledges outstanding as of the date of the Stockholders’ Agreement. Such obligations also do not apply to sales of less than 10% of the securities held by Bonds MX.

Additionally, if, after the date of the Stockholders’ Agreement, any person acquires shares of Series B Convertible Preferred Stock or Series B-1 Convertible Preferred Stock, the Company shall use its reasonable best efforts to have such stockholder become a party to the Stockholders’ Agreement. Additionally, the Company is prohibited from issuing any shares of its Series B Convertible Preferred Stock or Series B-1 Convertible Preferred Stock unless the purchaser becomes a party to the Stockholders’ Agreement.

Registration Rights Agreement

In connection with the financing transactions described above, on October 19, 2010, the Company entered into a Registration Rights Agreement with UBS Americas and Bonds MX (the “Registration Rights Agreement”). The Registration Rights Agreement requires the Company to file a registration statement with the Securities and Exchange Commission covering the resale of all of the shares of Common Stock issuable upon conversion of the Series B Convertible Preferred Stock and Series B-1 Convertible Preferred Stock sold to UBS Americas and Bonds MX, all of the shares of Common Stock issuable upon exercise of the warrants sold to Bonds MX, all of the Performance Shares and all of the shares of Common Stock issuable to investors who purchase securities as part of the Offering. The Company is required to file such registration statement not later than five days following the six month anniversary of the final closing of the Offering.

The Registration Rights Agreement also provides UBS Americas, Bonds MX and any subsequent investors in the same Offering “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 consummated a series of equity transactions resulting in, among other things, the redemption of all the outstanding shares of the Series B and Series B-1 Convertible Preferred Stock. 

UBS Americas Exchange Agreement

On October 19, 2010, the Company and UBS Americas entered into an Exchange Agreement (the “Exchange Agreement”) pursuant to which, among other things, UBS Americas cancelled its Ordinary Purchase Rights Certificate and in exchange the Company issued to UBS Americas 38,896 shares of Series A Preferred. The Ordinary Purchase Rights Certificate was issued by the Company to UBS Americas on January 11, 2010, and, prior to its cancellation and exchange, evidenced the right to purchase 137,280 shares of our Series A Preferred for a purchase price of $37.50 per share.
 
 
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On October 19, 2010, the Company issued to UBS Americas 38,896 shares of Series A Preferred in exchange for the cancellation of its previously outstanding Ordinary Purchase Rights Certificate.

Amendment to Certificate of Incorporation

In connection with the financing transactions summarized above, on October 19, 2010 the Company amended its Certificate of Incorporation by filing (a) a Certificate of Increase of Series A Participating Preferred Stock, which increased the authorized shares of the Company’s Series A Preferred from 200,000 to 450,000 shares, and (b) a Certificate of Designation of Series B Convertible Preferred Stock and B-1 Convertible Preferred Stock (the “Certificate of Designation”) which authorized and created 20,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred”) and 6,000 shares of Series B-1 Convertible Preferred Stock (the “Series B-1 Preferred”). The shares of Series B Preferred and Series B-1 Preferred Stock have the following rights, privileges and preferences, among others, as more fully set forth in the Certificate of Designation: 
 
the Series B Preferred and Series B-1 Preferred each have a stated value of $1,000 and are initially convertible at the option of the holder into shares Common Stock at a conversion price of $0.24 per share, for an initial conversion ratio of 4,167 shares of Common Stock for each share of Series B Preferred and Series B-1 Preferred;
 
the Series B Preferred is mandatorily convertible into shares of our Common Stock upon our shares of Common Stock attaining a closing trading price equal to 150% of the then applicable conversion price for 20 consecutive trading days on average daily trading volume of at least 250,000 shares;
 
the Series B-1 Preferred is mandatorily convertible into shares of our Series A Preferred (at a conversion price of $24.00 per share and using the same $1,000 stated value) upon our shares of Common Stock attaining a closing trading price equal to 150% of the then applicable conversion price for 20 consecutive trading days on average daily trading volume of at least 250,000 shares;
 
dividends of 8% per annum shall accrue on the Series B Preferred and Series B-1 Preferred but only be payable as, if and when declared by the Company’s Board of Directors or as part of the liquidation or change of control preference summarized below;
 
holders of shares of Series B Preferred and Series B-1 Preferred shall be entitled to a preferential payment (prior to any payment to holders of Series A Preferred or Common Stock) upon a liquidation or change of control, which payment shall be equal to the greater of (1) $1,200 per share plus all accrued but unpaid dividends, or (2) the amount that would have been received by the holder had they optionally converted their shares of Series B Preferred or Series B-1 Preferred into Common Stock prior to the liquidation or change of control;
 
holders of Series B Preferred have the right to vote with holders of Common Stock on an as-converted basis; and
 
holders of Series B Preferred and Series B-1 Preferred have the right to approve (by a majority of the Series B Preferred and Series B-1 Preferred voting together as a single class) certain corporate actions, including the incurrence of indebtedness for borrowed money unless the Company would have, after giving effect to such incurrence, an EBITDA-to-interest ratio of at least 2:1.

Exchange Offer

The aggregate number of shares issuable upon exercise of all Warrants of each class (when taken as a whole) that were validly tendered on October 7, 2010 was approximately 95,800,000, which represents approximately 85.64% of the shares issuable upon the exercise of all Warrants.

 In connection with the Exchange Offer, the Company issued approximately 27,000,000 shares of its common stock and recorded a charge of approximately $1,900,000.

Warrants to Terminate Agreement

As summarized in note 17, on October 19, 2010, the Company and Radnor Research and Trading Company, LLC terminated the Revenue Sharing Agreement. Prior to its termination, the Revenue Sharing Agreement required the Company to pay Radnor Research and additionally, on October 19, 2010, the Company issued Black-II Trust a warrant to purchase 10,000,000 shares of our Common Stock at an purchase price of $0.24 per share. This warrant was issued in exchange for affiliates of Black-II Trust consenting to terminate the Revenue Sharing Agreement and another contractual arrangement.

 
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Capital Raising February and March 2011

On February 2, 2011, the Company consummated a group of related transactions pursuant to which, among other things, the Company:
 
sold 65 units for an aggregate purchase price of $6,500,000 to two accredited investors, with each unit (each a “Unit”) comprised of (a) warrants to purchase 1,428,572 shares of Common Stock, at an initial exercise price of $0.07 per share (the “Common Stock Warrants”), and (b) 100 shares of a newly-created class of preferred stock designated as Series D Convertible Preferred Stock (the “Series D Preferred”);
  
issued 22.5 Units in exchange for (a) all of the outstanding shares of Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred”), and (b) certain outstanding warrants to purchase shares of Common Stock;
 
issued 12.5 units (each a “Series D-1 Unit”) comprised of (a) warrants to purchase 14,286 shares of our Series A Participating Preferred Stock, par value $0.0001 per share (the “Series A Preferred”), at an initial exercise price of $7.00 per share (the “Series A Warrants”) and (b) 100 shares of a newly-created class of preferred stock designated Series D-1 Convertible Preferred Stock, par value $0.0001 per share (the “Series D-1 Preferred”), in exchange for (a) all of the outstanding shares of our Series B-1 Convertible Preferred Stock, par value $0.0001 per share (the “Series B-1 Preferred”), and (b) certain outstanding warrants to purchase shares of our Series A Preferred; and
 
acquired substantially all of the assets of Beacon Capital Strategies, Inc. (through an indirect wholly-owned subsidiary) in exchange for issuing 10,000 shares of a newly-created class of preferred stock designated as Series C Convertible Preferred Stock, par value $0.0001 per share (the “Series C Preferred”).

The above transactions are summarized in more detail below.

The Company’s Sale of Units.

