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


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

FORM 10-Q

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

For the quarterly period ended June 30, 2012

OR

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

For the transition period from ________ to ________

Commission file number 000-51076

 
Bonds.com Group, Inc.
 
(Exact name of registrant as specified in its charter)
 
Delaware
 
38-3649127
 (State or other jurisdiction of incorporation or organization)
 
 (I.R.S. Employer Identification Number)
 
 
1500 Broadway, 31st Floor, New York, NY 10036
 
(Address of principal executive offices)
 
 
(212) 257-4062
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
Large accelerated filer
o
 
Accelerated filer
o
           
 
Non-accelerated filer
o
 
Smaller reporting company
x
 
(Do not check if a smaller reporting company)
 

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 104,354,190 shares of common stock, par value $0.001 per share, outstanding as of August 14, 2012.
 
 
 


 
 
BONDS.COM GROUP, INC.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements made in this Form 10-Q that are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements often can be identified by the use of terms, and words or phrases with similar meaning, such as “may”, “will”, “expect”, “believe”, “anticipate”, “estimate”, “approximate”, “plan” or “continue”, or the negative thereof. Forward-looking statements include statements about our anticipated or future business and operations, our business plan and the prospects or outlook for our future business and financial performance. Bonds.com Group, Inc. (“we”, “us”, “our” or the “Company”) intends that such forward-looking statements be subject to the safe harbors for such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s current expectations and assumptions. However, forward-looking statements, and such expectations and assumptions, are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include adverse economic conditions, entry of new and stronger competitors, inadequate capital, unexpected costs and the other risks, uncertainties and factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our other filings with the Securities and Exchange Commission. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.
 
 
2

 
 
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

BONDS.COM GROUP, INC.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
June 30,
 2012
   
December 31,
2011
 
   
(unaudited)
       
Assets
               
                 
Current assets
               
Cash
 
$
692,765
   
$
2,405,162
 
Receivable from clearing organizations
   
8,195,499
     
5,904,030
 
Prepaid expenses and other assets
   
245,984
     
185,757
 
Total current assets
   
9,134,248
     
8,494,949
 
                 
Property and equipment, net
   
513,036
     
159,439
 
Intangible assets, net
   
1,081,189
     
908,850
 
Other assets
   
143,575
     
60,267
 
Total assets
 
$
10,872,048
   
$
9,623,505
 
                 
Liabilities and Stockholders’ Deficit
               
                 
Current liabilities
               
Accounts payable and accrued expenses
 
$
3,716,883
   
$
5,015,622
 
Notes payable, related parties
   
     
100,000
 
Convertible notes payable, related parties
   
     
1,740,636
 
Other liabilities
   
18,261
     
107,032
 
Liability under derivative financial instruments
   
10,063,714
     
7,479,000
 
Total current liabilities
   
13,798,858
     
14,442,290
 
Long-term liabilities
               
Convertible notes payable, other, net of debt discount
   
393,883
     
391,038
 
Deferred rent
   
62,279
     
25,899
 
Total liabilities
   
14,255,020
     
14,859,227
 
Commitments and contingencies
               
Stockholders’ Deficit
               
Preferred stock Series A $0.0001 par value; 508,000 authorized; 85,835 and 85,835 issued and outstanding, respectively (aggregate liquidation value of $858 and $858, respectively)
   
8
     
8
 
Convertible preferred stock Series B $0.0001 par value; 20,000 authorized, 0 and 0 issued and outstanding, respectively (aggregate liquidation value of $0 and $0, respectively)
   
     
 
Convertible preferred stock Series B-1 $0.0001 par value; 6,000 authorized, 0 and 0 issued and outstanding, respectively (aggregate liquidation value of $0 and $0, respectively)
   
     
 
Convertible preferred stock Series C $0.0001 par value;10,000 authorized, 10,000 and 10,000 issued and outstanding, respectively (aggregate liquidation value of $6,500,000 and $6,500,000, respectively)
   
1
     
1
 
Convertible preferred stock Series D $0.0001 par value; 14,500 authorized, 0 and 0 issued and outstanding, respectively (aggregate liquidation value of $0 and $0, respectively)
   
     
 
Convertible preferred stock Series D-1$0.0001 par value; 1,500 authorized, 0 and 0 issued and outstanding, respectively (aggregate liquidation value of $0 and $0, respectively)
   
     
 
Convertible preferred stock Series E $0.0001 par value; 12,000 authorized, 11,831 and 11,831 issued and outstanding, respectively (aggregate liquidation value of $24,201,364 and $23,729,420 respectively)
   
1
     
1
 
Convertible preferred stock Series E-1 $0.0001 par value; 1,400 authorized, 1,334 and 1,334 issued and outstanding, respectively (aggregate liquidation value of $2,728,816 and $2,675,602 respectively)
   
     
 
Convertible preferred stock Series E-2 $0.0001 par value; 20,000 authorized, 17,000 and 10,000 issued and outstanding, respectively (aggregate liquidation value of $34,498,586 and $20,056,986, respectively)
   
2
     
1
 
Common stock $0.0001 par value; 1,500,000,000 authorized; 104,354,190 and 104,354,190 issued and outstanding, respectively
   
10,435
     
10,435
 
Additional paid-in capital
   
45,373,143
     
39,628,080
 
Accumulated deficit
   
(48,766,562
)
   
(44,874,248
)
Total stockholders’ deficit
   
(3,382,972
)
   
(5,235,722
)
Total liabilities and stockholders’ deficit
 
$
10,872,048
   
$
9,623,505
 
 
See the accompanying notes to the condensed consolidated financial statements.
 
 
3

 
 
 BONDS.COM GROUP, INC.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2012
(unaudited)
   
2011
(RESTATED)
(unaudited)
     
2012
(unaudited)
   
2011
(RESTATED)
(unaudited)
 
                             
Revenue
 
$
1,888,577
   
$
931,675
   
$
3,955,544
   
$
1,752,421
 
                                 
Operating expenses
                               
Payroll and related costs
   
2,357,150
     
1,355,027
     
3,475,198
     
3,212,916
 
Technology and communications
   
701,693
     
895,624
     
1,438,560
     
1,546,978
 
Rent and occupancy
   
100,558
     
137,206
     
178,234
     
269,717
 
Professional and consulting fees
   
1,197,890
     
604,096
     
1,863,911
     
1,801,147
 
Marketing and advertising
   
8,639
     
31,103
     
70,860
     
56,103
 
Other operating expenses
   
270,704
     
52,453
     
539,687
     
287,002
 
Clearing and executing cost
   
227,399
     
41,726
     
469,221
     
194,999
 
Total operating expenses
   
4,864,033
     
3,117,235
     
8,035,671
     
7,368,862
 
Loss from operations
   
(2,975,456
)
   
