UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2008
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:
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 No.) | |
1515 Federal Highway, Suite 212, Boca Raton, Florida | 33432 | |
(Address of Principal Executive Offices) | (Zip Code) |
(561) 953-5343
(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 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.
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o Smaller Reporting Company x
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
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. As of November 14, 2008 the registrant had 61,216,590 shares of common stock, $0.0001 par value, issued and outstanding.
BONDS.COM GROUP, INC.
INDEX TO FORM 10-Q
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements | 1 | |
Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 (Unaudited) | 1 | |
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and the cumulative period from October 18, 2005 (Inception) to September 30, 2008 (Unaudited) | 2 | |
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and the cumulative period from October 18, 2005 (Inception) to September 30, 2008 (Unaudited) | 3 | |
Notes to Condensed Consolidated Financial Statements (Unaudited) | 5 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17 | |
Item 3. Quantitative and Qualitative Disclosures about Market Risk | 21 | |
Item 4T. Controls and Procedures | 22 | |
PART II. OTHER INFORMATION | ||
Item 1. Legal Proceedings | 22 | |
Item 1A. Risk Factors | 23 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 23 | |
Item 3. Defaults upon Senior Securities | 23 | |
Item 4. Submission of Matters to a Vote of Security Holders | 23 | |
Item 5. Other Information | 24 | |
Item 6. Exhibits | 24 | |
SIGNATURES | 25 |
PART I. FINANCIAL INFORMATION
Bonds.com Group, Inc.
(A Development Stage Company)
Condensed Consolidated Balance Sheets (Unaudited)
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 247,838 | $ | 1,046,150 | |||
Investment in certificate of deposit | 47,570 | 119,570 | |||||
Accrued interest receivable | 3,643 | 2,950 | |||||
Prepaid expenses and other current assets | 372,561 | 84,260 | |||||
Total current assets | 671,612 | 1,252,930 | |||||
Property and equipment, net | 326,120 | 450,238 | |||||
Intangible assets, net | 1,211,353 | 1,292,315 | |||||
Other assets | 154,995 | 201,106 | |||||
Restricted cash | 72,000 | 72,000 | |||||
Total assets | $ | 2,436,080 | $ | 3,268,589 | |||
LIABILITIES AND S TOCKHOLDERS ' EQUITY (DEFICIT) | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 991,617 | $ | 459,939 | |||
Obligations under capital leases, current portion | 56,810 | 107,912 | |||||
Notes payable, related parties | 650,000 | - | |||||
Notes payable, other | 68,632 | 272,343 | |||||
Total current liabilities | 1,767,059 | 840,194 | |||||
Long-term liabilities: | |||||||
Obligations under capital leases, net of current portion | - | 28,612 | |||||
Notes payable, other, net of current portion | 237,122 | 50,010 | |||||
Convertible notes payalbe, net of debt discount, related parties | 1,016,086 | - | |||||
Convertible notes payable, net of debt discount | 229,220 | - | |||||
Deferred rent | 31,591 | 16,277 | |||||
Total liabilities | 3,281,078 | 935,093 | |||||
Commitments and contingencies (Note 10) | |||||||
Stockholders' equity (deficit) | |||||||
Preferred stock $0.0001 par value; 1,000,000 authorized; no shares issued and outstanding | - | - | |||||
Common stock $0.0001 par value; 150,000,000 authorized; 61,216,590 and 60,932,551 issued and outstanding, respectively | 6,121 | 6,093 | |||||
Additional paid in capital | 9,101,386 | 8,727,522 | |||||
Deferred share-based compensation | (43,325 | ) | (466,428 | ) | |||
Deficit accumulated during the development stage | (9,909,180 | ) | (5,933,691 | ) | |||
Total stockholders' equity (deficit) | (844,998 | ) | 2,333,496 | ||||
Total liabilities and stockholders' equity | $ | 2,436,080 | $ | 3,268,589 |
1
Bonds.com Group, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)
For the Period From | ||||||||||
For the Three | For the Nine | October 18, 2005 | ||||||||
Months Ended | Months Ended | (Inception) to | ||||||||
September 30, 2008 | September 30, 2008 | September 30, 2008 | ||||||||
Revenues | $ | 181,125 | $ | 285,461 | $ | 323,145 | ||||
Cost of sales | 53,033 | 79,948 | 86,444 | |||||||
Gross Margin | 128,092 | 205,513 | 236,701 | |||||||
Operating expenses: | ||||||||||
Technology and communications | 350,933 | 911,976 | 1,676,896 | |||||||
Software and support | 31,708 | 97,244 | 827,078 | |||||||
Payroll and related costs | 347,000 | 1,282,038 | 2,638,525 | |||||||
Rent and occupancy | 89,079 | 271,381 | 530,824 | |||||||
Legal, accounting and other professional fees | 157,555 | 780,629 | 2,291,088 | |||||||
Travel and entertainment | 17,265 | 94,898 | 213,413 | |||||||
Marketing and advertising | 8,029 | 290,448 | 384,718 | |||||||
Other operating expenses | 45,511 | 277,778 | 931,996 | |||||||
Royalties | - | - | 200,000 | |||||||
Depreciation | 40,338 | 118,206 | 224,703 | |||||||
Amortization | 47,251 | 142,103 | 247,188 | |||||||
Total operating expenses | 1,134,669 | 4,266,701 | 10,166,429 | |||||||
Loss from operations | (1,006,577 | ) | (4,061,188 | ) | (9,929,728 | ) | ||||
Other income (expense): | ||||||||||
Interest income | 2,109 | 11,997 | 18,493 | |||||||
Interest expense | (62,550 | ) | (115,398 | ) | (187,045 | ) | ||||
Other income | 25,000 | 294,950 | 294,950 | |||||||
Other expense | (2,900 | ) | (105,850 | ) | (105,850 | ) | ||||
Total other income (expense) | (38,341 | ) | 85,699 | 20,548 | ||||||
Net loss before taxes | (1,044,918 | ) | (3,975,489 | ) | (9,909,180 | ) | ||||
Income taxes | - | - | - | |||||||
Net loss | $ | (1,044,918 | ) | $ | (3,975,489 | ) | $ | (9,909,180 | ) | |
Loss per share, basic and diluted | $ | (0.02 | ) | $ | (0.06 | ) | ||||
Weighted average shares outstanding, basic and diluted | 61,216,590 | 61,198,967 |
See the accompanying notes to the condensed consolidated financial statements.
2
Bonds.com group, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Period From | |||||||
For the Nine | October 18, 2005 | ||||||
Months Ended | (Inception) to | ||||||
September 30, 2008 | S eptember 30, 2008 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (3,975,489 | ) | $ | (9,909,180 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation | 118,206 | 224,703 | |||||
Amortization | 142,103 | 247,188 | |||||
Share-based compensation | 84,169 | 243,340 | |||||
Amortization of debt discount | 5,030 | 5,030 | |||||
Impairment of property and equipment | - | 33,240 | |||||
Changes in operating assets and liabilities: | |||||||
Accrued interest receivable | (693 | ) | (3,643 | ) | |||
Prepaid expenses and other assets | (242,190 | ) | (518,526 | ) | |||
Accounts payable and accrued expenses | 583,363 | 977,437 | |||||
Advances payable, related parties | - | (65,284 | ) | ||||
Notes payable | - | 334,052 | |||||
Deferred rent | 15,314 | 31,591 | |||||
Net cash used in operating activities | (3,270,187 | ) | (8,400,052 | ) | |||
Cash flows from investing activities: | |||||||
Purchases of property and equipment | (5,137 | ) | (385,354 | ) | |||
Purchases of intangible assets | (61,141 | ) | (558,541 | ) | |||
Proceeds invested in broker-dealer | - | (50,000 | ) | ||||
Proceeds received from (invested) in certificate of deposit | 72,000 | (47,570 | ) | ||||
Net cash provided by (used in) investing activities | 5,722 | (1,041,465 | ) | ||||
Cash flows from financing activities: | |||||||
Advances received from related parties | - | 65,284 | |||||
Proceeds received from notes payable, related parties | 2,050,000 | 4,116,984 | |||||
Repayments of notes payable, related parties | - | (412,029 | ) | ||||
Proceeds received from convertible notes payable | 325,000 | 325,000 | |||||
Proceeds received from notes payable | - | 72,353 | |||||
Principal payments on notes payable | (16,599 | ) | (16,599 | ) | |||
Principal payments on obligations under capital leases | (79,714 | ) | (152,948 | ) | |||
Proceeds from common stock issued for cash, net of issuance costs | - | 4,825,104 | |||||
Proceeds from exercise of common stock warrants | 187,466 | 187,466 | |||||
Collections from stock subscriptions receivable | - | 750,000 | |||||
Restricted cash | - | (72,000 | ) | ||||
Reverse merger acquisition | - | 740 | |||||
Net cash provided by financing activities | 2,466,153 | 9,689,355 | |||||
Net (decrease) increase in cash and cash equivalents | (798,312 | ) | 247,838 | ||||
Cash and cash equivalents, beginning of period | 1,046,150 | - | |||||
Cash and cash equivalents, end of period | $ | 247,838 | $ | 247,838 |
See the accompanying notes to the condensed consolidated financial statements.