On February 2, 2011, the Company entered into a Unit Purchase Agreement (the “Unit Purchase Agreement”) with Oak Investment Partners XII, Limited Partnership (“Oak”) and GFINet Inc. (“GFI”). Pursuant to the Unit Purchase Agreement, among other things, on February 2, 2011, the Company sold to Oak and GFI an aggregate of 65 Units for a total purchase price of $6,500,000.

Conversion and Exercise Restriction

The shares of Series D Preferred included in the Units issued pursuant to the Unit Purchase Agreement are subject to the restriction that they may not be converted into shares of Common Stock until the Company’s authorized shares of Common Stock are increased from 300,000,000 to 1,000,000,000 (the “Conversion Restriction”), and the Common Stock Warrants included in the Units issued pursuant to the Unit Purchase Agreement are subject to the restriction that they may not be exercised for shares of Common Stock until the Company’s authorized shares of Common Stock are increased from 300,000,000 to 1,000,000,000 (the “Exercise Restriction”).

Subject to the Conversion Restriction, the shares of Series D Preferred included in the Units issued pursuant to the Exchange Agreement are initially convertible for an aggregate of approximately 92,857,143 shares of our Common Stock, and, subject to the Exercise Restriction, the Common Stock Warrants included in the Units issued pursuant to the Exchange Agreement are initially exercisable for an aggregate of approximately 92,857,143 shares of our Common Stock.

Warrants

The Common Stock Warrants issued pursuant to the Unit Purchase Agreement include provisions, among other things, (a) permitting the holder to exercise such Common Stock Warrant through a cashless “net exercise election,” (b) providing that, for a period of 18 months following the date of the Unit Purchase 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 customary “weighted-average” antidilution formula (subject to certain exempted issuances), and (c) until such time as the Exercise Restriction no longer applies, if the Company undergoes certain changes of control the holder may require the Company to redeem the Common Stock Warrant for such amount as the holder thereof would have received in the change of control had the Common Stock Warrant been exercised immediately prior thereto.
 
Unit Purchase Agreement

In addition to providing for the sale of the Units, the Unit Purchase Agreement contains representations and warranties and covenants of the Company in favor of Oak and GFI. The covenants set forth in the Unit Purchase Agreement include, without limitation, the following:
 
For so long as Oak or GFI owns any of the shares of Series D Preferred, Common Stock Warrants or the shares of Common Stock Warrants or the shares of Common Stock issuable upon conversion or exercise thereof, the Company is required to timely file all reports it is required to file with the SEC pursuant to the Securities Exchange Act of 1934 (as amended, the “1934 Act”), and the Company is prohibited from terminating its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise permit such termination.

 
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The Company is prohibited from selling any additional securities pursuant to the financing contemplated by the Unit Purchase Agreement without the prior written consent of each of Oak, GFI and UBS Americas, Inc.; provided, however, that until March 31, 2011, the Company may sell, without the prior written consent of such parties (a) up to an aggregate of 50 additional Units (at the same purchase price and on substantially identical terms to those set forth in the Unit Purchase Agreement (and in no event on terms more favorable than those set forth in the Unit Purchase Agreement)) to certain potential investors, and (b) up to an aggregate of 5 additional Units (at the same purchase price and on substantially identical terms to those set forth in the Unit Purchase Agreement (and in no event on terms more favorable than those set forth in the Unit Purchase Agreement)) to certain individuals approved by each Oak, GFI and UBS Americas, Inc.
 
Other than Series C Preferred, Series D Preferred, Series D-1 Preferred, the Common Stock Warrants, and Series A Warrants, the Company is prohibited from selling any warrants, convertible debt or other securities convertible into the Company’s Common Stock that include dilution protection provisions other than provisions relating to stock splits, reclassifications, stock dividends and other like kind events.
 
As promptly as possible, but in no event later than the date 180 days after the date of the Unit Purchase Agreement, the Company shall undertake any and all actions necessary to authorize, approve and effect the increase of its authorized Common Stock from 300,000,000 shares to 1,000,000,000 shares (the “Authorized Share Increase”), including, without limitation, (a) establishing a record date for, duly calling, giving notice of, convening and holding a meeting of its stockholders (the “Company Stockholders Meeting”) for the purpose of obtaining the necessary stockholder approval for the Authorized Share Increase, (b) preparing and filing with the Securities and Exchange Commission a proxy statement on Schedule 14A under the 1934 Act regarding the Authorized Share Increase and the Company Stockholders Meeting, and mailing (or otherwise making available in accordance with the 1934 Act and the Delaware General Corporation Law) a copy thereof to each of the Company’s stockholders, and (c) filing an amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware reflecting such Authorized Share Increase. If the Company fails to cause the Authorized Share Increase to become effective in accordance with these obligations, the accruing dividend on the Series D Preferred and Series D-1 Preferred shall be increased to 12% per annum (from 8% per annum).
 
Subject to certain limitations, the Company is required to defend, protect, indemnify and hold harmless Oak, GFI and each other holder of the securities acquired pursuant to the Unit Purchase Agreement from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith incurred by any such party as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Unit Purchase Agreement, (b) any breach of any covenant, agreement or obligation of the Company contained in the Unit Purchase Agreement or the Series D Stockholders’ Agreement, or (c) any cause of action, suit or claim brought or made against such party by a third party and arising out of or resulting from (i) the execution, delivery, performance or enforcement of the Unit Purchase Agreement, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the securities contemplated by the Unit Purchase Agreement, (iii) the status of Oak, GFI or another holder of the securities contemplated by the Unit Purchase Agreement as an investor in the Company, or (iv) the exchange of Series B Preferred Stock for Series D Preferred Stock pursuant to the Exchange Agreement.
 
In the event the conclusion, settlement or determination of any action, suit, proceeding, arbitration or dispute between the Company and Duncan-Williams, Inc. results in the Company issuing shares of capital stock to Duncan-Williams, Inc. or any of its affiliates, the Company is required to issue (and take such steps as are necessary in order to issue) to each of Oak and GFI such number of shares of capital stock and rights to acquire shares of capital stock of the same type and with the same terms as are then held by such buyer so that such buyer’s fully-diluted ownership percentage as of the time immediately prior to the issuance to Duncan Williams, Inc. is not decreased by such issuance.

Additionally, pursuant to the Unit Purchase Agreement, GFI and Oak agreed to, and Oak agreed to cause Beacon Capital Strategies, Inc. to: (a) appear (in person or by proxy) at any annual or special meeting of the stockholders of the Company at which the Authorized Share Increase will or may be considered, in each case, for the purpose of obtaining a quorum and (b) vote (in person or by proxy), or execute a written consent or consents if stockholders of the Company are requested to vote their shares by written consent, all of such stockholder’s voting shares of the Company’s capital stock: (i) in favor of the Authorized Share Increase; (ii) against: (x) any and all proposals contrary to the Authorized Share Increase; and (y) any action, proposal, transaction or agreement which could reasonably be expected to result in a breach or failure by the Company to perform its obligations under with respect thereto; and (c) otherwise in support of the Authorized Share Increase and of the Company’s performance of its obligations with respect thereto. Simultaneously with the execution of the Unit Purchase Agreement, GFI, Oak and Beacon entered into a Voting Agreement with Fund Holdings LLC, Bonds MX, LLC, Robert Jones, Edwin L. Knetzger, III (a member and Co-Chairman of the Company’s Board of Directors) and Laidlaw Venture Partners III, LLC pursuant to which Fund Holdings LLC, Bonds MX, LLC, Robert Jones, Edwin L. Knetzger, III and Laidlaw Venture Partners III, LLC agreed to take certain actions in support of the Authorized Share Increase, including voting all of their shares of the Company’s voting capital stock in favor of the Authorized Share Increase. We anticipate that the shares of voting capital stock currently held by GFI, Oak, Beacon and the other parties to the Voting Agreement will constitute more than a majority of the shares entitled to vote on the Authorized Share Increase and that such parties will have the ability to cause the Authorized Share Increase to be approved when it is considered at a meeting of the Company’s stockholders. 
 