(2,185,560
)
   
(4,080,127
)
   
(5,616,441
)
                                 
Other income (expense)
                               
Interest expense, net
   
8,508
     
(95,050
)
   
(46,690
)
   
(204,854
)
Gain on settled derivatives
   
     
     
     
465,952
 
Loss on retirement of fixed assets
   
(18,427
)
   
     
(18,427
)
   
 
Gain on extinguishment of debt
   
237,857
     
     
237,857
     
 
Change in value of derivative financial instruments
   
(142,285
   
71,426
     
(67,714
)
   
85,712
 
Other income, net
   
78,245
     
49,146
     
82,787
     
110,768
 
Total other income
   
163,898
     
25,522
     
187,813
     
457,578
 
Loss before income tax expense
   
(2,811,558
   
(2,160,038
)
   
(3,892,314
)
   
(5,158,863
)
Income tax expense
   
     
(34,710
)
   
     
(162,574
)
Net loss
   
(2,811,558
)
   
(2,194,748
)
   
(3,892,314
)
   
(5,321,437
)
Preferred stock dividend (undeclared)
   
(487,577
)
   
 (207,429
   
(938,755
)
   
 (1,265,493
Net loss applicable to common stockholders
 
$
(3,299,135
)
 
$
(2,402,177
)
 
$
(4,831,069
)
 
$
(6,586,930
)
Net loss per common share - basic and diluted
 
$
(0.03
)
 
$
(0.02
)
 
$
(0.05
)
 
$
(0.06
)
Weighted average number of shares of common stock outstanding
   
104,354,190
     
104,354,190
     
104,354,190
     
104,354,190
 
 
See the accompanying notes to the condensed consolidated financial statements.
 
 
4

 
 
BONDS.COM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT)
 

                                           
                           
Additional
         
Total
 
   
Preferred Stock
   
Common Stock
   
Paid-In
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
(Deficit)
   
(Deficit)
 
UNAUDITED
                                         
Balances at December 31, 2011
    119,000     $ 11       104,354,190     $ 10,435     $ 39,628,080     $ (44,874,248 )   $ (5,235,722 )
                                                         
Sale of convertible preferred Series E-2 shares, net of offering costs of $ 33,293
    7,000       1      
     
      6,966,706      
      6,966,707  
Fair value of Common Stock warrants issued in conjunction with sale of convertible preferred Series E-2 shares
   
     
     
     
      (2,517,000 )    
      (2,517,000 )
Stock-based compensation expense
   
     
     
     
      1,017,357      
      1,017,357  
Issuance of options in settlement of liability for directors fees
   
     
     
     
      278,000      
      278,000  
Net loss
   
     
     
     
     
      (3,892,314 )     (3,892,314 )
                                                         
Balances at June 30, 2012 (unaudited)
    126,000     $ 12       104,354,190     $ 10,435     $ 45,373,143     $ (48,766,562 )   $ (3,382,972 )

See the accompanying notes to the condensed consolidated financial statements.
 
 
5

 
 
 
 BONDS.COM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
For the Six Months Ended
June 30,
 
   
2012
(unaudited)
   
2011
(RESTATED)
(unaudited)
 
Cash Flows From Operating Activities
               
Net loss
 
$
(3,892,314
)
 
$
(5,321,437
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Deferred income taxes
   
     
162,574
 
Depreciation
   
55,280
     
24,205
 
Amortization
   
3,418
     
85,987
 
Share-based compensation
   
1,017,357
     
649,309
 
Interest income - write off of accrued interest
   
(27,350
)
   
 
Gain on settled derivatives
   
     
(465,952
)
Change in value of derivative financial instruments
   
 67,714
     
(84,607
)
Amortization of debt discount
   
2,845
     
5,744
 
Exchange offer financing
   
     
46,204
 
Consulting services for warrants
   
73,809
     
135,800
 
Gain on extinguishment of debt
   
(237,857
)
   
 
Gain on settlement of common stock due to note holders
   
(107,032
)
   
 
Finance cost
   
18,261
     
 
Deferred rent income
   
     
(15,714
)
Loss on retirement of fixed assets
   
18,427
     
 
Changes in operating assets and liabilities:
               
Deposit with clearing organization
   
(2,291,469
)
   
(3,074,184
Prepaid expenses and other assets
   
(134,036
)
   
(31,155
Security deposit
   
(83,308
)
   
6,716
 
Accounts payable and accrued expenses
   
(1,311,532
)
   
(849,256
Deferred rent
   
36,380
     
(7,805
)
                 
Net cash used in operating activities
   
(6,235,407
)
   
(8,733,571
)
                 
Cash Flows From Investing Activities
               
Purchase of property and equipment
   
(427,304
)
   
(30,526
)
Purchase of intangible assets
   
(175,757
)
   
 
                 
Net cash used in investing activities
   
(603,061
)
   
(30,526
)
                 
Cash Flows From Financing Activities
               
Proceeds received from issuance of preferred stock, net
   
6,966,707
     
8,561,375
 
Repayments of convertible notes payable, other
   
(1,740,636
)
   
(25,000
)
Repayments of notes payable, related parties
   
(100,000
)
   
(200,000
)
Repayments of notes payable, other
   
     
(82,000
)
                 
Net cash provided by financing activities
   
5,126,071
     
8,254,375
 
                 
Net decrease in cash
   
(1,712,397
)
   
(509,722
)
Cash, beginning of year
   
2,405,162
     
548,030
 
                 
Cash, end of year
 
$
692,765
   
$
38,308
 
                 
Supplemental Disclosure of Cash Flow Information
               
Cash paid for interest
 
$
409,364
   
$
53,356
 
Warrants issued in connection with unit sales
 
$
2,517,000
   
$
 
Warrants issued at Exchange offer
 
$
   
$
23,335
 
Issuance of  preferred stock for assets acquisition
 
$
   
$
1,072,000
 
Accrual of preferred stock dividend (undeclared)
 
$
938,755
   
$
 
    Issuance of  options in settlement of liability for directors fees   $ 278,000     $
 

See the accompanying notes to the condensed consolidated financial statements.
 
 
6

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 - Description of Business Summary
 
Principles of Consolidation
 
The accompanying condensed consolidated financial statements include the accounts of Bonds.com Group, Inc. (a Delaware Corporation), Bonds.com Holdings, Inc. (a Delaware Corporation), Bonds.com, Inc. (a Delaware Corporation), Bonds MBS, Inc. (a Delaware Corporation), and Bonds.com, LLC (an inactive Delaware Limited Liability Company). These entities are collectively referred to as the “Company,” “we,” “us,” and “our”.
 