3
Bonds.com group, Inc.
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited) - Continued
For the Period From | |||||||
For the Nine | October 18, 2005 | ||||||
Months Ended | (Inception) to | ||||||
September 30, 2008 | S eptember 30, 2008 | ||||||
Supplemental disclosure of cash flow information: | |||||||
Cash paid for interest | $ | 11,695 | $ | 82,050 | |||
Supplemental disclosure of non-cash investing and financing activities: | |||||||
Stock issued for stock subscription receivable | $ | - | $ | 750,000 | |||
Acquisition of leased property under capital leases | $ | - | $ | 209,758 | |||
Issuance of stock to acquire domain name | $ | - | $ | 850,000 | |||
Issuance of stock to settle related party notes payable and interest | $ | - | $ | 1,682,172 | |||
Conversion of notes payable and accrued interest due to related parties to convertible notes payable | $ | 1,440,636 | $ | 1,440,636 | |||
Debt discount on convertible notes payable | $ | 525,360 | $ | 525,360 | |||
Cancellation of unvested share-based compensation awards | $ | 338,934 | $ | 338,934 |
See the accompanying notes to the condensed consolidated financial statements.
4
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Description of Business and Summary of Significant Accounting Policies
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. Bonds.com Holdings, Inc. is a development stage company since it has generated no significant revenues to date and devotes most of its activities toward raising capital and implementing its business plan. 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, municipal bonds, agency bonds, certificates of deposit, and U.S. Treasuries to potential customers via Bonds.com Holdings, Inc.’s software and website, www.bondstation.com. After final testing of its software and fully staffing its back office operations, Bonds.com Holdings, Inc. commenced initial operations in December of 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. 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 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 of Holdings Inc.’s common stock and all outstanding options and warrants in exchange for its common stock, options and warrants. The acquisition was accounted for as a reverse merger with Bonds.com Holdings, Inc. as the accounting acquirer.
Principals 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 Insight Capital Management, LLC, all of which are hereafter collectively referred to as the “Company”.
All material inter-company transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited financial statements of Bonds.com Group, Inc. (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 (all of which were of a normal recurring nature) 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 and practices applied consistently with those used in the preparation of the Company's financial statements for the cumulative period From October 18, 2005 (Inception) to December 31, 2007. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.
The Company recommends that the accompanying financial statements for the interim period be read in conjunction with the Company's financial statements for the cumulative period From October 18, 2005 (Inception) to December 31, 2007 included in the Company’s Annual Report on Form 10-K as filed on March 31, 2008.
Reclassifications
Certain reclassifications have been made to the accompanying condensed consolidated statement of operations and condensed consolidated statement of cash flows for the cumulative period from October 18, 2005 (Inception) to September 30, 2008 to conform to the current period presentation. These reclassifications had no impact on total revenues or net loss.
5
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Description of Business and Summary of Significant Accounting Policies, Continued
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 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.
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 per the following table. Leasehold improvements are amortized over the shorter of the estimated useful lives or related lease terms. The Company periodically reviews property and equipment to determine that the carrying values are not impaired.
Category | Lives | |
Leased property under capital leases | 3 years | |
Computer equipment | 3 years | |
Furniture and fixtures | 5 years | |
Office equipment | 5 years | |
Leasehold improvements | 5.25 years |
Intangible Assets
Intangible assets are initially recorded at cost, which is considered to be fair value at the time of purchase. Amortization is provided for on a straight-line basis over the estimated useful lives of the assets per the following table. 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 |
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. During 2007, leasehold improvements to the Company’s Boca Raton, Florida office space were impaired when it was determined that the tenant sub-lessor from which the Company was subleasing failed to make the required monthly payments to the primary lessor. During October 2007, the Company negotiated and entered into a new lease with the lessor for different office space within the same office building. The landlord allowed the Company to continue to occupy the old office space while improvements were made to the new office space. Accordingly, the leasehold improvements made to the old space were written off in 2007. Accordingly, an impairment loss of $21,365 was recognized in other operating expenses in the accompanying statement of operations for the period from October 18, 2005 (Inception) to September 30, 2008. There were no impairment losses recorded during the three or nine months ended September 30, 2008.
6
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Description of Business and Summary of Significant Accounting Policies, Continued
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 and nine months ended September 30, 2008 were $8,029 and $290,448, 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 in accordance with SFAS 123 (revised 2004), “Share-Based Payment”, or SFAS 123R, and its related implementation guidance as promulgated by both the Financial Accounting Standards Board (the “FASB”), and the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 107, or SAB 107, associated with the accounting for share-based compensation arrangements with employees and directors. These pronouncements require that equity-based compensation cost be 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. The Company adopted SFAS 123R using the prospective method on February 1, 2007, the date the initial option was granted. Under this method, share-based compensation is recognized for all new share-based awards and to awards modified, repurchased, or cancelled on or after January 1, 2006, the effective date, in accordance with the original provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) based on the grant date fair value estimated using the Black-Scholes option pricing model.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, which defines fair value, establishes a new framework for measuring that value and expands disclosures about fair value measurements. Broadly, SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 established market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. SFAS 157 will require, among other things, expanded disclosure about fair value measurements that have a significant portion of the value determined using unobservable inputs (level 3 measurements). The standard applies prospectively to new fair value measurements performed after the required effective dates, which are as follows: on January 1, 2008, the standard applied to our measurements of the fair values of financial instruments and recurring fair value measurements of non-financial assets and liabilities; on January 1, 2009, the standard will apply to all remaining fair value measurements, including non-recurring measurements of non-financial assets and liabilities such as measurement of potential impairments of goodwill, other intangible assets and other long-lived assets. It also will apply to fair value measurements of non-financial assets acquired and liabilities assumed in business combinations. On January 18, 2008, the FASB issued proposed FASB Staff Position (FSP) FAS 157-c, Measuring Liabilities under Statement 157, which will modify the definition of fair value by requiring estimation of the proceeds that would be received if the entity were to issue the liability at the measurement date. Further revisions to the measurement guidance are possible and we are monitoring emerging interpretations and developments. SFAS 157 will not have a material effect on our earnings or financial position and will have no effect on our cash flows.
7
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1 – Description of Business and Summary of Significant Accounting Policies, Continued
Recent Accounting Pronouncements - Continued
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for financial statements issued for an entity’s first fiscal year beginning after November 15, 2007. Adoption of SFAS No. 159 is not expected to have a material effect on the Company’s consolidated statements of financial condition, income or cash flows.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” and SFAS No. 160, “Non-controlling Interest in Consolidated Financial Statements.” These Statements replace FASB Statement No. 141, “Business Combinations,” and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS No. 141(R) also makes significant amendments to other Statements and other authoritative guidance. The Statements are effective for years beginning on or after December 15, 2008. The Company is evaluating if the adoption of these new standards would have a material effect on its consolidated financial position or operating results.