 
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Series D Convertible Preferred Stock

The Company has authorized 14,500 shares of preferred stock designated as Series D Convertible Preferred Stock (the “Convertible Series D Preferred Stock”), $0.0001 par value per share, of which 6,500 shares are issued and outstanding.  Each share of Convertible Series D Preferred Stock has a stated value per share of $1,000 (the “Stated Value”).

The Company’s Exchange of Series B and B-1 Units for Series D and D-1 Units for Certain Outstanding Securities.

On February 2, 2011, in connection with and as a condition to the transactions contemplated by the Unit Purchase Agreement, we entered into an Exchange Agreement (the “Exchange Agreement”) with UBS Americas, Inc. (“UBS”), Bonds MX, LLC (“Bonds MX”) and Robert Jones (“Jones”). Pursuant to the Exchange Agreement, among other things, on February 2, 2011, we (a) issued 22.5 Units in exchange for all of the outstanding shares of our Series B Preferred and certain outstanding warrants to purchase shares of our Common Stock, and (b) issued 12.5 Series D-1 Units in exchange for all of the outstanding shares of our Series B-1 Preferred and certain outstanding warrants to purchase shares of our Series A Preferred.

The Series D Preferred and Series D-1 Preferred and the Common Stock Warrants included in the Units and Series D-1 Units issued pursuant to the Exchange Agreement are subject to the Conversion Restriction and Exercise Restriction, respectively.

The Common Stock Warrants issued pursuant to the Exchange Agreement include provisions, among other things, (a) permitting the holder to exercise such Common Stock Warrant through a cashless “net exercise election,” (b) 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 customary “weighted-average” antidilution formula (subject to certain exempted issuances), and (c) until such time as the Exercise Restriction no longer applies, if the Company undergoes certain changes of control the holder may require the Company to redeem the Common Stock Warrant for such amount as the holder thereof would have received in the change of control had the Common Stock Warrant been exercised immediately prior thereto.

Subject to the Conversion Restriction, the shares of Series D Preferred included in the Units issued pursuant to the Exchange Agreement are initially convertible for an aggregate of approximately 32,142,857 shares of our Common Stock, and subject to the Exercise Restriction, the Common Stock Warrants included in the Units issued pursuant to the Exchange Agreement are initially exercisable for an aggregate of 32,142,857 shares of our Common Stock.

The shares of Series D-1 Preferred included in the Series D-1 Units issued pursuant to the Exchange Agreement are initially convertible for an aggregate of approximately 178,571 shares of our Series A Preferred, and, subject to the Conversion Restriction and only in certain circumstances, also are initially convertible for an aggregate of approximately 17,857,143 shares of our Common Stock. The Series A Warrants included in the Series D-1 Units issued pursuant to the Exchange Agreement are initially exercisable for an aggregate of approximately 178,571 shares of our Series A Preferred. The Series A Warrants issued pursuant to the Exchange Agreement include provisions, among other things, (a) permitting the holder to exercise such Series A Warrant through a cashless “net exercise election,” and (b) 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 Series A Warrants will be reduced by a customary “weighted-average” antidilution formula (subject to certain exempted issuances).

In addition to providing for the issuance of the of the Units and Series D-1 Units in exchange for the Series B Securities and Series B-1 Securities, the Exchange Agreement contains representations and warranties and covenants of the Company in favor of UBS, Bonds MX and Jones. The covenants set forth in the Exchange Agreement substantially similar to those set forth in the Unit Purchase Agreement.

The Company has reviewed the terms of the preferred stock and warrants exchanges and accounted for these exchanges in accordance to the provision of ASC 480, Distinguishing Liabilities from Equity and ASC 470, Debt.

Related to the exchange of the 22.5 Series B for Series D Units the Company had fair value the warrants issued associated for each at grant date, which amounted to $369,376 and $1,266,429 respectively, resulting in an $897,053 realized loss of derivatives financial instruments at the exchange date. The fair values were determined using the Black-Scholes option-pricing model at $0.04 per warrant utilizing the following assumptions, expected volatility of 66.00% , risk-free interest rate of 2.10%, contractual term of five years.
 
 
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Due to the down-round provision and in accordance with the Contracts in Entity’s Own Equity Topic of ASC 815-40-15, all warrants issued are recognized as liabilities at their respective fair values on each reporting date. The fair values of these securities were estimated using a Black-Scholes valuation model, 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 revaluation of the warrants at June 30, 2011 resulted in $64,287 unrealized gain on derivative financial instruments.

The remaining residual value of the 22.5 Units was then allocated to the Convertible Series D Preferred Stock which amounted to $983,571.  As a result the Company has reviewed the terms of the preferred stock and accounted for these preferred stock in accordance to the provision of ASC 480, Distinguishing Liabilities from Equity and ASC 470, Debt, and as such, will be classified as an equity instrument with a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of the Convertible Series D Preferred Stock was reflected as a preferred dividend of $1,285,713 at the time of the exchange.  As a result of the exchange of the Convertible Preferred Stock Series B and Series D the unit holders received the ability to convert in to approximately 22,768,000 additional common shares of stock.  This incremental benefit has been recorded as a $683,036 preferred dividend on the exchange date.

Related to the exchange of the 12.5 Series B-1 for Series D-1 Units the Company had fair value the warrants issued associated for each at grant date, which amounted to amounted to $205,225 and $703,572, respectively, resulting in an $498,347 realized loss of derivatives financial instruments at the exchange date. The fair values were determined using the Black-Scholes option-pricing model at $0.04 per warrant utilizing the following assumptions, expected volatility of 66.00%, risk-free interest rate of 2.10%, contractual term of five years.

Due to the down-round provision and in accordance with the Contracts in Entity’s Own Equity Topic of ASC 815-40-15, all warrants issued are recognized as liabilities at their respective fair values on each reporting date. The fair values of these securities were estimated using a Black-Scholes valuation model, 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 revaluation of the warrants at June 30, 2011 resulted in $35,714 unrealized gain on derivative financial instruments.

The remaining residual value of the 12.5 Units was then allocated to the Convertible Series D-1 Preferred Stock which amounted to $546,429.  As a result the Company has reviewed the terms of the preferred stock and accounted for these preferred stock in accordance to the provision of ASC 480, Distinguishing Liabilities from Equity and ASC 470, Debt, and as such, will be classified as an equity instrument with a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of the Convertible Series D Preferred Stock was reflected as a preferred dividend of $714,285 at the time of the exchange.  As a result of the exchange of the Convertible Preferred Stock Series B and Series D the unit holders received the ability to convert in to approximately 12,649,000 additional common shares of stock.  This incremental benefit has been recorded as a $379,464 preferred dividend on the exchange date.

Series D Stockholders Agreement.

In connection with and as a condition to the transactions contemplated by the Unit Purchase Agreement and the Exchange Agreement, on February 2, 2011, the Company, Oak, GFI, UBS, Bonds MX and Jones entered into a Series D Stockholders’ Agreement setting forth certain agreements among and between the Company and such stockholders (the “Stockholders Agreement”).

Pursuant to the Stockholders Agreement, in the event that Oak, GFI, UBS, Bonds MX or Jones (the “Series D Stockholders”) seeks to sell its shares of Series D Preferred or Series D-1 Preferred or warrants to purchase shares of Series D Preferred or Series D-1 Preferred, each other Series D Stockholder shall have the right to sell a pro rata portion of its similar securities along with the selling Series D Stockholder. Alternatively, the Company, at its option, may redeem the applicable securities from the other Series D Stockholders and the selling Series D Stockholder would be permitted to sell his, her or its shares free of such obligation. The foregoing obligations do not apply to transfers pursuant to Rule 144, transfers to certain permitted transferees, bona fide pledges and pledges outstanding as of the date of the Stockholders’ Agreement. Such obligations also do not apply to sales of less than 10% of the securities held by the selling Series D Stockholder.