All material intercompany transactions have been eliminated in consolidation.
 
Basis of Presentation

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

On April 2, 2012, the Company filed a Form 8-K after determining that the Company’s unaudited, condensed consolidated financial statements for the interim periods ended March 31, June 30 and September 30, 2011, which were included in the Company’s Quarterly Reports on Form 10-Q for such periods, should no longer be relied upon due to accounting errors contained in such financial statements. The financial information for the interim period ended June 30, 2011 included herein, are restated to reflect those adjustments.  Those errors and their impact on such previously filed financial statements are discussed in Note 19 to the Company’s financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Description of Business
 
Bonds.com, Inc. a Financial Industry Regulatory Authority (“FINRA”) registered broker-dealer, offers corporate bonds, through its proprietary electronic trading platforms, via its www.Bondpro.com website, and other electronic interfaces.
    
Bonds.com, Inc., commenced trading on it BondsPRO electronic platform during 2010 as it reduced and discontinued its support and use of BondStation, its prior trading platform. This platform offers professional traders and large institutional investors an alternative trading system to trade odd-lot fixed income securities. Users are able to customize screens and utilize dynamic filtering capabilities to quickly and easily select and view only those market areas that meet their criteria. The platform supports a broad range of trading opportunities, offering cutting edge technology solutions for list trading, Application Programming Interface (“API”) based order submission(s), and user portfolio specific market views. These securities include corporate bonds including emerging market debt. The BondsPRO platform provides users the ability to obtain real-time executable bids or offers on thousands of bond offerings sourced directly from broker-dealers and other end users. Unlike other electronic trading platforms that charge subscription fees, access charges, ticket fees, or commissions in order to generate revenue, the Company's model allows us to generate revenue through mark-ups or mark-downs on secondary market securities.
   
Note 2 - Summary of Significant Accounting Policies
 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
   
 Revenue Recognition
 
The Company executes transactions between its clients and liquidity providers.  It acts as an intermediary in these transactions by serving as a trading counterparty to both the buyer and the seller in matching back-to-back trades, which are then settled through its clearing firm.  Securities transactions and the related revenues and expenses are recorded on a trade-date basis.  Interest income is recorded on the accrual basis.
 
 
7

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Software Development Costs

Costs for software developed for internal use are accounted for by the capitalization of certain costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheet. Capitalized software and website development costs are amortized over three years.
 
Costs incurred during the preliminary project along with post-implementation stages of internal-use computer software and website development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life. At June 30, 2012, the Company had $181,189 in capitalized software of which $171,647 was capitalized during the quarter. The recently captalized software will be placed in service in stages beginning in 2014 and the Company will begin amortizing over the software's estimated economic life. For the three and six months ended June 30, 2012, amortization expense for recently captitalized software was zero.

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

Income Taxes

Current income taxes are based on the year’s taxable income for federal and state income tax reporting purposes. Deferred income taxes are provided on a liability basis whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and rates on the date of enactment. The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. The Company’s policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The Company’s 2009, 2010, and 2011 tax year remains subject to examination by taxing authorities. The Company has determined that it does not have any significant uncertain tax positions at June 30, 2012.

Recent Issued Accounting Pronouncements

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

Note 3 - Going Concern
 
Since its inception, the Company has generated limited revenues and has an accumulated deficit of approximately $48,800,000 at June 30, 2012, used approximately $6,200,000 of cash in operations for the six months ended June 30, 2012 and at June 30, 2012 had a stockholders' deficiency of approximately $3,400,000 and a working capital deficiency of approximately $4,700,000. Operations have been funded using proceeds received from the issuance of common and preferred stock and the issuance of notes to related and unrelated parties.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company raised $17,000,000 of new capital funded in December 2011 ($10,000,000), January 2012 ($300,000) and June 2012 ($6,700,000).  The Company plans to continue to grow its operations through the implementation of the business plan and when necessary through raising additional capital.
 
The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the resolution of this contingency.

 
8

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 4 - Fair Value of Financial Instruments
 
Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements.
 
The fair value hierarchy measures the financial assets in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow a company to sell its ownership interest back at net asset value (“NAV”) on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities or funds.
   
Level 2 – Valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government and agency debt securities, and mortgage-backed securities. Valuations are usually obtained from third party pricing services for identical or comparable assets or liabilities.
   
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealers, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

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

The Company’s derivative financial instruments consist of conversion options embedded in convertible promissory notes and warrants issued in connection with the sale of common and preferred stock that contain “down round” protection to the holders. These derivatives are valued with pricing models using inputs that are generally observable. The Company considers these models to involve significant judgment on the part of management.  The fair value of the Company’s derivative financial instruments are considered to be in Level 3 of the fair value hierarchy. The Company estimates the fair value of derivatives utilizing the Binomial Lattice pricing model. This model is dependent upon several variables such as the expected instruments term, expected strike price, expected risk-free interest rate over the expected instrument  term, the expected dividend yield rate over the expected instrument  term and the expected volatility of the Company’s stock price over the expected term. The expected term represents the period of time that the instruments granted are expected to be outstanding. The expected strike price is based upon a weighted average probability analysis of the strike price changes expected during the term as a result of the down round protection.  The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected terms of the options at the date of issuance. Expected dividend yield is based on historical trends.  Previously, the Company estimated the volatility of its common stock based on an average of published volatilities contained in the most recent audited financial statements of other publicly reporting companies in the similar industry to that of the Company since the Company determined that the historical prices of its publicly-traded common stock no longer was the best proxy to estimate the Company’s volatility.  Commencing in the quarter ended September 30, 2011, the Company determined that the prior methodology for measuring volatility of its common stock was no longer the best estimate of volatility. The Company began to measure volatility using a blended weighted average of the volatility rates for a number of similar publicly-traded companies along with the Company’s historical volatility.
 
Since the over-the-counter market has not been active and private sales of the Company’s shares sold are significantly lower than the historical trading price, the Company bases the fair market value of its common stock on an independent valuation.

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.