Note 2 – Going Concern
Since its inception, the Company has generated no significant revenues and has incurred a cumulative operating loss since inception of $9,929,728 and a cumulative net loss since inception of $9,909,180 and further losses are anticipated in the development of its business. The Company is in the development stage and has not generated significant operating revenues since its inception. Without additional capital from outside investors, or further financing, the Company’s ability to continue with development stage activities and to implement its business plan is limited. Management commenced operations in December of 2007 utilizing additional capital raised during the months of October and November 2007, with operations during 2008 also being funded using proceeds received primarily from the issuance of related party notes. The Company’s independent registered public accounting firm included an additional paragraph in their December 31, 2007 report raising substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Fair Value of Financial Instruments
Cash and cash equivalents, accounts payable and accrued expenses, and other current liabilities are recorded in the financial statements at cost, which approximates fair market value because of the short-term maturity of these instruments. Based on the market interest rates currently available to the Company for investments with similar terms and maturities, the fair value of its certificates of deposit at September 30, 2008 and December 31, 2007, was $119,570, of which $72,000 is collateral for a loan to a non-related lender and is classified as restricted cash on the Company’s balance sheet. The carrying amount of the Company's obligations under capital leases approximates quoted market prices or current rates offered to the Company for debt of the same remaining maturities.
8
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 4 – Property and Equipment
Property and equipment consisted of the following at September 30, 2008 and December 31, 2007:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Leased property under capital leases | $ | 209,758 | $ | 209,758 | |||
Computer equipment | 175,815 | 173,437 | |||||
Furniture and fixtures | 43,088 | 40,329 | |||||
Office equipment | 111,177 | 122,227 | |||||
Leasehold improvements | 10,372 | 10,372 | |||||
Total property and equipment | 550,210 | 556,123 | |||||
Less: Accumulated depreciation and amortization | (224,090 | ) | (105,885 | ) | |||
Property and equipment, net | $ | 326,120 | $ | 450,238 |
Depreciation expense for the three and nine months ended September 30, 2008 was $40,338 and $118,206, respectively.
Note 5 – Intangible Assets
Intangible assets consisted of the following at September 30, 2008 and December 31, 2007:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
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 | 401,497 | 340,356 | |||||
Capitalized website development costs | 150,515 | 150,515 | |||||
Other | 6,529 | 6,529 | |||||
1,458,541 | 1,397,400 | ||||||
Less: Accumulated amortization | (247,188 | ) | (105,085 | ) | |||
Intangible assets, net | $ | 1,211,353 | $ | 1,292,315 |
Amortization expense for the three and nine months ended September 30, 2008 was $47,251 and $142,103, respectively.
The following is a schedule of estimated future amortization expense of intangible assets as of September 30, 2008:
Year ending December 31, | ||||
2008 | $ | 47,251 | ||
2009 | 176,304 | |||
2010 | 81,855 | |||
2011 | 5,943 | |||
2012 | - | |||
$ | 311,353 |
9
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 6 – Investment in Broker-Dealer
On October 4, 2007, the Company acquired all of the outstanding shares of Pedestal in exchange for a cash purchase price of $50,000 plus the existing regulatory capital at the closing date ($61,599).
The following is a summary of the estimated fair values of the assets acquired and liabilities assumed as of the date of the acquisition:
Assets acquired | ||||
Cash | $ | 61,119 | ||
Other current assets | 2,504 | |||
Identified intangible assets | 50,000 | |||
Total assets acquired | $ | 113,623 | ||
Liabilities assumed | ||||
Other current liabilities | $ | 2,024 | ||
Total liabilities assumed | 2,024 | |||
Net investment | $ | 111,599 |
During the nine months ended September 30, 2008, the Company invested an additional $342,000, bringing the total investment to $1,968,609.
Note 7 – Notes Payable, Related Parties
The following is a summary of related party notes payable at September 30, 2008 and December 31, 2007:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
$250,000 unsecured promissory note payable to John Barry III, one of the Company's directors, originating from a total of $250,000 in cash received in January and February of 2008, bearing interest at 10% per annum, principal and accrued interest is due at maturity on December 31, 2008 | $ | 250,000 | $ | - | |||
$400,000 secured promissory note payable to Valhalla Investment Partners, an investment fund co-managed by Christopher D. Moody, one of the Company's directors, originating from $400,000 in cash received in May of 2008, bearing interest at 9% per annum, principal and accrued interest is due at maturity on April 30, 2009, secured by the Company's Bonds.com domain name | $ | 400,000 | $ | - | |||
Total | 650,000 | - | |||||
Less: Cuurent portion | (650,000 | ) | - | ||||
Long-term portion | $ | - | $ | - |
10
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 7 – Notes Payable, Related Parties, Continued
Interest expense recognized on related party notes payable for the three and nine months ended September 30, 2008 was $39,933 and $70,939, respectively.
During the year ended December 31, 2007, the Company received an aggregate of $1,990,000 of proceeds from related parties in exchange for notes payable bearing interest from 3.6% to 12%. Interest expense recognized on notes payable, related parties for the year ended December 31, 2007 was $53,334. During 2007, the notes were repaid via payment of cash and issuance of common stock.
Note 8 – Convertible Notes Payable, Related Parties and Non-related Parties
The following is a summary of related party and non-related party convertible notes payable at September 30, 2008 and December 31, 2007:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
$1,236,836 secured convertible promissory note payable to Christopher D. Moody, one of the Company's directors, originating from the conversion of $1,236,836 of previously outstanding promissory notes and accrued interest in September of 2008, bearing interest at 10% per annum, principal and accrued interest is due at maturity on September 24, 2010, principal and accrued interest is convertible into common stock at any time prior to maturity at a conversion price of $0.375 per share, secured by all tangible and intangible assets of the Company | $ | 1,236,836 | $ | - | |||
$203,800 secured convertible promissory note payable to Valhalla Investment Partners, an investment fund co-managed by Christopher D. Moody, one of the Company's directors, originating from the conversion of $203,800 of previously outstanding promissory notes and accrued interest in September of 2008, bearing interest at 10% per annum, principal and accrued interest is due at maturity on September 24, 2010, principal and accrued interest is convertible into common stock at any time prior to maturity at a conversion price of $0.375 per share, secured by all tangible and intangible assets of the Company | $ | 203,800 | $ | - | |||
$325,000 in secured convertible promissory notes payable to various individuals, originating from $325,000 in cash received in September of 2008, bearing interest at 10% per annum, principal and accrued interest is due at maturity on September 24, 2010, principal and accrued interest is convertible into common stock at any time prior to maturity at a conversion price of $0.375 per share, secured by all tangible and intangible assets of the Company | $ | 325,000 | $ | - | |||
Total | 1,765,636 | - | |||||
Less: Unamortized debt discount | (520,330 | ) | - | ||||
Less: Current portion | - | - | |||||
Long-term portion | $ | 1,245,306 | $ | - |
11
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 8 – Convertible Notes Payable, Related Parties and Non-related Parties, Continued
On September 24, 2008, in connection with the execution of secured convertible note and warrant purchase agreements with Christopher D. Moody “Moody”, one of the Company’s directors, and Valhalla Investment Partners (“Valhalla”), an investment fund co-managed by Moody, an aggregate of $1,440,636 of previously outstanding notes payable and accrued interest due to Moody and Valhalla was converted into new convertible notes payable with an aggregate principal amount of $1,440,636.
On September 24, 2008, the Company also executed secured convertible promissory note and warrant purchase agreements with certain third-party investors in the aggregate principal amount of $325,000 (collectively the “Convertible Notes”).
Under the terms of the Convertible Notes, the entire principal amount is due and payable on September 24, 2010 (the “Maturity Date”), interest accrues at a rate of 10% per annum, with unpaid interest payable, in full, upon the earlier of (1) the conversion of the Convertible Notes or (2) on the Maturity Date. Holders of the Convertible Notes have the right to convert principal and interest due and payable into shares of common stock of the Company at a conversion price equal to the lesser of (1) $0.375 per share, as adjusted for stock splits, combinations and the like, 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, along with its affiliated companies, Bonds.com Holdings, Bonds.com, Inc. and Insight Capital Management, LLC, in generally all of the Company’s assets, pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008 (see Notes 12 and 15).