The Stockholders Agreement requires the Company to offer the Series D Stockholders the right to participate on a pro rata basis (based on its fully diluted shares of preferred stock relative to the total number of fully diluted shares of the Company) in future issuances of equity securities by the Company.

The foregoing right does not apply to issuance of equity securities (a) in connection with any acquisition of assets of another person, whether by purchase of stock, merger, consolidation, purchase of all or substantially all of the assets of such person or otherwise approved by the Company’s Board of Directors and the requisite holders of the Series D Preferred to the extent required under the Certificate of Designation of the Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock, (b) Exempted Securities (as such term is defined in the Certificate of Designation of the Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock), (c) in an underwritten public offering with gross proceeds of at least $50,000,000 and a market capitalization of at least $175,000,000, and (d) approved by holders of a majority of the shares of Series D Preferred. The Company may elect to consummate the issuance of equity securities and subsequently provide the Series D Stockholders their right to participate. The foregoing right to participate under the Stockholders Agreement shall terminate on such date as of which less than 25% of the shares of Series D Preferred remain outstanding. 
 
 
35

 
 
Pursuant to the Stockholders Agreement, for so long as the Series D Stockholders collectively own at least 25% of the shares of Series D Preferred issued pursuant to the Unit Purchase Agreement or Exchange Agreement or 25% of the shares of Common Stock issued upon the conversion thereof, (a) the Company is required to nominate and use its reasonable best efforts to cause to be elected and cause to remain a director on the Company’s Board of Directors and (b) each Series D Stockholder is required to vote all shares of voting capital stock of the Company owned by it, so as to elect, and not to vote to remove, one person designated in writing collectively by the Series D Stockholders (the “Series D Designee”). Subject to the following sentence, the consent of each of the Series D Stockholders holding at least 8% of the outstanding shares of Series D Preferred as of the date of the Stockholders Agreement shall be required in respect of the designation of the Series D Designee. Notwithstanding the foregoing, for so long as Oak continues to own at least 25% of the shares of Series D Preferred acquired by it pursuant to the Unit Purchase Agreement or 25% of the Common Stock issued upon the conversion thereof, the Series D Designee shall be designated by Oak in its sole discretion. Subject to applicable law and the rules and regulations of the Securities and Exchange Commission and any securities exchange or quotation system on which the Company’s securities are listed or quoted, the Series D Designee shall have a right to be a member of each principal committee of the Board of Directors.

Pursuant to the Stockholders Agreement, for so long as Oak continues to own at least 25% of the shares of Series D Preferred Stock acquired by it pursuant to the Unit Purchase Agreement or 25% of the Common Stock issued upon the conversion thereof, (a) the Company is required to nominate and use its reasonable best efforts to cause to be elected and cause to remain a director on the Company’s Board of Directors and (b) each Series D Stockholder is required to vote all shares of voting capital stock of the Company owned by it, so as to elect, and not to vote to remove, one person designated by Oak (the “Oak Designee”), which Oak Designee shall, for the avoidance of doubt, be in addition to Oak’s rights in respect of the Series D Designee.

So long as any Series D Stockholder holding at least 8% of the outstanding shares of Series D Preferred or Series D-1 Preferred as of the date of the Stockholders Agreement owns at least 25% of the shares of Series D Preferred Stock or Series D-1 Preferred Stock, respectively, acquired by it pursuant to the Unit Purchase Agreement or Exchange Agreement, such Series D Stockholder shall have the right to appoint one non-voting representative to attend each meeting of the Board of Directors and each committee thereof (an “Investor Observer”). Each Investor Observer will be entitled to receive copies of all notices, minutes, consents and other materials and information that the Company provides to the Board; provided that (x) the Investor Observer shall execute a confidentiality agreement in a form reasonably acceptable to the Company and the investor designating such Investor Observer, and (y) the Company may require such Investor Observer to be recused from any meeting and may redact such materials on advice of counsel in connection with matters involving the attorney-client privilege or conflicts of interest.

Additionally, if, after the date of the Stockholders Agreement, any person acquires shares of Series A Preferred, Series D Preferred or Series D-1 Preferred, the Company shall use its reasonable best efforts to have such stockholder become a party to the Stockholders Agreement. Additionally, the Company is prohibited from issuing any shares of Series D Preferred or Series D-1 Preferred without the prior consent of the Series D Stockholders (other than as permitted by the Unit Purchase Agreement) and unless such purchaser becomes a party to the Stockholders Agreement. As also noted above, on February 2, 2011, the Company entered into the Stockholders Agreement. Pursuant to the Stockholders Agreement, the Company’s Series B Stockholders’ Agreement, dated October 19, 2010, with UBS, Bonds MX and Jones was terminated.

Amended and Restated Registration Rights Agreement.

In connection with and as a condition to the transactions contemplated by the Unit Purchase Agreement and the Exchange Agreement, on February 2, 2011, the Company entered into an Amended and Restated Registration Rights Agreement with Oak, GFI, UBS, Bonds MX and Jones (the “Amended and Restated Registration Rights Agreement”). The Amended and Restated Registration Rights Agreement requires the Company to file a registration statement with Securities and Exchange Commission covering the resale of all of the shares of Common Stock issuable upon conversion of the shares of Series D Preferred and Series D-1 Preferred and the exercise of the Common Stock Warrants sold to Oak, GFI, UBS (with respect to Common Stock issuable upon conversion of shares of Series D-1 Preferred only), Bonds MX and Jones. The Company is required to file such registration statement not later than August 7, 2011. The Amended and Restated Registration Rights Agreement amended, restated and replaced the Registration Rights Agreement, dated as of October 19, 2010, by and among the Company, UBS Americas, Bonds MX and Jones.

The Amended and Restated Registration Rights Agreement also provides Oak, GFI, UBS, Bonds MX and Jones “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, and also contains other customary undertakings and restrictions with respect to the Company.

Unregistered Sale of Equity Securities.

As discussed above, on February 2, 2011, the Company sold an aggregate of 87.5 Units pursuant to the Unit Purchase Agreement and the Exchange Agreement. The purchase price for 65 of Units was $6,500,000, and the consideration for 22.5 of such Units was the exchange of previously issued and outstanding securities which had been purchased from the Company for an aggregate purchase price of $2,250,000. Additionally, as also discussed above, on February 2, 2011, the Company sold an aggregate of 12.5 Series D-1 Units pursuant to the Exchange Agreement. The consideration for the 12.5 Series D-1 Units was the exchange of previously issued and outstanding securities which had been purchased from the Company for an aggregate purchase price of $1,250,000. 
 
 
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Related to the sale of the 65 Units the Company had to fair value the warrants issued associated with units, which amounted to $3,658,572, determined using the Black-Scholes option-pricing model at $0.04 per warrant utilizing the following assumptions, expected volatility of 66.00% , risk-free interest rate of 2.10%, and a contractual term of five years. Down-round provisions reduce the exercise price of the warrants if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new convertible instruments that have a lower exercise price.  Due to the down-round provision in the warrants and in accordance with the Contracts in Entity’s Own Equity Topic of ASC 815-40-15, all warrants issued are recognized as liabilities at their respective fair values on each reporting date. The fair values of these securities were estimated using a Black-Scholes valuation model, 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 remaining residual value of the Units was then allocated to the Convertible Series D Preferred Stock which amounted to $2,841,428.  As a result the Company has reviewed the terms of the preferred stock and accounted for these preferred stock in accordance to the provision of ASC 480, Distinguishing Liabilities from Equity and ASC 470, Debt, and as such, will be classified as an equity instrument with a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of the Convertible Series D Preferred Stock was reflected as a preferred dividend of $3,714,285 at the time of issuance of the stock.