 
9

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Fair values of assets measured on a recurring basis at June 30, 2012 and December 31, 2011 are as follows:
 
         
Quoted Prices in Active Markets for Identical Assets / Liabilities
   
Significant Other Observable Inputs
   
Significant Unobservable Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
June 30, 2012
                       
                         
Liabilities
                       
Derivative financial instruments
 
$
10,063,714
   
$
   
$
   
$
10,063,714
 
Total liabilities measured at fair value on a recurring basis
 
$
10,063,714
   
$
   
$
   
$
10,063,714
 
                                 
December 31 , 2011
                               
                                 
Liabilities
                               
Derivative financial instruments
 
$
7,479,000
   
$
     
   
$
7,479,000
 
Total liabilities measured at fair value on a recurring basis
 
$
7,479,000
   
$
   
$
   
$
7,479,000
 
 
Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains for liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs. The following table presents additional information about Level 3 liabilities measured at fair value on a recurring basis for the period ended June 30, 2012:

   
Fair Value of Derivative Liabilities
 
Balance – December 31, 2011
  $
7,479,000
 
Changes in fair value included in operations
   
67,714
 
Issuances
   
2,517,000
 
Balance - June 30, 2012
 
$
10,063,714
 

The change in value of derivative financial instruments included in the June 30, 2012 and 2011 statements of operation are related to Level 3 instruments held.
 
Quantitative information about Level 3 Fair Value Measurements
                         
   
Fair Value at 6/30/12
 
Valuation Technique
 
Unobservable Inputs
 
Range
   
(Weighted Average)
 
                         
Derivative liability
  $
10,063,714
 
Binomial lattice pricing model
 
Market price
 
$
0.03
   
$
0.03
 
             
 Probability strike price
 
$
0.03 - $0.07
   
$
0.0635
 
             
Expected term/life (years)
   
3.59 - 4.94
     
4.22
 
             
Dividend yield
   
0.00
%
   
0.00
%
             
 Expected volatility
   
181.36% - 190.24
%
   
184.06
%
             
Risk-free rate for expected life
   
0.57% - 0.72
%
   
0.60
%
                               
The weighted-average fair value of warrants outstanding for the six months ended June 30, 2012 was $0.024.
 
 
10

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 5 - Intangible Assets

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

   
June 30, 2012
 
   
Gross
   
Accumulated Amortization
   
Net
 
Non-amortizing intangible assets:
                   
Domain name (www.bonds.com)
 
$
850,000
           
$
 850,000
 
Broker dealer license
   
50,000
             
50,000
 
     
900,000
             
900,000
 
Amortizing intangible assets
                       
Software
   
600,253
     
(419,064
)
   
181,189
 
Capitalized website development costs
   
196,965
     
(196,965
)
   
 
Other
   
6,529
     
(6,529
)
   
 
Total intangible assets
 
  
803,747
     
(622,558
)
 
  
181,189
 
Intangible assets, net
 
$
1,703,747
   
$
(622,558
)
 
$
    1,081,189
 
 
Amortization expense for the three and six months ended June 30, 2012 was $1,644 and $3,418, respectively, and for the three and six months ended June 30, 2011 was $46,539 and $85,987, respectively.  

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

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

Year Ending December 31,
     
2012 (remaining six months)
 
$
3,516
 
2013
   
4,198
 
2014
   
58,583
 
2015
   
57,676
 
2016 and after
   
57,216
 
   
$
181,189
 
         
Note 6 - Notes Payable, Related Parties
 
The following is a summary of related party notes payable at June 30, 2012 and December 31, 2011:
 
   
2012
   
2011
 
Note payable held by Receiver
 
$
   
$
100,000
 
Total
   
     
100,000
 
Less: current portion
   
     
(100,000
)
Long-term portion
 
$
   
$
 
 
Note payable held by Receiver

Interest expense recognized on related party notes payable for the three months ended June 30, 2012 and 2011 was $450 and $2,275, respectively, and for the six months ended June 30, 2012 and 2011 was $2,725 and $7,275, respectively.
  
 
11

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 7 - Convertible Notes Payable, Related Parties and Non-Related Parties
 
The following is a summary of related party and non-related party convertible notes payable at June 30, 2012 and December 31, 2011:
 
Related Parties
 
2012
   
2011
 
Convertible promissory note held by the Receiver
 
$
   
$
1,740,636
 
Total Related Parties
   
     
1,740,636
 
                 
Non-Related Parties
               
Convertible promissory notes payable
   
400,000
     
400,000
 
Less: unamortized debt discount
   
(6,117
)
   
(8,962
)
Total Non-Related Parties
   
393,883
     
391,038
 
                 
Total
   
393,883
     
2,131,674
 
Less: current portion
   
     
(1,740,636
)
Long-term portion
 
$
393,883
   
$
391,038
 
 
The convertible promissory notes are secured by all of the assets of Bonds.com Group, Inc. and Bonds.com Holdings. Inc. pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008, between the Company and the holders of such notes, as amended on February 3, 2009, as amended on May 28, 2010 (the “Security Agreement”).

On April 18, 2012, the Company paid the Receiver an aggregate of $2,250,000 in full settlement of the i) termination of any rights related to the contingent performance shares (approximately 3,257,578 shares of Common Stock) and carrying amount of the convertible note ($1,740,636) and notes payable ($100,000) plus accrued interest ($647,221) which resulted in the Company recording a gain of $237,857 on the extinguishment of the debt which is included in other income (expense), in the accompanying consolidated statement of operations.  Also, the Company has the obligation to pay the Receiver $5,000 in consideration for the repurchase of 7,582,850 shares of common stock at such time as it may lawfully repurchase such shares.
 
During the three months ended June 30, 2012 and 2011, the Company recognized $1,426 and $2,493 in interest expense related to the amortization of the debt discount associated with the warrants, respectively; and during the six months ended June 30, 2012 and 2011, the Company recognized $2,845 and $5,744, respectively.
 
During the three months ended June 30, 2012 and 2011, the Company also recognized $18,814 and $89,954 in interest expense on the Convertible Promissory Notes related parties and non-related parties, respectively; and during the six months ended June 30, 2012 and 2011, the Company also recognized $72,925 and $179,344, respectively.

Note 8 - 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. In May 2012, the Company entered into a new lease agreement for office space, which is the Company’s new headquarters. The term of the new lease is 28 months and monthly amounts due range from approximately $21,000 to $23,000.The following is a schedule of future minimum rental payments required under operating leases as of June 30, 2012:
 
Year Ending December 31,
     
2012
   
361,330
 
2013
   
353,020
 
2014
   
180,971
 
Thereafter
   
3,499
 
Total minimum payments required
 
$
898,820
 
 
 
12

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The Company had an office in Florida, which has been closed, but the Company is still obligated to pay rent through December 31, 2012.  The full amount due under this lease was charged to operations in 2011 and payments of approximately $211,000 in 2012, under the lease, are not included in rent expense for 2012.
 
Rent expense for all operating leases for the three months ended June 30, 2012 and 2011 was $100,558 and $137,206, respectively and for the six months ended June 30, 2012 and 2011 was $178,234 and $269,717, respectively.
   