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 1,177,106 shares of the Company’s common stock at an exercise price of $0.46875 per share and expiring on September 24, 2013.
The Company has accounted for the warrants issued in conjunction with the Convertible Notes in accordance with the provisions of APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“APB 14”). Accordingly, the warrants were valued using a Black-Scholes option pricing model with the following assumptions: (i) a risk free interest rate of 2.91%, (ii) a contractual life of 5 years, (iii) an expected volatility of 181.37%, 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 $321,534, and is being amortized to interest expense over the expected term of the Convertible Notes.
Additionally, the difference between the effective conversion price of the Convertible Notes into shares of the Company’s common stock, and the fair value of the Company’s common stock on the date of issuance of the Convertible Notes, resulted in a beneficial conversion feature in the amount of $203,826 and was calculated in accordance with EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” and EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”. This beneficial conversion feature was recorded as an additional debt discount (with a corresponding increase to additional paid-in capital) and is being amortized to interest expense over the expected term of the Convertible Notes.
During the three and nine months ended September 30, 2008, the Company recognized $5,030 in interest expense related to the amortization of the debt discount associated with the warrants and the debt discount associated with the beneficial conversion feature.
During the three and nine months ended September 30, 2008, the Company also recognized $2,090 in interest expense on the outstanding related party and non-related party Convertible Notes.
12
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 9 – Notes Payable, Other
The following is a summary of third party notes payable at September 30, 2008 and December 31, 2007:
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Equipment loan payable to a financial institution, monthly principal and interest payments of $2,251 are required, bearing interest at 7.5%, with a maturity date of December 4, 2010, secured by a certificate of deposit | $ | 55,754 | $ | 72,353 | |||
$250,000 note payable to an investment advisory firm for services rendered in relation to the Company's reverse merger transaction, monthly principal payments of $7,500 are required beginning in April 2009 and each month thereafter, bearing interest at 10.0% per annum, remaining principal and accrued interest is due at maturity on December 31, 2009 | 250,000 | 250,000 | |||||
Total | 305,754 | 322,353 | |||||
Less: Current portion | (68,632 | ) | (272,343 | ) | |||
Long-term portion | $ | 237,122 | $ | 50,010 |
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 20, 2008 was extended until December 31, 2009, (ii) repayment of principal and interest can now be accelerated in the event that the Company raises certain amounts of capital, (iii) monthly principal payments of $7,500 are required beginning on April 30, 2009 and each month thereafter until the maturity date, (iv) penalty interest that might have otherwise been due following the original maturity date was waived, and (v) the ability of the Company to repay outstanding principal and accrued interest through the issuance of common stock was eliminated.
Interest expense recognized on third party notes payable for the three and nine months ended September 30, 2008 was $7,366 and $22,841, respectively.
Note 10 – 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. The following is a schedule of future minimum rental payments required under operating leases as of September 30, 2008:
Year Ending December 31, | ||||
2008 | $ | 100,952 | ||
2009 | 309,294 | |||
2010 | 206,818 | |||
2011 | 200,714 | |||
2012 | 211,007 | |||
Total minimum payments required | $ | 1,028,785 |
Rent expense and related occupancy charges for all operating leases for the three and nine months ended September 30, 2008 was $89,079 and $271,381, respectively.
13
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 10 – Commitments and Contingencies, continued
Capital Leases
The Company leases internet servers under long-term lease agreements that are classified as capital leases. Amortization expense for capital leases is included in depreciation expense (See Note 4). Interest expense under capital leases for the three and nine months ended September 30, 2008 was $2,253 and $9,151, respectively.
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2008:
Year Ending December 31, | ||||
2008 | $ | 29,622 | ||
2009 | 29,622 | |||
Net minimum lease payments | 59,244 | |||
Less: Amount representing interest | (2,434 | ) | ||
Present value of net minimum lease payments | $ | 56,810 |
Customer Complaints and Arbitration
From time to time our 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.
Consulting Agreement
On December 21, 2007, the Company entered into a consulting agreement with a third party that is engaged in the business of providing investors relations services to small cap public companies. The one year agreement initially required the Company to pay a consulting fee in the amount of $10,000 per month and is cancellable with 30 days notice after six months from the date of execution. Effective June 1, 2008, the monthly consulting fee was reduced from $10,000 to $5,000.
Other Litigation
On February 21, 2008, a complaint was filed against the Company in the Superior Court of New Jersey by Z6 Solutions, Inc. (“Z6”) under an alleged breach of contract, asserting a claim for a sum of $50,000 for damages plus interest and all costs including attorney’s fees. The Company believes the claim is without merit and plans to defend the case accordingly. On June 4, 2008, the Company filed an Answer and Counterclaim, asserting breach of contract and failure by Z6 to carry out its obligations under the contract and a violation of the New Jersey Computer Related Offenses Act (N.J.S.A.2A:38A-1).
On September 2, 2008, a complaint was filed against the Company in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida by William M. Bass, a former director and executive of the Company. The complaint alleges that the Company in July of 2008 breached Mr. Bass’ Employment Agreement and Stock Option Agreement. The complaint seeks damages, prejudgment interest, costs and attorney fees, including without limitation: (i) severance payments amounting to approximately $700,000, (ii) current payment of an estimated future value of the stock options previously awarded to Mr. Bass, after full acceleration of the vesting thereof, and (iii) the lost value of the bonus payments Mr. Bass believes he would have earned during the remainder of the term of his Employment Agreement.
The Company is defending the lawsuit on the grounds that it properly terminated Mr. Bass “for cause” under the Employment Agreement and has satisfied all of its obligations to Mr. Bass. On October 13, 2008, the Company filed a Motion to Dismiss Complaint and alternative Motion to Strike certain portions of Mr. Bass’ complaint. The Company has paid Mr. Bass all amounts that the Company believes are owed to Mr. Bass arising from a termination of his Employment Agreement for cause and thus does not believe Mr. Bass is entitled to any of the damages claimed.
In addition, Mr. Bass has filed a charge of discrimination with the U.S. Equal Opportunity Commission and the Florida Commission on Human Relations. In his Charge, Mr. Bass alleges the Company discriminated against him because the Company erroneously regarded him as being disabled in violation of the Americans With Disability Act of 1990 and the Florida Civil Rights Act (Chapter 760). The Company believes that such charge is without merit and plans to defend the charge accordingly.
14
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 11 – Earning (Loss) Per Share
Basic earnings (loss) per share are computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings (loss) per share considers the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the entity.
The calculation of diluted earnings (loss) per share at September 30, 2008 does not include options to acquire 1,892,812 shares or warrants to acquire 4,658,225 shares of common stock, as their inclusion would have been anti-dilutive.
Note 12 – Net Capital and Reserve Requirements
Bonds.com, Inc., the broker dealer subsidiary of the Company, is subject to the requirements of the securities exchanges of which they are members as well as the Securities and Exchange Commission Uniform Net Capital Rule 15c3-1, which requires the maintenance of minimum net capital. The Company claims an exemption from Rule 15c3-3 under Paragraph (k)(2)(ii) of the Rule as all customer transactions are cleared through other broker-dealers on a fully disclosed basis. Bonds.com, Inc. is also required to maintain a ratio of aggregate indebtedness to net capital that shall not exceed 15 to 1.
Net capital positions of the Company’s broker dealer subsidiary were as follows at September 30, 2008:
Ratio of aggregate indebtedness to net capital | -1.28 to 1 | |||
Net capital | $ | (1,513,204 | ) | |
Required net capital | $ | 129,181 |
At September 30, 2008, Bonds.com, Inc. was not in compliance with its minimum net capital or ratio of aggregate indebtedness requirements. As discussed in Note 8, the Company’s Convertible Notes are secured by the assets of the Company, as well as its subsidiaries, including Bonds.com, Inc. and Bonds.com, Inc. provided a guaranty of the Company’s obligations there under. Due to the existence of the pledge of assets by Bonds.com, Inc. as collateral for the Convertible Notes and the related guaranty, the notional value of the obligation has been included in Bonds.com, Inc.’s computation of aggregate indebtedness, and reflected as a deduction in Bonds.com, Inc.’s computation of net capital, in accordance with Rule 15c3-1, as of September 30, 2008, which resulted in the noncompliance.