On March 7, 2011, the Company entered into two separate Unit Purchase Agreements with two accredited investors pursuant to which, among other things, the Company sold 4 Units for an aggregate purchase price of $400,000.  Additionally, in connection with such sales, the two accredited investors joined as parties to the Series D Stockholders Agreement and the Amended and Restated Registration Rights Agreement.

Related to the sale of the 4 Units the Company had to fair value the warrants issued associated with units, which amounted to $225,714 determined using the Black-Scholes option-pricing model at $0.04 per warrant utilizing the following assumptions, expected volatility of 66.00% , risk-free interest rate of 2.19%, and a contractual term of five years. Down-round provisions reduce the exercise price of the warrants if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new convertible instruments that have a lower exercise price. Due to the down-round provision in the warrants and in accordance with the Contracts in Entity’s Own Equity Topic of ASC 815-40-15, all warrants issued are recognized as liabilities at their respective fair values on each reporting date. The fair values of these securities were estimated using a Black-Scholes valuation model, 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 remaining residual value of the Units was then allocated to the Convertible Series D Preferred Stock which amounted to $174,286.  As a result the Company has reviewed the terms of the preferred stock and accounted for these preferred stock in accordance to the provision of ASC 480, Distinguishing Liabilities from Equity and ASC 470, Debt, and as such, will be classified as an equity instrument with a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of the Convertible Series D Preferred Stock was reflected as a preferred dividend of $228,572 at the time of issuance of the stock.

Capital Raising June 2011

On June 23, 2011, the Company entered into a Unit Purchase Agreement with Jefferies & Company, Inc. (“Jefferies”) pursuant to which, among other things, the Company sold 20 Units to Jefferies for an aggregate purchase price of $2,000,000.  In connection with such sale, Jefferies joined as a party to the Series D Stockholders’ Agreement and the Amended and Restated Registration Rights Agreement.
In addition to providing for the sale of the Units, the Unit Purchase Agreement contains representations and warranties and covenants of the Company in favor of Jefferies.  The covenants set forth in the Unit Purchase Agreement include, without limitation, the following:
 
For so long as Jefferies owns any of the shares of Series D Preferred, Common Stock Warrants or the shares of Common Stock issuable upon conversion or exercise thereof, the Company is required to timely file all reports it is required to file with the SEC pursuant to the Securities Exchange Act of 1934 (as amended, the “1934 Act”), and the Company is prohibited from terminating its status as an issuer required to file reports under the 1934 Act even if the 1934 Act or the rules and regulations thereunder would otherwise permit such termination.
     
 
The Company is prohibited from selling any additional securities pursuant to the financing contemplated by the Unit Purchase Agreement without the prior written consent of Jefferies.

 
Until the earlier of (i) February 2, 2013 and (ii) the date Jefferies no longer holds Series D Preferred or at least 25% of the Common Stock received by Jefferies upon conversion of the Series D Preferred, the Company is prohibited from selling any equity or debt to a competitor of Jefferies without Jefferies’ prior written consent.
 
 
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The Company is prohibited from selling any warrants, convertible debt or other securities convertible into the Company’s Common Stock that include dilution protection provisions other than provisions relating to stock splits, reclassifications, stock dividends and other similar events.

 
Subject to certain limitations, the Company is required to defend, protect, indemnify and hold Jefferies harmless from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith incurred by Jefferies as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in the Unit Purchase Agreement, (b) any breach of any covenant, agreement or obligation of the Company contained in the Unit Purchase Agreement or the Series D Stockholders’ Agreement, or (c) any cause of action, suit or claim brought or made against Jefferies by a third party and arising out of or resulting from (i) the execution, delivery, performance or enforcement of the Unit Purchase Agreement, (ii) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of the issuance of the securities contemplated by the Unit Purchase Agreement, or (iii) the status of Jefferies as an investor in the Company.
  
 
In the event the conclusion, settlement or determination of any action, suit, proceeding, arbitration or dispute between the Company and Duncan-Williams, Inc. results in the Company issuing shares of capital stock to Duncan-Williams, Inc. or any of its affiliates, the Company is required to issue (and take such steps as are necessary in order to issue) to Jefferies such number of shares of capital stock and rights to acquire shares of capital stock of the same type and with the same terms as are then held by Jefferies so that Jefferies’ fully-diluted ownership percentage as of the time immediately prior to the issuance to Duncan Williams, Inc. is not decreased by such issuance.

The Unit Purchase Agreement entered into on June 23, 2011 is substantially similar to the Unit Purchase Agreement entered into on February 2, 2011 and described in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2011.

Additionally, in connection with the sale of Units on June 23, 2011, the Company and certain existing investors entered into an Amendment No. 1 to Series D Stockholders’ Agreement (the “Stockholders’ Agreement Amendment”).  Pursuant to the Stockholders’ Agreement Amendment, among other things, the Company agreed not to take certain actions without the prior consent of the holders of at least 85% of the Company’s issued and outstanding shares of Series C Convertible Preferred Stock, Series D Preferred and Series D-1 Convertible Preferred Stock voting together as a single class on an as-converted basis.  These actions include certain changes of control, the incurrence of indebtedness for borrowed money unless the Company would have (after giving effect to such incurrence) an EBITDA-to-interest ratio of at least 2:1, declaring any dividend in respect of the Company’s Common Stock, commencing bankruptcy or similar proceedings, making material changes to the Company’s principal business or the repurchase or redemption of the Company’s equity securities.  Prior to entering into the Stockholders’ Agreement Amendment, the Company was prohibited from taking such actions without the consent of the holders of at least 67% of the Company’s issued and outstanding shares of Series C Convertible Preferred Stock, Series D Preferred and Series D-1 Convertible Preferred Stock (voting together as a single class on an as-converted basis) pursuant to the Certificate of Designation of the Series D Convertible Preferred Stock and Series D-1 Convertible Preferred Stock.

The foregoing descriptions of the June 23, 2011 Unit Purchase Agreement, Amended and Restated Registration Rights Agreement, Series D Stockholders’ Agreement and Stockholders’ Agreement Amendment are summaries only and are qualified in their entirety by reference to actual agreements, which are included or incorporated by reference as exhibits on the Form 8-k filed with the Securities and Exchange Commission on June 28, 2011.

Related to the sale of the 20 Units the Company had to fair value the warrants issued associated with units, which amounted to $1,114,286, determined using the Black-Scholes option-pricing model at $0.04 per warrant utilizing the following assumptions, expected volatility of 66.00%, risk-free interest rate of 1.48%, and a contractual term of five years. Down-round provisions reduce the exercise price of the warrants if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new convertible instruments that have a lower exercise price.  Due to the down-round provision in the warrants and in accordance with the Contracts in Entity’s Own Equity Topic of ASC 815-40-15, all warrants issued are recognized as liabilities at their respective fair values on each reporting date. The fair values of these securities were estimated using a Black-Scholes valuation model, 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 remaining residual value of the Units was then allocated to the Convertible Series D Preferred Stock which amounted to $885,714.  As a result the Company has reviewed the terms of the preferred stock and accounted for these preferred stock in accordance to the provision of ASC 480, Distinguishing Liabilities from Equity and ASC 470, Debt, and as such, will be classified as an equity instrument with a beneficial conversion feature. The intrinsic value of the beneficial conversion feature of the Convertible Series D Preferred Stock was reflected as a preferred dividend of $1,142,857 at the time of issuance of the stock.
 
 
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Warrants for Services

On February 2, 2011, the Company issued three warrants to third parties in exchange for services provided and to be provided to the Company. The fair value of the warrants issued, totaled $1,017,700, was determined using the Black-Scholes option-pricing model ranging from $0.04 to $0.03 per warrant utilizing the following assumptions, expected volatility of 66.00% , risk-free interest rate of 2.10%, contractual term of five years, for further detail see Note 17.