Customer Complaints and Arbitration
 
From time to time the Company’s subsidiary broker-dealer, Bonds.com, Inc., may be a defendant or co-defendant in arbitration matters incidental to its retail and institutional brokerage business. Bonds.com, Inc. may contest the allegations in the complaints in these cases and the Company carries errors and omissions insurance policy to cover such incidences. The policy terms require that the Company pay a deductible of $50,000 per incidence. The Company is not currently subject to any customer complaints or arbitration claims and therefore has not accrued any liability with regards to these matters.
 
Employment Agreements
 
On May 10, 2012, the Company entered into a new employment agreement (the “Employment Agreement”) with its Chief Executive Officer.  The term of the Employment Agreement is indefinite and commits the Company to the following: an initial base salary of $300,000 per annum, subject to increase (but not decrease) by the Company’s Board of Directors;  severance benefits;  an annual bonus up to 100% of the base salary, at the discretion of the Board of Directors;  a bonus payment of $750,000 to be paid to the employee upon certain changes in control and;  an option to purchase 78,000,000 shares of the Common Stock at an exercise price of $0.09 per share, for a period of 7 years. 
 
Litigation
  
On January 12, 2009, the Company learned that Duncan-Williams, Inc. (“Duncan-Williams”) filed a complaint against the Company in United States District Court for the Western District of Tennessee, Western Division, under an alleged breach of contract.  Duncan-Williams is seeking monetary damages, a declaration of ownership relating to certain intellectual property and accounting of income earned by the company.  The Company filed a motion to dismiss the complaint.  The Court granted in part the Company’s motion and entered an order staying the action pending arbitration between the parties.  The Company is prepared to move forward with the arbitration, yet it is the Company’s position that Duncan-William’s claims are without merit.   Duncan-Williams has contacted the Company to propose a settlement of this matter.  The accompanying statement of operations does not include any charge related to the resolution of this matter.

Note 9 - Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Management believes the financial risks associated with this financial instrument is not material. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits.

Note 10 - Stockholders' Equity
 
Description of Authorized Capital

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

   
Series A
   
Series C
   
Series E
   
Series E-1
   
Series E-2
 
Balance at December 31, 2011
   
85,835
     
10,000
     
11,831
     
1,334
     
10,000
 
Issued
   
  —
     
  —
     
  —
     
  —
     
7,000
 
Balance at June 30, 2012
   
85,835
     
10,000
     
11,831
     
1,334
     
17,000
 
 
 
13

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Covenant Violation

The Series D, D-1, E, E-1 and  E-2 preferred unit purchase agreements each include a covenant which requires the Company to timely file all the required reports with the SEC pursuant to the Securities Exchange Act of 1934.   The Company is currently in violation of this covenant.

Issuances

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

On June 8, 2012, the Company sold an aggregate of 67 units for a total purchase price of $6,700,000, with each unit comprised of (a) warrants to purchase 1,428,572 shares of Common Stock and (b) 100 shares of Series E-2 Preferred.   The Company allocated $2,412,000 and $4,288,000 of its proceeds to the warrants and Series E-2 Preferred, respectively, using the residual method.  Such warrants contain down-round protection provisions for the holders and are therefore considered a derivative liability.  Such warrants have been valued using a Binomial Lattice Model.  The value of each warrant was estimated to be $0.0252 per warrant utilizing the following assumptions, expected volatility of 180.74%, risk-free interest rate of 0.71%, expected term of 5 years, weighted average probability strike price of $0.0635 and a market price of $0.03.  The Company analyzed the effective conversion feature of the Series E-2 Preferred and determined that there was no beneficial conversion features upon the issuance.
 
Common Stock Purchase Warrants
 
Warrant activity for the six months ended June 30, 2012 is as follows:
 
   
Numbers of Warrants
   
Weighted-Average Exercise Price
 
Outstanding at December 31, 2011
   
358,436,977
   
$
0.08
 
Issued
   
100,000,001
     
0.06
 
Cancelled or expired
   
     
 
Exercised
   
     
 
Outstanding at June 30, 2012
   
458,436,978
   
$
0.08
 
                 
Weighted average grant date fair value of warrants granted during the six months ended June 30, 2012
         
$
0.025
 
 
The Company recorded consulting expenses for the three months ended  June 30, 2012 and 2011 of $66,666 and $0, respectively and $73,809 and $135,800 for the six months ended June 30, 2012 and 2011, respectively, relating to warrants awarded.

Series A Participating Preferred Warrants

Series A Preferred warrant activity for the six months ended June 30, 2012 is as follows:
 
   
Numbers of Series A Preferred Warrants
   
Weighted-Average Exercise Price
 
Outstanding at December 31, 2011
   
178,575
   
$
6.10
 
Issued
   
     
 
Cancelled or expired
   
     
 
Exercised
   
     
 
Outstanding at June 30, 2012
   
178,575
   
$
6.10
 
                 
Weighted average fair value granted during the six months ended June 30, 2012
         
$
 
 
 
14

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Note 11 - Earnings (Loss) Per Share
 
Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share considers the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the entity.  No diluted loss per share has computed since the effect of any potentially dilutive securities would be antidilutive.  Potentially dilutive securities excluded from the calculation of weighted average common shares outstanding at June 30, 2012 and 2011, respectively, include the following numbers of common shares issuable under the instruments indicated 478,150,429 and 244,855,092 Common Stock and Series A Preferred warrants, 127,480,006 and 66,003,538 Common Stock underlying the Company's stock options, 7,539,683 and 64,394,019 convertible notes payable and 480,208,729 and 290,548,275 shares of preferred stock all which have the ability to be converted to common stock.
 
At June 30, 2012 and December 31, 2011, the Company had undeclared cumulative dividends in arrears of approximately $1,070,000 and $130,000, respectively.

Note 12 - Net Capital and Reserve Requirements

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

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

Net capital positions of Bonds.com Inc. were as follows at June 30, 2012:
 
   
2012
 
Ratio of aggregate indebtedness to net capital
 
0.92 to 1
 
Net capital
 
$
7,508,828
 
Required net capital
 
$
100,000
 

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

Bonds.com is currently undergoing an examination by FINRA for 2011 which, as of the date of this report, is ongoing.

Note 13 - Share-Based Compensation
 
The Company has two equity-based compensation plans, the 2006 Equity Plan (the “2006 Plan”) and the 2011 Equity Plan (the “2011 Equity Plan", and together with the 2006 Plan, each a “Plan” and together the “Plans”), each of which is effective for 10 years from the date of its adoption. The 2006 Plan and 2011 Equity Plan provides for a total of 13,133,825 and 200,000,000 shares, respectively, to be allocated and reserved for the purposes of offering non-statutory stock options to employees, consultants and non-employee directors and incentive stock options to employees.   If any option expires, terminates or is terminated or canceled for any reason prior to exercise in full, the shares subject to the unexercised portion shall be available for future options granted under the Plan.  Options become exercisable over various vesting periods depending on the nature of the grant. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans). 