This noncompliance may result in regulatory fines and/or disciplinary actions against Bonds.com, Inc. or individuals associated with it. Management is unable at this time to estimate the nature and extent of potential loss arising from regulatory action against it or its associated persons, if any. The ultimate outcome could be material to the future financial condition and results of operations of Bonds.com, Inc. which are included in the consolidated results of operations presented herein.
Note 13 – Related Party Transactions
Notes Payable, Related Parties
During the nine months ended September 30, 2008 and the year ended December 31, 2007, the Company received an aggregate of $2,050,000 and $1,990,000 of proceeds from related parties in exchange for notes payable bearing interest from 3.6% to 12.0%, respectively. Interest expense recognized on related party notes payable for the three and nine months ended September 30, 2008 was $39,933 and $70,939, respectively.
During the year ended December 31, 2007, an aggregate of $1,054,955 of principal and $27,217 of related accrued interest was converted into 327,393 shares of stock and $10,000 was repaid in cash.
The balance of notes payable due to related parties at September 30, 2008 and December 31, 2007 was $650,000 and $0, respectively.
Convertible Notes Payable, Related Parties
On September 24, 2008, an aggregate of $1,440,636 of previously outstanding related party notes payable and accrued interest was converted to new convertible notes payable bearing interest at 10% per annum, with principal and accrued interest due at maturity on September 24, 2010, and with principal and accrued interest being convertible into common stock at any time prior to maturity at a conversion price of $0.375 per share. Interest expense, including amortization of debt discounts, recognized on convertible related party notes payable for the three and nine months ended September 30, 2008 was $6,472.
Equity
On January 11, 2008, a director of the Company exercised warrants to purchase 284,039 shares of common stock of the Company at $0.66 per share and total cash of $187,466.
Note 14 – Litigation Settlement Payments
During 2006, the Company paid Kestrel Technologies, LLC (“Kestrel”) approximately $600,000 to develop proprietary software on its behalf and this amount has been expensed to software expenses in the accompanying condensed consolidated statements of operations. Also during 2006, the Company’s then Chairman advanced $250,000 to Kestrel on behalf of the Company. The Company guaranteed Kestrel’s repayment of the advance to the Company’s Chairman. During August 2006, the Company commenced an action against Kestrel, alleging certain defaults by Kestrel related to the development of software.
15
Bonds.com Group, Inc.
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 14 – Litigation Settlement Payments, Continued
On April 9, 2008, a jury found Kestrel liable for an anticipatory breach of certain of its contractual obligations to Bonds.com Holdings, Inc. (“Holdings”), and awarded Holdings $600,000 in damages and $112,466 in interest for a total of $712,466. In addition, the Company’s then Chairman was awarded $312,906 in damages.
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 $826,729.71 in varying installments as follows: (i) $300,000 on or before June 1, 2008; (ii) $77,771.11 on or before the first day of each month from July through December 2008; and (iii) 59,653.05 on or before the first day of January 1, 2009. Kestrel has breached its obligations under the Payment Agreement by failing to make the $300,000 payment due on or before June 1, 2008 as well as subsequent monthly payments. As of November 14, 2008, Kestrel has only paid $324,950 to the Company under the Payment Agreement. The Company has sent Kestrel written notices of breach under the Payment Agreement. 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.
As there is no assurance that Kestrel will have the funds to pay amounts due under the Payment Agreement or that it will make such payments even if it does have such funds, the Company has elected to recognize any gains from the Judgments only when actual cash payments are received from Kestrel. As of September 30, 2008, the Company had received $294,950 in aggregate payments from Kestrel, which have been classified as other income in the accompanying statements of operations.
Note 15 – Subsequent events
Convertible Notes Payable
On October 20, 2008, the Company executed a secured convertible promissory note and warrant purchase agreement with the Neil Moody Revocable Trust (the “Neil Moody Trust”), an entity controlled by the father of Christopher Moody, one of the Company’s directors, in the principal amount of $250,000, and also executed secured convertible promissory note and warrant purchase agreements with additional third-party investors in the aggregate principal amount of $75,000 (collectively the “Convertible Notes”).
Under the terms of the Convertible Notes, the entire principal amount is due and payable on September 24, 2010 (the “Maturity Date”), interest accrues at a rate of 10% per annum, with unpaid interest payable, in full, upon the earlier of (1) the conversion of the Convertible Notes or (2) on the Maturity Date. Holders of the Convertible Notes have the right to convert principal and interest due and payable into shares of common stock of the Company at a conversion price equal to the lesser of (1) $0.375 per share, as adjusted for stock splits, combinations and the like, 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, along with its affiliated companies, Bonds.com Holdings, Bonds.com, Inc. and Insight Capital Management, LLC, in generally all of the Company’s assets, pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008.
In connection with the execution of the convertible note and warrant purchase agreements, the Neil Moody Trust and the third-party investors were granted warrants to purchase an aggregate of 216,671 shares of the Company’s common stock at an exercise price of $0.46875 per share and expiring on September 24, 2013.
On February 3, 2009, the Company amended the Purchase and Security Agreements underlying its private issuance of Convertible Notes to remove Bonds.com, Inc.’s guaranty and pledge of assets as collateral for the Convertible Notes. At such time as the Purchase and Security Agreements were amended, Bonds.com, Inc. was no longer in violation of its minimum net capital and ratio of aggregate indebtedness requirements.
16
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our Company’s plan of operation, financial condition and results of operation should be read in conjunction with the consolidated financial statements and the notes thereto included in this quarterly report.
General
We are a development stage company and, as of the date of this quarterly report, we are not fully operational. As a result, we have only generated nominal revenues to date. Since inception, we have funded our working capital needs through the sale of our equity securities and incurrence of debt from our founders, directors, investors and financial institutions.
During the period from October 19, 2007 to November 2, 2007, we raised gross proceeds of $4,350,000 (the “October 2007 Offering”) in order to finance the continued development of our BondStation trading platform and also to provide us with additional working capital. In January 2008 we obtained loans from two of our directors in an aggregate principal amount of $500,000 (the “January Loans”). In April 2008 we entered into loan transactions with one of our directors and an entity in which he has 60% voting control to obtain additional funds in an aggregate principal amount of $800,000. These loans were fully funded in April and May of 2008 (the “April Loans”). In July and August 2008, the April Loans were amended to increase the aggregate amount that can be borrowed to $1,550,000 (the “Amended April Loans”) and the additional borrowings available under the Amended April Loans were fully funded in July and August of 2008. In September 2008, in connection with the execution of secured convertible note and warrant purchase agreements, we converted $1,440,636 of outstanding indebtedness, including accrued interest, payable under the January Loans, the April Loans and the Amended April Loans, into long-term convertible promissory notes with an aggregate principal amount of $1,440,636 (the “Convertible Notes”). In September and October of 2008, we also executed secured convertible note and warrant purchase agreements with several third party investors in an aggregate principal amount of $650,000 and which resulted in the Company receiving $650,000 in cash proceeds (the “Convertible Notes”). The October 2007 Offering, the January Loans, the Amended April Loans and the Convertible Notes are described in greater detail under the subheading Recent Financing Activities below.
Based on our business plan, we believe that our business will begin to generate positive cash flow from operations during the first quarter of 2009. Additionally, we believe that we currently have sufficient funds available for the operation of our business through approximately December 31, 2008. Since we do not anticipate becoming cash flow positive until the first quarter of 2009, we need to continue to raise additional funds for general working capital purposes, either through additional equity financing and/or additional loans from our officers, directors and others.