14.
Earnings (Loss) Per Share

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

15.
Net Capital, Reserve Requirements and Regulatory Matters

Bonds.com, Inc., the broker dealer subsidiary of the Company, is subject to the requirements of the securities exchanges of which they are members as well as the Securities and Exchange Commission Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital.  The Company claims an exemption from Rule 15c3-3 under Paragraph (k)(2)(ii) of the Rule as all customer transactions are cleared through other broker-dealers on a fully disclosed basis.  Bonds.com, Inc.  is also required to maintain a ratio of aggregate indebtedness to net capital that shall not exceed 15 to 1. 
 
Net capital positions of the Company’s broker dealer subsidiary were as follows at June 30, 2011:
 
Ratio of aggregate indebtedness to net capital
 
0.02 to 1
 
Net capital
 
$
3,418,181
 
Required net capital
 
$
100,000
 
 
On June 29, 2011, the Company received an Examination Report and Disposition Letter from the department of Member Regulation of the Financial Industry Regulatory Authority (FINRA), based on its examination of the Financial/Operational and Sales Practices of the Company covering a period during which Bonds.com Inc. was generally under prior management. The Examination Report identified certain violations of securities rules and regulations (Exceptions), which the department has referred to the Enforcement Department for its review and disposition. The Company continues to cooperate fully with FINRA.
 
The Company has contested each of the Exceptions identified, however cannot predict the outcome of the matters under review by Member Regulation, Enforcement Department, other FINRA departments or other regulatory agencies. The outcome of and costs associated with these matters could have a material adverse effect on the Companys business, financial condition and/or operating results, and could divert the efforts and attention of management from the Companys ordinary business operations.
 
16.
Share-Based Compensation
 
On February 26, 2010, pursuant to the letter agreement with John J. Barry, IV, John Barry, III and Holly A.W. Barry (the “Letter Agreement”), John J. Barry, IV was granted the right to acquire up to 6,000,000 shares of stock at an exercise price of $0.375 per share.  All stock options granted vested immediately on that date.  Also pursuant to the Letter Agreement, all remaining unvested options granted to Mr. Barry on July 7, 2009 vested on February 26, 2010.

On May 14, 2010, the Company granted two independent members of the Board of Directors 1,000,000 common stock options each, which fully vested on the date of grant. The options have a ten year life and an exercise price of $0.375 per share.

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. 

Pursuant to the employment agreements, 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 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.

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.

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. 
 
 
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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. 

Additionally, on February 2, 2011, the Company issued Common Stock options to two employees. (a) two Common Stock options issued to an employee of the Company to purchase 5,000,000 shares of the Company’s Common Stock at an exercise price of $0.07 per share and 5,000,000 shares of the Company’s Common Stock at an exercise price of $0.105 per share, the first option was fully vested on grant date, the second option shall be vested quarterly in equal amounts over a subsequent period of four years from the date of grant, each for a period of up to 7 years (subject to earlier termination) pursuant to the Company’s 2011 Equity Plan and on the other terms set forth in the Stock Option Agreement, and (b) two Common Stock Options issued to an employee of the Company to purchase 500,000 shares of the Company’s Common Stock at an exercise price of $0.07 per share and 500,000 shares of the Company’s Common Stock at an exercise price of $0.105 per share, the first option was fully vested on grant date, the second option shall be vested quarterly in equal amounts over a subsequent period of four years from the date of grant, each for a period of up to 7 years (subject to earlier termination) pursuant to the Company’s 2011 Equity Plan and on the other terms set forth in the Stock Option Agreement.
 
Additionally, on February 2, 2011, under the Loughlin separation agreement, the Company issued fully vested options to purchase 5,000,000 shares of common stock at $0.07 per share.

On March 3, 2011, our Board of Directors adopted resolutions pursuant to which the Company agreed to issue to Patricia Kemp and H. Eugene Lockhart, each directors of the Company, options to purchase shares of the Company’s Common Stock, an option to purchase 5,666,560 shares of the Company’s Common Stock at a purchase price of $0.07 per share for a period of 7 years, which was vested at grant date; 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.

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

A summary of option activity as of June 30, 2011 and changes during the three months then ended is presented below:
 
   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Term
   
Aggregate
Intrinsic
Value
 
                         
Outstanding at January 1, 2011
   
4,846,357
   
$
0.40
     
4.51
   
$
 
Granted
   
112,633,120
     
0.09
     
6.61
     
 
Exercised
   
     
     
     
 
Forfeited
   
     
     
     
 
Outstanding at June 30, 2011
   
117,479,477
   
$
0.10
     
6.61
   
$
 
Exercisable at June 30, 2011
   
53,023,930
   
$
0.08
     
3.17
   
$
 

The compensation expense recognized for the three months ended June 30, 2011 and 2010 were $0 and $998,828, respectively.   As of June 30, 2011, total unrecognized share-based compensation expense related to non-vested stock options was $2,830,961, and is expected to be recognized over a weighted average period of approximately 2.1 years.
 
 
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17.
Related Party Transactions
 
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 $0.07 per share, as of February 2, 2011.

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”).

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.
 
 
41

 

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

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

See notes 9, 10  and 11 with respect to Notes Payable, Related Parties and Convertible Notes Payable, Related Parties, Stockholders Equity
 
18.
Income Tax
 
For the six months ended June 30, 2011 and 2010, the Company recorded an income tax provision of $162,574 and $342,386, respectively.  The effective tax rate for the six months ended June 30, 2011 and 2010 was 1.94% and 4.6%, respectively.   The effective tax rate decrease for the six months ended June 30, 2011 was attributed to an unrealized gain on derivatives related to convertible notes payable.  The tax rate differs from the statutory federal rate of 34% primarily due to valuation allowances recorded on the Company's net operating loss carry forward generated during the period.  A valuation allowance has been recorded because it is more likely than not that the company will not be able to utilize net operating loss carry forward. 
 
19.
Subsequent Events
 
On July 1, 2011, the Company held its 2011 Annual Meeting of Stockholders.  The proposals voted upon at the 2011 Annual Meeting were (1) the election of Edwin L. Knetzger, III, Michael O. Sanderson, David S. Bensol, Jeffrey M. Chertoff, George P. James, Patricia Kemp and H. Eugene Lockhart as directors of the Company to serve until the 2012 Annual Meeting of Stockholders, (2) the amendment of the Company’s Certificate of Incorporation to increase the number of shares of common stock we are authorized to issue from 300,000,000 to 1,500,000,000, and (3) the adjournment, postponement or continuation of the meeting if necessary to permit further solicitation of proxies if there were insufficient votes to approve either of the foregoing proposals.  All seven nominees for director were elected and the remaining proposals approved by the requisite votes of the Company’s stockholders.  Each of the foregoing proposals are described in more detail in the Company’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 25, 2011.
 
On July 14, 2011, the Company awarded stock options to H. Eugene Lockhart and Patricia Kemp, each directors of the Company.  Each option was fully vested upon grant and provides the holder with the right to purchase up to 6,157,767 shares of our Common Stock at an exercise price of $0.075 per share, which was the most recent closing price of our Common Stock reported on the OTC Bulletin Board as of the date of grant.  The foregoing options expire on the seventh anniversary of the date of grant.  These options include the options for 5,666,560 shares of Common Stock that our Board of Directors previously approved subject to the satisfaction of certain conditions, as we reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on March 9, 2011.
 
Additionally, on July 14, 2011, the Company awarded stock options to Michael O. Sanderson, our Chief Executive Officer, George O’Krepkie, our President, Jeffrey M. Chertoff, our Chief Financial Officer, and John Ryan, our Chief Administrative Officer, pursuant to our 2011 Equity Plan.  The options awarded to Messrs. Sanderson, O’Krepkie, Chertoff and Ryan provide them with the right to purchase up to 41,051,780, 3,901,780, 8,000,000 and 8,000,000 shares of our Common Stock, respectively, at an exercise price of $0.075 per share.  Each of these options was 25% vested upon grant, with the balance vesting in equal quarterly installments over a four-year period.  These options expire on the seventh anniversary of the date of grant.  The options awarded to Messrs. Sanderson, Chertoff and Ryan were pursuant to their Employment Agreements reported by the Company in a Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2011.
 