The exercise price of both incentive and non-statutory options may not be less than 100% of the fair market value of the Common Stock on date of grant; provided, however, that the exercise price of an incentive stock option granted to a holder of at least ten percent (10%) of total issued and outstanding Common Stock shall not be less than 110% of the fair market value of the shares of Common Stock.  As of June 30, 2012, the Company had 34,750,158 shares of Common Stock available for the future grant of options under the 2011 Equity Plan, and 2,245,287 shares of Common Stock available for the future grant of options under the 2006 Plan.

 
15

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Stock option activity related to options granted to employees and non-employees under the Plans and related information for the six months ended June 30, 2012 is provided below: 
 
   
Shares
   
Weighted-Average Exercise Price
   
Weighted-Average Remaining Contractual Term (Years)
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2012
   
57,523,378
   
$
0.12
     
     
 
Granted
   
118,650,002
     
0.08
     
     
 
Forfeited
   
(35,000
   
0.33
     
     
 
Exercised
   
     
     
     
 
                                 
Outstanding at June 30, 2012
   
176,138,380
   
$
0.10
     
6.45
     
 
                                 
Vested or expected to vest
   
176,138,380
   
$
0.10
     
6.45
     
 
                                 
Options exercisable at June 30, 2012
   
77,801,972
   
$
0.12
     
6.57
     
 
 
Stock option activity related to options granted outside the Plans to both employees and non-employees and related information for the six months ended June 30, 2012 is provided below:
 
   
Shares
   
Weighted-Average Exercise Price
   
Weighted-Average Remaining Contractual Term (Years)
   
Aggregate Intrinsic Value
 
Outstanding at January 1, 2012
   
58,965,534
   
$
0.13
     
     
 
Granted
   
     
     
 -
     
 
Forfeited
   
     
     
     
 
Exercised
   
     
     
     
 
                                 
Outstanding at June 30, 2012
   
58,965,534
   
$
0.13
     
5.90
     
 
                                 
Vested or expected to vest
   
58,965,534
   
$
0.13
     
5.90
     
 
                                 
Options exercisable at June 30, 2012
   
49,678,034
   
$
0.14
     
5.90
     
 
 
The Company granted an aggregate of 58,965,534 options outside the Plans of which 9,500,000 was granted to non-employees.

The weighted-average grant date fair value of options granted to employees and non-employee directors during the six months ended June 30, 2012 and 2011 was $0.03 and $0.01, respectively.  Options granted to non-employee directors during the six months ended June 30, 2012 with a fair value of $278,000 were for partial payment of previously accrued directors compensation of $271,000 and $146,000 for the years ended December 31, 2011 and 2010, respectively, have a three-year life, and were fully vested at the grant date. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions:

   
 June 30
   
2012
   
2011
Dividend yield
   
     
 
Expected volatility
   
195.59% - 205.34%
     
66.00%
 
Risk-free interest rate
   
0.27% - 0.79%
     
1.61% - 2.10%
 
Expected life (in years)
   
2 - 5
     
4 - 5
 
 
The weighted-average expected life for the options granted reflects the alternative simplified method permitted by authoritative guidance, which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches.  Expected volatility for the 2011 option grants prior to July 1, 2011 was based on historical volatility over the same number of years as the expected life, prior to the option grant date. Beginning July 1, 2011, expected volatility was based on an average of the Company’s volatility plus comparable companies over the same number of years as the expected life.
 
As of June 30, 2012, there was approximately $2,939,842 of unrecognized compensation cost related to options issued of which approximately $2,319,897 will be allocated to Bonds.com, Inc.  This amount is expected to be recognized over a weighted-average 2.87 years.

 
16

 
BONDS.COM GROUP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
There were no options exercised during the six months ended June 30, 2012.  Tax benefits related to option exercises were not deemed to be realized as net operating loss carryforwards are available to offset taxable income computed without giving effect to the deductions related to option exercises.

Non-cash compensation expense relating to stock options was calculated by using the Black-Scholes option pricing model, amortizing the value calculated over the vesting period and applying a zero forfeiture percentage as estimated by the Company's management, using historical information.  The Company has elected to recognize compensation cost for option awards that have graded vesting schedules on a straight-line basis over the requisite service period for the entire award.

For the three months ended June 30, 2012 and 2011 the non-cash compensation expense relating to option grants amounted to $918,792 and $94,143, respectivley and for the six months ended June 30, 2012 and 2011, at $1,017,357 and $649,309, respectively.
 
Note 14 - Income Taxes

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

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

Note 15 - Related Parties Transactions

In the six months ended June 30, 2012 and 2011, one customer, who is also an investor in the Company, represented approximately 9.5% and 14.4%, respectively, of total revenue. The loss of that client could have a material adverse effect on our business.

 
17

 
 
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 the Company, Inc. as well as our liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the Company’s unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011
 
Executive Overview
  
The Company, through its indirect, wholly-owned subsidiary Bonds.com, Inc. (“Bonds.com”) operates an electronic trading platform under the name BondsPRO. This platform offers large institutional investors an alternative trading system to trade odd-lot fixed-income securities. Our customers are able to customize screens and utilize dynamic filtering capabilities to quickly and easily select and view only those market areas that meet their criteria. The platform supports a broad range of trading opportunities, offering cutting edge technology solutions for list trading, API based order submission, and user portfolio specific market views. The platform supports investment grade and high yield corporate bonds and emerging market debt. The BondsPRO platform provides users the ability to obtain real-time executable bids or offers on thousands of bond offerings sourced directly from broker-dealers and other end users. As a registered broker-dealer, Bonds.com acts as riskless principal on all trades which allows our customers to trade anonymously on the platform. Our customer base includes major corporate bond dealers in the odd-lot market and all market makers and liquidity providers are eligible to participate on our platform for free. Unlike other electronic trading platforms that charge subscription fees, access charges, ticket fees, or commissions in order to generate revenue, our model allows us to generate revenue through mark-ups or mark-downs on secondary market securities on those aggressing on the platform. BondsPRO provides a direct connection between our institutional customers and the trading desks at our participating broker-dealers, which we expect will reduce sales and marketing costs, and eliminate layers of intermediaries between dealers and end investors.