We are currently marketing our BondStation electronic trading platform on our Bonds.com and BondStation.com websites. We also began an advertising and marketing campaign for our electronic trading platform in the first quarter of 2008 on television and over the Internet. During the three and nine months ended September 30, 2008, we spent approximately $8,000 and $290,000, respectively, on advertising and marketing.
To promote our BondStation electronic trading platform to fixed income investors, we have created and developed Bonds.com TV, a streaming video presentation. Bonds.com TV includes a complete video based educational series incorporating content provided on our BondClass.com website as well as a general primer on economic indicators. Beginning late in the fourth quarter of 2008 or early in the first quarter of 2009, we intend to produce and distribute segments that provide daily updates on new issue underwriting in municipal bonds, agency bonds, corporate bonds, mortgages and other fixed-income securities. We expect to deliver Bonds.com TV to registered users via e-mail and it also will be archived on the Bonds.com and BondClass.com websites.
17
BondStation received several enhancements during the second quarter, including:
o | Enhanced Bid Wanted – Clients can now see the depth of the market on bid wanted by looking in the comments section of the trade ticket. |
o | S&P And Moody’s Underlying Ratings – These ratings serve as added informational resource for our clients when making investment decisions concerning municipal securities and their credit worthiness. |
o | Help Section – We have added a Frequently Asked Questions section (FAQ), providing guidance on how to perform a security search, buy or sell a position, create a portfolio, etc. |
o | New Issue E-mail Alerts – Our alerts allows clients who are interested in new issue municipal bonds, agency securities, retail corporate notes or new issue certificates of deposit to see the most recent daily/weekly offerings. |
o | Training Tutorials – We now have customized video / flash tutorials on the platform to allow users to actively learn the platform. | |
o | Customer Branding– Clients now have the ability to customize portfolios created on the platform with their logo and branding. |
Additionally, we have registered to participate in several banking and credit union trade shows to enhance our relationships with banks and other institutions. Through our CD Station portal, which is in the final stages of development, we will provide banks and other institutional investors with a platform to buy and sell brokered certificates of deposit. We expect our CD Station portal to be fully operational by the end of the fourth quarter of 2008 and on November 9, 2008, we provided the first demonstration of the CD Station portal at the American Bankers Association Conference in San Francisco.
We currently have twenty employees and one consultant to support and grow our business operations. Two of our employees provide hardware and software technology support and also assist us with our internal programming requirements. Twelve of these employees serve as relationship managers and directly service our individual and institutional investor clients with their trading operations. We also have four employees and one consultant that provide customer support relating to new accounts, trading and compliance requirements. We believe that our staff is sufficient to handle our current business needs. We expect to add an additional five members to our sales staff in the near future. Our goal is to expand our sales staff to approximately seventeen professionals by December 2008.
Our business requires significant expenditures on hardware and software to support the anticipated volume of online activity associated with our BondStation electronic trading platform. A substantial portion of our working capital has been utilized to contract with third parties for information and data feeds, servers with backup locations and onsite computer trading equipment. To date, we have spent approximately $2.05 million on hardware, software, third party professional fees and licensing rights to operate our BondStation trading platform as currently in use.
If we do not generate revenues at the levels projected in our business plan and/or do not become profitable in the timeframe expected, we will need to raise additional capital. We may not be able to obtain additional financing, if needed, in amounts or on terms acceptable to us, if at all. If we are not able to timely and successfully raise additional capital and/or achieve profitability or positive cash flow, our operating business, financial condition, cash flows and results of operations may be materially and adversely affected.
Recent Financing Activities
Pursuant to the October 2007 Offering, our wholly-owned subsidiary, Bonds.com Holdings, Inc. (“Holdings”) raised gross proceeds of $4,350,000 from the sale of common stock and warrants to 49 accredited investors. In the October 2007 Offering, Holdings raised $3,750,000 of new funds and converted $600,000 of outstanding indebtedness. Holdings issued an aggregate of 1,314,135 shares of common stock and warrants to purchase up to an aggregate of 657,111 shares of Holdings’ common stock, at an exercise price of $4.14 per share. In the Reverse Merger consummated on December 21, 2007, these securities of Holdings were converted into 8,236,551 shares of our common stock and warrants to purchase 4,118,569 shares of our common stock at an exercise price of $0.66 per share. We also issued warrants to designees of the placement agent in connection with the October 2007 Offering to purchase up to an additional 823,695 shares of common stock at an exercise price of $0.66 per share. The net proceeds received by Holdings, after the deduction of offering expenses and excluding the conversion of indebtedness, were approximately $3,375,000. Under the terms of the October 2007 Offering, net proceeds were allocated to (1) repayment of outstanding loans to Holdings’ founders in an aggregate principal amount of up to $500,000; (2) recruiting and training additional management, technical and marketing personnel; (3) research and development; (4) public relations; (5) advertising and marketing; (6) development and maintenance of our BondStation electronic trading platform; and (7) general working capital purposes.
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In connection with certain financial advisory services provided by Keating Investments, LLC (“Keating”), we agreed to pay Keating an advisory fee of $500,000. We have previously paid $250,000 of this fee and issued a promissory note to Keating, dated December 21, 2007, for the remaining $250,000 (the “Keating Note”). Under the terms of the Keating Note, the entire principal amount and accrued interest at the rate of 10% per annum were due and payable on June 21, 2008. The Company negotiated with Keating to extend the maturity date and amend other provisions of the Keating Note. On September 17, 2008, the Company amended the Keating Note (the “Amended Keating Note”). Pursuant to the Amended Keating Note, among other things, we have agreed to: (i) extend the maturity date until December 31, 2009 from the original maturity date of June 20, 2008, (ii) provide for acceleration of repayment of the principal and interest due in the event that the Company raises certain amounts of capital, (iii) commence on April 30, 2009 monthly payments toward the principal amount due in the amount of $7,500 per month, (iv) waive any penalty interest that might have otherwise been due following the original maturity date, and (v) eliminate the ability of the Company to repay the amount due through the provision of equity in the Company.
In connection with the January Loans, we executed promissory notes with two of our directors, John Barry III and Christopher D. Moody, pursuant to which each of them made loans to us in an aggregate principal amount of $250,000 for a total of $500,000. The outstanding principal amounts of these loans accrue interest at a rate of 10% per annum and all outstanding principal and interest is due and payable on or before December 31, 2008. We have used the proceeds from the January Loans for general working capital purposes.
In connection with the April Loans, we originally executed secured promissory notes with Mr. Moody and Valhalla Investment Partners, an investment fund co-managed by Mr. Moody, pursuant to which each of them made loans to us in an aggregate principal amount of $400,000 for a total of $800,000 (the “Moody Note” and the “Valhalla Note,” respectively). On July 8, 2008, the April Loans were amended to increase the aggregate amount that can be borrowed from Mr. Moody and Valhalla Investment Partners to $700,000 and $600,000, respectively (the “Amended Moody Note” and the “Amended Valhalla Note”). In July of 2008, we received $300,000 in additional proceeds under the Amended Moody Note and $200,000 in additional proceeds under the Amended Valhalla Note. On August 28, 2008, the Amended Moody Note was further amended to increase the amount that can be borrowed from Mr. Moody to $950,000 (the “Second Amended Moody Note” collectively with the Amended Valhalla Note, the “Amended Notes”), and to date, we have received an aggregate of $1,550,000 under the Second Amended Moody Note and the Amended Valhalla Note. Prior to conversion, as further discussed below, the previously outstanding principal amounts of these loans, as amended, accrued interest at a rate of 9% per annum and all outstanding principal and interest was due and payable on or before April 30, 2009. The April Loans, as amended, were secured by our interest in the “bonds.com” domain name. Approximately $1,550,000 of the amount received under the Amended Notes was used to pay: (i) salaries and other benefits for employees; (ii) trading platform technology and related maintenance costs; (iii) legal, accounting and other professional fees; and (iv) other administrative expenses. We have and will continue to use the remainder of the proceeds from the April Loans, as amended, for general working capital purposes.