On August 11, 2011, the Company entered into a Marketing Agreement with Red Kite Americas LLC (“Red Kite”). Pursuant to the Marketing Agreement, among other things, Red Kite has agreed to use its best efforts to market and promote our trading platform to institutional investors whose principal places of business are located in Brazil, Mexico or Columbia, and the Company has agreed to compensate Red Kite for such efforts. Red Kite’s compensation pursuant to this Marketing Agreement will be comprised of (a) a flat fee in the amount of $175.00 for each transaction in fixed income instruments executed on our trading platform by clients referred to Bonds.com, Inc. by Red Kite (subject to certain limitations), (b) a warrant to purchase 2,857,143 shares of the Company’s common stock at an exercise price of $0.07 per share, which will be issued to Red Kite immediately (the “Initial Warrant”), and (c) additional warrants to purchase shares of the Company’s common stock, with the number of shares issuable under and exercise price of such warrants determined based on 5% of the net revenue in excess of $100,000 we generate from clients referred to us by Red Kite and the 20-day weighted average price of our common stock at the end of each 12-month period under the Marketing Agreement (each an “Additional Warrant”). For example, if after the first 12-month period under the Marketing Agreement, we have generated net revenue of $200,000 from clients referred to us by Red Kite, Red Kite’s compensation would include a warrant for a number of shares equal to $5,000 (the 5% of the net revenue in excess of $100,000 for such 12-month period) divided by the 20-day weighted average price of the Company’s common stock, and such warrant would have an exercise price equal to the 20-day weighted average price of such common stock. The Initial Warrant and any Additional Warrants will have an exercise period of five years.
 
Pursuant to the Marketing Agreement, Red Kite has agreed that it will offer our corporate fixed income trading platform exclusively, except that Red Kite may collaborate with a competitor of ours to offer such a platform if it determines that we have not made substantial reasonable progress in building, marketing and branding an emerging markets fixed income product after one year. Additionally, the Company has agreed that it will offer its trading platform exclusively through Red Kite in Brazil, Mexico and Columbia, except that this exclusivity obligation would terminate if Red Kite exercises its right to collaborate with a competitor of ours.
 
The Marketing Agreement’s initial term is three years and it automatically renews for successive one-year terms unless terminated by either party upon 90-days notice prior to the end of a term. Red Kite shall have the right to terminate the Marketing Agreement earlier if the Company is unable to develop an emerging markets trading platform on or before the first anniversary of the Marketing Agreement or if the Company materially breaches the Marketing Agreement. The Company will have the right to terminate the Marketing Agreement earlier if (a) the aggregate per-transaction fees payable to Red Kite during the first year of the Marketing Agreement do not equal or exceed $100,000, (b) Red Kite materially breaches the Marketing Agreement, (c) Red Kite experiences a change of control, or (d) the Company experiences a change of control and pays a one-time termination fee equal to 50% of the per-transaction fees that otherwise would have been payable during the 12-month period following termination.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is management’s discussion and analysis of the financial condition and results of operations of Bonds.com Group, Inc. (“we”, “our”, “us”, or the “Company”), as well as our liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 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
 
 
43

 
 
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. 

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.

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

The Company incurred a loss applicable to common stockholders of approximately $17,214,000 for the six months ended June 30, 2011.  During the six months ended June 30, 2010, the Company incurred a loss of approximately $7,438,000, which is a change of approximately $9,776,000.  The net change was primarily due to an increase in preferred stock dividends expense of approximately $11,125,000, an increase in realized loss on settled derivative related to the February 2, 2011 exchange offer and conversion price reduction related to the convertible notes of approximately $1,411,000,  an increase in unrealized gain on derivative financial instrument of approximately $2,594,000 and  an increase in share based compensation, professional fee and technology and communication expense of approximately $2,232,000, $1,920,000 and $87,000, respectively, offset by an increase in gross margin of approximately $322,000, and a decrease in compensation expense, interest expense, other expense, income tax and other miscellaneous expense of approximately $2,444,000, $412,000, $916,000, $180,000 and $131,000, respectively.  

Revenue

During the six months ended June 30, 2011, the Company generated revenue of $1,752,000, compared to $1,414,000 for the six months ended June 30, 2010.  The comparative increase of 24% or approximately $338,000, was due to revenues from increased transactions in fixed income securities on our trading platform.  The sale revenues are generated by spreads we receive equal to the difference between the prices at which we sell securities on our BondPro trading platforms and the prices we pay for those securities. Given that our revenue is measured as a function of the aggregate value of the securities traded, our per trade revenue varies to a great deal based on the size of the applicable trade.
 
Gross Margin

Gross margin as a percentage of sales, or gross margin, increased by 9% to 96% for the three  months ended June 30, 2011 compared to the three months ended June 30, 2010 of 87%.  The increase in gross margin was due the renegotiation of the clearing charges with our vendor in February 2011.   

For the six months ended June 30, 2011, gross margin increased by 2% to 89% compared to the six months ended June 30, 2010 of 87%.  The increase in gross margin was due the renegotiation of the clearing charges with our vendor in February 2011.   

Operating Expenses

For the three months ended June 30, 2011, operating expenses were $2,914,000, compared to $3,323,000 for the three months ended June 30, 2010.  The comparative decrease of approximately $409,000 during the three months ended June 30, 2011 is primarily due to a decrease in compensation expense of approximately $697,000, a decrease in depreciation and amortization of approximately $8,000, a decrease in other miscellaneous expense of approximately $72,000, offset by an increase in professional fees and technology and communication expense of approximately $253,000 and $115,000, respectively.   

For the six months ended June 30, 2011, operating expenses were $9,400,000, compared to $7,736,000 for the six months ended June 30, 2010.  The comparative increase of approximately $1,664,000 during the six months ended June 30, 2011 is primarily due to a decrease in compensation expense of approximately $2,444,000, a decrease in depreciation and amortization of approximately $23,000, a decrease in other miscellaneous expense of approximately $108,000, offset by an increase in share based compensation, professional fees and technology and communication expense of approximately $2,232,000, $1,920,000 and $87,000, respectively.   
 
 
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Other Income and Expense

For the three months ended June 30, 2011, other income was 1,786,000 compared to $2,125,000 for the three months ended June 30, 2010.  The comparative decrease of approximately $339,000 during the three months ended June 30, 2011 is primarily due to a decrease in interest expense of approximately $151,000,  a decrease in other expense approximately $954,000, offset by a decrease in unrealized gain on derivative financial instrument of approximately $1,428,000 and an increase on realized loss on derivative financial instrument of approximately $16,000.

For the six months ended June 30, 2011, the Company incurred other income of $1,917,000, compared to other expense of $595,000 for the six months ended June 30, 2010.  The comparative increase of approximately $2,512,000 during the six months ended June 30, 2011 is primarily due to a decrease in interest expense of approximately $412,000,  a decrease in other expense of approximately $916,000, an increase in unrealized gain on derivative financial instrument of approximately $2,595,000, offset by an increase in realized loss on settled derivatives of approximately $1,411,000.

Liquidity and Capital Resources

As of June 30, 2011, the Company had total current assets of approximately $3,611,000, which was comprised of cash and cash equivalents, deposits with clearing organizations, and prepaid expenses and other assets.  This compares with current assets of approximately $1,016,000, comprised of cash and cash equivalents, investment securities, deposits with clearing organizations, and prepaid expenses and other assets, as of December 31, 2010.  As of June 30, 2011 and December 31, 2010, $3,447,312 and $373,128, respectively, of current assets were classified as deposits with clearing organizations.  The increase is primarily related to the aggregate of $8,561,375, net of costs, raised by the Company in financing transaction on February 2, March 7 and June 23, 2011 and the result of the Company using cash and cash equivalents available for operations during the quarter period ended June 30, 2011.