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

Technology

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

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

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

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

Financial Results of Operations

Earnings Overview
 
As the Company continues on its growth path and implements its business plan we continue to incur operating losses. For three months ended June 30, 2012, we incurred a net loss of $2.8 million, which was $0.6 million more than the net loss of $2.2 million incurred for the period ended June 30, 2011. The change was due to an increase in gross revenues, which were offset by an increase in operating expenses primarily associated with payroll, professional and consulting fees, and related costs. Additionally there was a gain recorded of $0.2 million for the extinguishment of the convertible promissory note held by the Receiver.

 
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For six months ended June 30, 2012, we incurred a net loss of $3.9 million, which was $1.4 million less than the net loss of $5.3 million incurred for the period ended June 30, 2011. The change was due to an increase in gross revenues, which were offset by an increase in operating expenses primarily associated with payroll and related costs. Additionally there was a gain recorded of $0.2 million for the extinguishment of the convertible promissory note held by the Receiver.

Revenue
 
The Company generates substantially all of its revenue through its riskless principal trading activity. Customers who initiate trades on our platform pay a mark-up/mark-down on each trade based on the trade’s size and maturity. All trades, once matched on the platform, settle at our clearing firm and the net proceeds are credited to our account.
 
Total revenue increased by 103% to approximately $1.9 million from $0.9 million for the three months ended June 30, 2012 compared to the same period in 2011. The increase was due to the continued growth in our customer base and increased trading volumes. Our revenue is measured as a function of the aggregate value of the securities traded, therefore revenue varies based on the size of the applicable trade.

Total revenue increased by 126% to approximately $4.0 million from $1.8 million for the six months ended June 30, 2012 compared to the same period in 2011. The increase was due to the continued growth in our customer base and increased trading volumes. Our revenue is measured as a function of the aggregate value of the securities traded, therefore revenue varies based on the size of the applicable trade.

Operating Expenses

The primary operating expenses of the Company are compensation, technology, clearing costs, and professional and consulting fees. Payroll expenses in 2012 and 2011 include salaries, sales commissions, bonuses and employee benefits and payroll taxes. In addition there is share based compensation expenses associated with the issuance of stock options under the Company’s employee equity plans. Our technology costs include license and other fees to our technology vendor, market data services and other communication and technology costs. The professional and consulting fees are primarily corporate and regulatory counsel fees, audit and accounting services fees and marketing and other consulting related costs.
 
Operating expenses increased 56%, or approximately $1.8 million to $4.9 million from $3.1 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The increase was due to additional expense of i) $1.0 million in payroll related costs primarily due the issuance of employee stock options during the quarter and the hiring of new staff, ii) $0.6 million in professional and consulting fees mainly related to legal and accounting expenses, iii) $0.2 million in other operating expenses, and iv) $0.2 million in clearing costs, all which were offset by a decrease of $0.2 million in technology and communications cost.

Operating expenses increased 9%, or approximately $0.6 million, to $8.0 million from $7.4 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The increase was driven primarily by increases of i) $0.3 million in payroll related costs due to the issuance of employee stock options offset by a reduction in sales commissions and executive compensation, ii) $0.1 million in professional and consulting fees mainly related to legal expenses, iii) $0.2 million in other operating expenses and iv) $0.3 million in clearing costs, all which were offset by an decrease of $0.1 million in technology and communications cost and a decrease of $0.1 million in rent and occupancy due to closure of Boca office.

Other Income and Expense
 
For the three months ended June 30, 2012, the Company's other income amounted to approximately $160,000 compared to other income of approximately $26,000 for the three months ended June 30, 2011. The small net increase is due primarily to a gain on the extinguishment of debt in the amount of $0.2 million.

For the six months ended June 30, 2012, the Company's other income amounted to approximately $190,000 compared to other income of $458,000 for the six months ended June 30, 2011. The decrease is due to a gain on the extinguishment of debt in the amount of $0.2 million together with a net reduction in income from settlement of derivatives of $0.5 million in 2011.

 Liquidity and Capital Resources
 
The Company continues to rely on investor capital to fund its growing business. As of June 30, 2012, the Company had total current assets of approximately $9.1 million comprised of cash and cash equivalents ($0.7 million), receivables from clearing organizations ($8.2 million), and prepaid expenses and other assets ($0.2 million). This compares with current assets of approximately $8.5 million, comprised of cash and cash equivalents ($2.4 million), receivables from clearing organizations ($5.9 million), and prepaid expenses and other assets ($0.2 million), all as of December 31, 2011. This increase of $0.6 million in current assets between such dates was primarily due to capital, net, raised as a result of the second tranche funding of the Series E-2 Preferred Stock offset by cash used in ongoing operations.

The Company’s current liabilities as of June 30, 2012 totaled approximately $13.8 million, comprised primarily of accounts payable and accrued expenses ($3.7 million), and liabilities under derivative financial instruments ($10.1 million). By comparison current liabilities at December 31, 2011 were approximately $14.4 million, comprised primarily of accounts payable and accrued expenses ($5.0 million), and liabilities under derivative financial instruments ($7.5 million), and convertible notes payable to related parties ($1.7 million).  

 
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The working capital deficiency decreased approximately 22% or ($1.2 million) to  ($4.7 million) at June 30, 2012 from ($5.9 million) at December 31, 2011.

During the six months ended June 30, 2012, the Company raised additional equity capital, net of issuance costs, by the issuance preferred stock and common stock warrants in the aggregate amount of $7.0 million. 

Our business is dependent upon the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs primarily through equity and debt financing. Our ability to continue operations and grow our business depends on our continued ability to raise additional funds and generate our targeted revenues.  We anticipate that we will need to raise additional funds to satisfy our working capital needs.
 
The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2012 and 2011 (in 000’s):
 
   
Six Months Ended
June 30, 2012
   
Six Months Ended
June 30, 2011
 
Net cash (used) in operating activities
 
$
(6,235
)
 
$
(8,733
)
Net cash (used in) investing activities
 
$
(603
)
 
$
(31
)
Net cash provided by financing activities
 
$
5,126
   
$
8,254
 
Net (decrease) in cash
 
$
(1,712
)
 
$
(510
)
 
Operating Activities - Cash used in operations for the six months ended June 30, 2012 amounted to approximately $6.2 million, consisting primarily of a net loss of approximately $3.9 million adjusted for non-cash related items of $0.9 million, and operating cash used for the transfer of net deposits as a result of capital raised, to our clearing organization in the amount of $2.3 million and payments to reduce our accounts payable and accrued expenses of $1.3 million.
 
Investing Activities – Cash used in investing activities of $0.6 million for the six months ended June 30, 2012, primarily consisted of leasehold improvements associated with the new headquarters and capitalized software costs associated with the development of the new platform.