On September 24, 2008, in connection with a certain Secured Convertible Note and Warrant Purchase Agreement (the “Purchase Agreement”), we converted $1,440,636 of the outstanding indebtedness, including accrued interest, payable under the Amended Notes to Mr. Moody and Valhalla Investment Partners and in turn executed secured convertible promissory notes to certain investors in the aggregate principal amount of $1,765,636, which resulted in the Company receiving $325,000 in cash proceeds (the “Convertible Notes”). Under the terms of the Convertible Notes, the entire principal amount is due and payable on September 24, 2010 (the “Maturity Date”). Additionally, interest accrues at a rate of 10% per annum, with unpaid interest payable, in full, upon the earlier of (1) the conversion of the Convertible Notes or 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 at a conversion price equal to the lesser of (1) $0.375 per share, as adjusted for stock splits, combinations and the like, or (2) the price paid for our Common Stock in any future sale of our securities while the Convertible Notes are outstanding, exclusive of certain excluded transactions. The Convertible Notes are secured by the Company, along with its affiliated companies, Holdings, Bonds.com, Inc. and Insight Capital Management, LLC, in generally all of the Company’s assets, pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008. As discussed in the accompanying notes to the financial statements, due to the existence of the pledge of Bonds.com, Inc.’s assets as security for the Convertible Notes and Bonds.com, Inc’s guaranty of the Company’s obligations there under, the notional amount of the obligation has been included in Bonds.com, Inc.’s computation of aggregate indebtedness, and reflected as a deduction in Bonds.com, Inc.’s computation of net capital, in accordance with Rule 15c3-1, as of September 30, 2008. As a result, at September 30, 2008, Bonds.com, Inc. was not in compliance with its minimum net capital and ratio of aggregate indebtedness requirements. On February 3, 2009, the Company amended the Purchase and Security Agreements underlying its private issuance of Convertible Notes to remove Bonds.com, Inc.’s pledge of assets as collateral for the Convertible Notes and eliminate the related guaranty. At such time as the Purchase and Security Agreements were amended, Bonds.com, Inc. was no longer in violation of its minimum net capital and ratio of aggregate indebtedness requirements.
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In connection with the execution of the Purchase Agreements, Mr. Moody, Valhalla Investment Partners and the third-party investors were granted warrants to purchase an aggregate of 1,177,106 shares of the Company’s common stock at an exercise price of $0.46875 per share and expiring on September 24, 2013.
On October 20, 2008, we executed a secured convertible promissory note and warrant purchase agreement with the Neil Moody Revocable Trust (the “Neil Moody Trust”), an entity controlled by the father of Christopher Moody, one of our directors, in the principal amount of $250,000, and also executed secured convertible promissory note and warrant purchase agreements with additional third-party investors in the aggregate principal amount of $75,000 (collectively the “Convertible Notes”).
Under the terms of the Convertible Notes, the entire principal amount is due and payable on September 24, 2010 (the “Maturity Date”), interest accrues at a rate of 10% per annum, with unpaid interest payable, in full, upon the earlier of (1) the conversion of the Convertible Notes or (2) on the Maturity Date. Holders of the Convertible Notes have the right to convert principal and interest due and payable into shares of common stock of the Company at a conversion price equal to the lesser of (1) $0.375 per share, as adjusted for stock splits, combinations and the like, or (2) the price paid for our 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, along with its affiliated companies, Bonds.com Holdings, Bonds.com, Inc. and Insight Capital Management, LLC, in generally all of the Company’s assets, pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008.
In connection with the execution of the convertible note and warrant purchase agreements, the Neil Moody Trust and the third-party investors were granted warrants to purchase an aggregate of 216,671 shares of the Company’s common stock at an exercise price of $0.46875 per share and expiring on September 24, 2013.
Operating Revenues and Expenses
Sales revenues from trading in fixed income securities are generated by spread we receive equal to the difference between the prices at which we sell securities on our BondStation trading platform 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. However, our marginal costs per trade are not variable based on the size of the traded securities. Based on the company’s current operating costs to date, our marginal costs of executing and settling a trade over our systems, inclusive of clearing fees and licensing fees ranges between approximately $13 and $22 per trade. Our operating costs may change in the future as we increase in size and are able to obtain more favorable terms with our vendors. To date we have only generated nominal revenues on our BondStation trading platform.
Sales revenues from investment advisory business will generally be generated from fees we charge for each account we manage ranging from 0.3% to 2% of the assets under management in each account; provided, however, that any assets allocated to the trading of fixed income securities will be excluded in determining the amount of assets under management, since we will generate revenue on those amounts through our fixed income trading business. The applicable percentage fee we will charge with respect to an account will depend on the amount of fees that we are required to share, if any, with other investment advisors or fund managers, as well as other factors which we may determine on an account-specific basis. To date we have not generated any revenues from providing investment advisory services.
Costs of sales will generally consist of the amounts we pay to purchase securities, charges incurred for each transaction (ticket charges) and other trading related expenses.
Operating expenses will generally consist of commissions to salespersons (which generally do not exceed 30% of the revenues generated by such salespersons’ accounts), employee salaries and benefits, trading platform technology and software support related costs, professional fees, and marketing and advertising related expenses. We expect that our operating expenses will decrease as a percentage of net sales if we are able to increase our net sales by executing our business plan. We also expect this reduction in operating expenses, as a percentage of net sales, will be partially offset by the continuing development of our business plan and the increased costs of operating as a public company.
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Cash flows used in operating activities from October 18, 2005 (inception) through September 30, 2008 were approximately $8.4 million. Of this amount, employee salaries and benefits accounted for approximately $2.6 million. Expenses associated with our BondStation trading platform, primarily comprised of technology related expenses, software development and support, and fees paid to data service providers, accounted for approximately $2.5 million. Legal, accounting and other professional fees associated with formation of the Company, domain name acquisition, general corporate representation and public company preparation accounted for approximately $2.3 million. Interest expense was approximately $0.2 million. All other cash flows used in operating activities including rent, travel and entertainment, marketing and advertising, and miscellaneous expenses accounted for the remaining approximately $0.8 million of our total cash flows used in operating activities during the period from October 18, 2005 (inception) through September 30, 2008.
As discussed in the accompanying notes to the financial statements, at September 30, 2008, Bonds.com, Inc. was not in compliance with its minimum net capital or aggregate indebtedness requirements. This noncompliance may result in regulatory fines and/or disciplinary actions against Bonds.com, Inc. or individuals associated with it. Management is unable at this time to estimate the nature and extent of potential loss arising from regulatory action against them, if any. The ultimate outcome could be material to the financial condition and future results of operations of Bonds.com, Inc. which are included in the consolidated results of operations presented herein.
Litigation Settlement and Payment Agreement
The Company, along with John Barry III, one of its directors, commenced an action in the Supreme Court of the State of New York, County of New York, on or about August 15, 2006, against Kestrel Technologies LLC a/k/a Kestrel Technologies, Inc. (“Kestrel”) and Edward L. Bishop III, Kestrel’s President, alleging certain defaults and breaches by Kestrel and Mr. Bishop under: (i) a Master Professional Services Agreement by and between the Company and Kestrel, dated on or about December 27, 2005, as amended, along with the two Statements of Work thereunder (the “Master Agreement”) and (ii) a Revolving Credit Agreement by and between Kestrel and the Company, dated February 1, 2006 and the promissory notes issued by Kestrel thereunder, in the aggregate amount of $250,000. 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 Revolving Credit Agreement and the associated promissory notes and awarded John Barry III $250,000 plus interest. Kestrel filed a counterclaim, on or about September 27, 2006, seeking damages in an aggregate amount of $1,000,000 for the Company’s alleged breach of the Master Agreement, as well as a declaration that Kestrel has no further obligations under the Master Agreement. 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 Master Agreement and awarded the Company $600,000 plus interest.
On May 14, 2008, we entered into a Payment Agreement with Kestrel. Under the terms of the Payment Agreement, Kestrel is required to pay us a total of $826,729.71 in monthly payments, which would result in our receiving monthly payments of: (i) $300,000 on or before June 1, 2008; (ii) $77,771.11 on or before the first day of each month from July through December 2008; and (iii) 59,653.05 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 November 14, 2008, Kestrel has only paid $324,950 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.