The Company’s current liabilities as of June 30, 2011 totaled approximately $8,255,000, comprised of accounts payable and accrued expenses of approximately $3,780,000, liabilities under derivative financial instruments of $3,488,000, convertible note payable of $650,000 and preferred stock dividend payable of  approximately $337,000.  This compares to current liabilities at December 31, 2010 of approximately $5,439,000, comprised of accounts payable and accrued expenses of approximately $4,868,000, liabilities under derivative financial instruments of approximately $465,000, and convertible notes payable other and notes payable other of approximately $24,000 and $82,000, respectively, due within the next 12 months. 

As of June 30, 2011, we had a working capital deficit of approximately $4,643,000, compared to a working capital deficiency of approximately $4,423,000 at December 31, 2010, an increase of approximately $220,000.  We currently do not believe we have sufficient liquidity to satisfy all current obligations when they come due; however, management is actively pursuing additional financing.  There is no assurance that those efforts will be successful. If we are unable to secure additional funding it may materially impair our ability to continue to operate our business.
 
Historically, we have satisfied our funding needs primarily through equity and debt financings, and we need to raise additional funding promptly or we risk a cessation or interruption in our business. As of August 15, 2011, the Company had cash on hand and liquid deposits with clearing organizations in the total amount of approximately $2,300,000, which includes the proceeds from the recent financings described in Note 13. We intend to use the majority of these funds for working capital purposes. Management anticipates that our current liquidity, along with cash generated from revenues, will be sufficient for sustaining our operating activities only until approximately the end of October 2011. While we are actively negotiating for additional equity investments by new investors, there is no assurance that we will be successful in raising additional capital. If we are unable to raise sufficient capital in the very near term, we may experience an interruption or cessation of our business and may be forced to seek reorganization or liquidation under U.S. bankruptcy laws. For these reasons and others, there is substantial doubt about our ability to continue as a going concern.
 
The Company is actively pursuing additional equity capital from new investors. These potential investors have discussed potential terms of their investments which include, among other things, a valuation of the Company that would significantly dilute the ownership stake of existing stockholders.  It appears that the Company will not be able to raise additional equity capital, if at all, except at a valuation that will be significantly dilutive to existing investors.
 
 
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The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2011 and 2010 (in 000’s):
 
   
Six
Months
 Ended
June 30,
2011
   
Six
Months
Ended
June 30,
2010
 
Net cash (used) in operating activities
 
$
(8,734
)
 
$
(4,266
)
Net cash (used in) investing activities
 
$
(30
)
 
$
(17
)
Net cash provided by financing activities
 
$
8,254
   
$
1,719
 
Net (decrease) in cash
 
$
(510
)
 
$
(2,564

Net cash used in operations for the six months ended June 30, 2011 was approximately $8,734,000, compared with a use of cash of approximately $4,266,000 for the six months ended June 30, 2010. The increase in cash usage for the six months ended June 30, 2011 is due primarily to non-cash items related to the Exchange Offer and the Unit sale for unrealized gain on derivative financial instruments, realized loss on derivative financial instruments and preferred stock dividends of  approximately $880,000, $1,411,000 and $8,148,000, respectively, and share based compensation of $2,332,000 offset by cash outflows for transfer of net deposits to clearing organizations in the amount of approximately $3,074,000 and net changes in working capital items in the amount of approximately $784,000.
 
Net cash used in investing activities for the six months ended June 30, 2011 were approximately $30,000, compared with a use of cash of approximately $17,000 for the six months ended June 30, 2010.

Net cash provided by financing activities were approximately $8,254,000 for the six months ended June 30, 2011, compared with cash provided by financing activities of approximately $1,719,000 for the six months ended June 30, 2010. Cash flows provided by financing activities in the six months ended June 30, 2011 reflected approximately $8,561,000 of net proceeds received from the Series D-1 Convertible Preferred Stock capital raise.  These amounts were offset by payments of debt made during the quarter ended June 30, 2011 of approximately $307,000. Cash flows provided by financing activities for the six months ended June 30, 2010  reflected the issuance of approximately $655,000 in common stock, approximately $1,542,000 Series A Preferred Stock and proceeds from notes payable and convertible notes payable of approximately $20,000 and $650,000, respectively.  These amounts were offset by repayments of debt made during the quarter ended June 30, 2010 of $1,148,000.
 
On June 29, 2011, the Company received an Examination Report and Disposition Letter from the department of Member Regulation of the Financial Industry Regulatory Authority (FINRA), based on its examination of the Financial/Operational and Sales Practices of the Company covering a period during which Bonds.com Inc. was generally under prior management. The Examination Report identified certain violations of securities rules and regulations (Exceptions), which the department has referred to the Enforcement Department for its review and disposition. The Company continues to cooperate fully with FINRA.
 
The Company has contested each of the Exceptions identified, however cannot predict the outcome of the matters under review by Member Regulation, Enforcement Department, other FINRA departments or other regulatory agencies. The outcome of and costs associated with these matters could have a material adverse effect on the Companys business, financial condition and/or operating results, and could divert the efforts and attention of management from the Companys ordinary business operations.
 
Recent Financing Activities

See Note 13 in respect to recent financing which includes prohibiting the Company from selling any additional securities pursuant to the financing contemplated by the Unit Purchase Agreement without the prior written consent of the Series D Preferred Stockholders.

Going Concern

Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with the consolidated financial statements of Bonds.com Group, Inc. for the years ended December 31, 2010 and 2009, with respect to their doubt about our ability to continue as a going concern due to our recurring losses from operations and our accumulated deficit. We have a history of operating losses since our inception in 2005, and had a working capital deficit of approximately $4,643,000 and an accumulated deficit of approximately $45,809,000 at June 30, 2011, which together raises doubt about the Company’s ability to continue as a going concern.  Our ability to continue as a going concern will be determined by our ability to sustain a successful level of operations and to continue to raise capital from debt, equity and other sources. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified in Note 2 - “Summary of Significant Accounting Policies” to the Financial Statements contained in this Annual 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 June 30, 2011 and 2010, a valuation allowance was established for the full amount of deferred tax assets related to the Companys net operating loss carry forwards due to the uncertainty of its realization.
 
 
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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 the 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 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 Black-Scholes valuation model.
 
Revenue Recognition

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

 
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Off-Balance Sheet Arrangements

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

Contractual Obligations

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

Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4T.
Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this annual report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the 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 Annual 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 determination that our disclosure controls and procedures are not operating effectively at the reasonable assurance level is based on our conclusions that we have material weaknesses in our internal control over financing reporting, which we consider an integral part of our disclosure controls and procedures.  The Company’s Chief Financial Officer is currently overseeing our disclosure controls and procedures and assisting the Company in remediating all of the above or other weaknesses in controls.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal controls over financial reporting during the quarter ended June 30, 2011 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

 
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PART II — OTHER INFORMATION
 
Item 1.
Legal Proceedings.

The Company, along with John Barry III, one of its former 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 agreement and awarded the Company $600,000 plus interest.

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

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

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

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.

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.
 
 
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As of the date of this report the Company has not received a response, except for an informal communication from an officer of Duncan-Williams seeking to discuss the litigation.
  
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.
 
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.

None.

Item 3.
Defaults Upon Senior Securities.

None.
 
Item 4. 
 
 
None.
 
Item 5.
Other Information.

None.
 
 
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Item 6.
Exhibits.

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


 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Dated:  August 22, 2011
 
BONDS.COM GROUP, INC.
 
       
   
By:
/s/ Jeffrey Chertoff
 
   
Name:  
Jeffrey Chertoff
 
   
Title:
Chief Financial Officer
 

(Signing in his capacity as duly authorized officer and as Principal Financial Officer of the Registrant)
 
 
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