Financing Activities - Net cash provided by financing activities of $5.1 million for the six months ended June 30, primarily consisted of net proceeds from the issuance of preferred stock and Common Stock warrants of $6.9 million offset by the repayment of certain promissory notes payable of $1.8 million.
 
Recent Financing Activities
 
In December 2011, we sold units of convertible preferred stock and common stock warrants in the amount of $10.0 million to two existing and one new institutional investor. This investor group committed to additional funding of $6.6 million conditioned upon the achievement of certain performance metrics by the Company in the first half of 2012. This additional funding was closed and received in June 2012, after the investors waived the performance metrics condition. This cash was raised primarily for the purpose of covering general operating costs of the Company.

Going Concern
 
Our independent auditors have added an emphasis paragraph to their audit opinion issued in connection with the consolidated financial statements of Bonds.com Group, Inc. for the years ended December 31, 2011 and 2010, with respect to the significant doubt that exists regarding our ability to continue as a going concern due to our recurring losses from operations, a working capital deficiency, and our accumulated deficit. We have a history of operating losses since our inception in 2005, and have a working capital deficiency of approximately $4.7 million, an accumulated deficit of approximately $48.8 million and a stockholders deficiency of approximately $3.4 million at June 30, 2012, which together raises doubt about the Company’s ability to continue as a going concern. Our ability to continue as a going concern will be determined by our ability to sustain a successful level of operations and to continue to raise capital from debt, equity and other sources.
  
Critical Accounting Policies and Estimates
 
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified in Note 2 - “Summary of Significant Accounting Policies” to the Financial Statements contained in this Annual Report certain critical accounting policies that affect the more significant judgments and estimates used in the preparation of the financial statements.
 
 
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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, 2012 and 2011, a valuation allowance was established for the full amount of deferred tax assets due to the uncertainty of its realization.
 
Share-Based Compensation
 
We measure equity-based compensation awards at the grant date (based upon an estimate of the fair value of the compensation granted) and record to expense over the requisite service period, which generally is the vesting period. Accordingly, we estimate the value of employee stock options using a Black-Scholes option pricing model, where the assumptions necessary for the calculation of fair value include expected term and expected volatility, which are subjective and represent management’s best estimate based on the characteristics of the options granted.  
 
Fair Value of Financial Instruments
 
Under U.S. GAAP, fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” U.S. GAAP establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as Level 1 (unadjusted quoted prices for identical assets or liabilities in active markets), Level 2 (inputs that are observable in the marketplace other than those inputs classified in Level 1) and Level 3 (inputs that are unobservable in the marketplace). The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of its investment securities and derivative financial instruments.
 
“Down-Round” Provisions with Rights (Warrants and Conversion Options)
 
Purchase rights (warrants) associated with certain of our financings include provisions that protect the purchaser from certain declines in the Company’s stock price (or “down-round” provisions). Down-round provisions reduce the exercise price of the warrants (and conversion rate of the convertible promissory notes) if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new convertible instruments that have a lower exercise price. Due to such down-round provision, all warrants issued are recognized as liabilities at their respective fair values on each reporting date and are marked-to-market on a monthly basis. Changes in value are recorded on our condensed consolidated statement of operations as a gain or loss on derivative financial instruments and investment securities in other income (expense). The fair values of these securities are estimated using a Binomial Lattice valuation model.
 
Revenue Recognition
 
Revenues generated from securities transactions and the related commissions are recorded on a trade date basis.
 
Off-Balance Sheet Arrangements
 
None, other than leases.
 
Contractual Obligations
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item.
 
Item 4.
Controls and Procedures.
  
Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls were not operating effectively to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (a) recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The basis for the determination that our disclosure controls and procedures are not operating effectively at the reasonable assurance level are that (a) we have material weaknesses in our internal control over financial reporting (as disclosed in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 filed with the Securities and Exchange Commission on May 21, 2012 (Item 9A. Controls and Procedures)), and (b) our historical periodic filings have not always been completed on a timely basis.
 
 
21

 
 
Changes in Internal Control over Financial Reporting
 
There have been no changes in our internal control over financial reporting in the quarter ending June 30, 2012 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
 
22

 
 
PART II — OTHER INFORMATION
 
Item 1.
Legal Proceedings.
 
On January 12, 2009, the Company learned that Duncan-Williams, Inc. (“Duncan-Williams”) filed a complaint against the Company and its subsidiaries in the United States District Court for the Western District of Tennessee, Western Division, under an alleged breach of contract arising from the Company’s previous relationship with Duncan-Williams. Duncan-Williams is seeking monetary damages for alleged breach of contract, a declaration of ownership relating to certain intellectual property and an accounting of income earned by the Company. It is the Company’s position that Duncan-Williams’ claims are without merit because, among other things, the Company did not breach any contract with Duncan-Williams and any alleged relationship that the Company had with Duncan-Williams was in fact terminated by the Company on account of Duncan-Williams’ breach and bad faith. The Company plans to defend against the claims accordingly. On February 20, 2009, the Company filed a motion to dismiss the complaint on the grounds that, among other reasons, the parties agreed to arbitrate the dispute. On October 23, 2009, the court granted in part the Company’s motion and entered an order staying the action pending arbitration between the parties. Such order does not affect the substantive and/or procedural rights of the parties to proceed before the court at a later date, or any rights the Company or Duncan-Williams may have, if any, to seek arbitration.
 
On December 3, 2010, Duncan-Williams filed a motion to lift the stay issued on October 23, 2009 and to litigate the dispute in the United States District Court for the Western District of Tennessee based on the Company’s alleged failure to move forward with arbitration. On December 20, 2010, the Company filed a response to Duncan-Williams’ motion, objecting to litigating the dispute in court and supporting the Company’s claims that it is prepared to arbitrate. On December 27, 2010, Duncan-Williams filed a reply to the Company’s response. On February 11, 2011 the United States District Court for the Western District of Tennessee issued an Order Denying Motion To Lift Stay and the Company on February 22, 2011 sent a letter to Duncan-Williams counsel stating that the Company is prepared to move forward with the arbitration. Duncan-Williams has contacted the Company to propose a settlement of this matter.
 
Item 1A.
Risk Factors.
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this Item. Please see our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission on May 21, 2012 , for a detailed discussion of risk factors applicable to us.
 
 
23

 
 
Item 2.
Exhibits.
 
(a) Exhibits required by Item 601 of Regulation S-K.
 
 
 
24


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 14, 2012
 
BONDS.COM GROUP, INC.
     
   
By:
/s/ John Ryan
   
Name:
John Ryan
   
Title:
Chief Financial Officer
  (Signing in his capacity as duly authorized officer and as Principal Financial Officer of the Registrant)
 
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