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, 2007 and 2006, 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. The Company has a history of operating losses since its inception in 2005, and has an accumulated deficit of approximately $9.9 million at September 30, 2008, 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2008.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not Applicable.
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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 quarterly report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Based on the controls evaluation, our Chief Executive Officer has concluded that, subject to the limitations noted herein, as of the end of the period covered by this quarterly report, our disclosure controls were effective to provide reasonable assurance that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time period specified by the SEC, and that material information relating to the Company and its consolidated subsidiaries is made known to management, including the principal executive officer and principal financial officer, particularly during the period when our periodic reports are being prepared.
Management's Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company's financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.
The Company's management has assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2008. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated Framework." Based on this assessment, management concluded that certain controls and procedures were not effective. An explanation of the deficiencies is set forth below.
The principal executive officer and the principal financial officer determined that certain deficiencies involving internal controls constituted material weaknesses as of the end of the period covered by this quarterly report. The deficiencies identified related to audit adjustments made due to limited or no review procedures performed by management beyond the initial preparer calculations and estimates. Additionally, the Company identified a lack of formal control design structure for the review of external financial data.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On February 21, 2008, Z6 Solutions, Inc. filed a complaint in the Superior Court of New Jersey claiming that Bonds.com Holdings, Inc., IPORussia, Inc. and John Barry IV, and/or their affiliates failed to pay for approximately $50,000 in web development services allegedly performed by Z6 Solutions, Inc. Pursuant to such claim, Z6 Solutions, Inc. seeks to recover such $50,000 plus interest, attorney fees and court costs. While Z6 Solutions, Inc. was retained by Bonds.com Holdings, Inc. in June of 2007 to provide certain internet development services, Bonds.com Holdings, Inc. believes that all services that were actually and adequately provided by Z6 Solutions, Inc. have already been paid for in full. On June 4, 2008, Bonds.com Holdings, Inc. filed an answer to such complaint with the Superior Court of New Jersey which: (i) denied the claims made by Z6 Solutions, Inc. in their complaint and (ii) initiated a counterclaim against Z6 Solutions, Inc. asserting that Z6 Solutions, Inc. breached its obligations to Bonds.com Holdings, Inc. and violated various applicable New Jersey State Statutes.
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On September 2, 2008, a complaint was filed against the Company in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida by William M. Bass, a former director and executive of the Company. The complaint alleges that the Company in July of 2008 breached Mr. Bass’ Employment Agreement and Stock Option Agreement. The complaint seeks damages, prejudgment interest, costs and attorney fees, including without limitation: (i) severance payments amounting to approximately $700,000, (ii) current payment of an estimated future value of the stock options previously awarded to Mr. Bass, after full acceleration of the vesting thereof, and (iii) the lost value of the bonus payments Mr. Bass believes he would have earned during the remainder of the term of his Employment Agreement.
The Company is defending the lawsuit on the grounds that it properly terminated Mr. Bass “for cause” under the Employment Agreement and has satisfied all of its obligations to Mr. Bass. On October 13, 2008, the Company filed a Motion to Dismiss Complaint and alternative Motion to Strike certain portions of Mr. Bass’ complaint. The Company has paid Mr. Bass all amounts that the Company believes are owed to Mr. Bass arising from a termination of his Employment Agreement for cause and thus does not believe Mr. Bass is entitled to any of the damages claimed.
In addition, Mr. Bass has filed a charge of discrimination with the U.S. Equal Opportunity Commission and the Florida Commission on Human Relations. In his Charge, Mr. Bass alleges the Company discriminated against him because the Company erroneously regarded him as being disabled in violation of the Americans With Disability Act of 1990 and the Florida Civil Rights Act (Chapter 760). The Company believes that such charge is without merit and plans to defend the charge accordingly.
Item 1A. Risk Factors
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Pursuant to the private placement offering (the “Offering”) described in our current report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2008 (File No. 000-51076) (the “September 29th Current Report”), on September 24, 2008, we held the first closing of the Offering, upon which we sold, to certain investors, secured notes (the “Notes”) in an aggregate principal amount of $1,765,636. On such date, these Notes could be converted by the investors into an aggregate of 4,708,363 shares of Common Stock. Additionally, we issued warrants (the “Warrants”) to these investors to purchase an aggregate of 1,177,106 shares of Common Stock at an initial exercise price of $0.46875 per share.
On October 20, 2008, we held the second closing of the Offering, upon which we sold, to certain investors, including the Neil Moody Revocable Trust, an entity controlled by the father of Christopher Moody, one of our directors, Notes in an aggregate principal amount of $325,000, including $250,000 to the Neil Moody Revocable Trust. On such date, these Notes could be converted by the investors into an aggregate of 866,667 shares of Common Stock. Additionally, we issued Warrants to these investors to purchase an aggregate of 216,671 shares of Common Stock at an initial exercise price of $0.46875 per share.
A more detailed description of these security offerings is provided in Part I, Section 2 (under the subheading Recent Financing Activities) of this quarterly report.
This offer and sale of securities, pursuant to the terms of the Offering, was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act and Regulation D promulgated under the Securities Act. More detailed information relating to the offering can be found in the September 29th Current Report, which is incorporated herein by reference.
All of such securities offered and sold by us have not been registered under the Securities Act and may not be offered or sold in the United States absent registration exemption from registration requirements.
The information provided in this quarterly report is not an offer to sell nor is it a solicitation of an offer for the purchase of any of our securities and is intended to comply with Rule 135c of the Securities Act.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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Item 5. Other Information
Subsequent to the period covered by this quarterly report, effective as of October 6, 2008, Leslie-Anne Moore resigned as Vice President and Chief Compliance Officer of our subsidiary, Bonds.com Holdings, Inc. and also resigned as Chief Compliance Officer and Chief Financial Officer of our FINRA registered broker dealer subsidiary, Bonds.com, Inc. Ms. Moore continued to be employed by us until November 3, 2008, on which date she resigned as an employee. Our Chief Executive Officer, John J. Barry IV, served as our FINRA compliance officer, on an interim basis, from October 7, 2008 through October 20, 2008, on which date we hired a new employee to serve as our FINRA compliance officer. Ms. Moore currently provides services, on a consulting basis, as required during the transition period for our new FINRA compliance officer. We do not expect these consulting services to continue past the end of this year.
As discussed in the accompanying financial statements, due to the existence of the pledge of Bonds.com, Inc.’s assets as security for the Convertible Notes and Bonds.com, Inc’s guaranty of the Company’s obligations there under, the notional amount of the obligation has been included in Bonds.com, Inc.’s computation of aggregate indebtedness, and reflected as a deduction in Bonds.com, Inc.’s computation of net capital, in accordance with Rule 15c3-1, as of September 30, 2008. As a result, at September 30, 2008, Bonds.com, Inc. was not in compliance with its minimum net capital requirement. On February 3, 2009, the Company amended the Purchase and Security Agreements underlying its private issuance of Convertible Notes to remove Bonds.com, Inc.’s pledge of assets as collateral for the Convertible Notes and eliminate the related guaranty. At such time as the Purchase and Security Agreements were amended, Bonds.com, Inc. was no longer in violation of its minimum net capital requirement.
As discussed in the accompanying financial statements, at September 30, 2008, Bonds.com, Inc. was not in compliance with its minimum net capital requirement. This noncompliance may result in regulatory fines and/or disciplinary actions against Bonds.com, Inc. or individuals associated with it. Management is unable at this time to estimate the nature and extent of potential loss arising from regulatory action against them, if any. The ultimate outcome could be material to the financial condition and future results of operations of Bonds.com, Inc. which are included in the consolidated results of operations presented herein.
Item 6. Exhibits
31.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a)). |
32.1 | Certification of the Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(b)). |
Remainder of the Page Intentionally Left Blank
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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.
BONDS.COM GROUP, INC. | ||
Date: February 27, 2009 | By: | /s/ John J. Barry IV |
Name: John J. Barry IV President and Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
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