Walker Innovation (WLKR) 10-Q 2009 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 (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, 2009

¨ 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: 001-33700

GLOBALOPTIONS GROUP, INC

(Exact name of registrant as specified in its charter)

Delaware	30-0342273
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
75 Rockefeller Plaza, 27th Floor New York, New York	10019
(Address of Principal Executive Offices)	(Zip Code)

(212) 445-6262

(Registrant’s telephone number, including area code)

(Former name and former address, if changed since last report)

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

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

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

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

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

As of November 12, 2009, there were 14,299,350 shares of the issuer’s common stock outstanding.

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Form 10-Q

September 30, 2009

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
ITEM 1.       Financial Statements.
Condensed Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008	1
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2009 and 2008 (Unaudited)	2
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended
September 30, 2009 (Unaudited)	3
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008 (Unaudited)	4
Notes to Condensed  Consolidated Financial Statements (Unaudited)	6
ITEM 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations.	21
ITEM 3.       Quantitative and Qualitative Disclosures About Market Risk.	30
ITEM 4T.    Controls and Procedures.	30
PART II
OTHER INFORMATION
ITEM 1.       Legal Proceedings.	31
ITEM 1A.    Risk Factors.	31
ITEM 2.       Unregistered Sales of Equity Securities and Use of Proceeds.	31
ITEM 3.       Defaults Upon Senior Securities.	31
ITEM 4.       Submission of Matters to a Vote of Security Holders.	31
ITEM 5.       Other Information.	31
ITEM 6.       Exhibits.	32
SIGNATURES.	33

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(dollars in thousands, except per share amount)

	September 30, 2009			December 31,
	2009			2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	5,142		$	5,276
Accounts receivable, net		22,272			27,485
Inventories, net		3,419			2,522
Prepaid expenses and other current assets		993			862
Total current assets		31,826			36,145
Property and equipment, net		6,573			5,834
Intangible assets, net		4,666			5,981
Goodwill		19,968			19,968
Security deposits and other assets		543			553
Total assets	$	63,576		$	68,481
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit	$	3,677		$	7,093
Notes payable		-			400
Accounts payable		4,592			6,199
Deferred revenues		645			585
Accrued compensation and related benefits		4,597			3,155
Other current liabilities		1,870			1,966
Total current liabilities		15,381			19,398
Other long-term obligations		801			838
Total liabilities		16,182			20,236
Commitments and contingencies
Stockholders'  equity:
Preferred stock, $0.001 par value, 14,900,000 shares authorized, no shares issued or outstanding		-			-
Series D convertible preferred stock, non-voting, $0.001 par value, 100,000 shares authorized, dividends do not accrue,  no anti-dilution protection, 0 and 55,388.37 shares issued and  outstanding, convertible into 0 and 3,692,743 shares of common stock at September 30, 2009  and December 31, 2008, respectively, liquidation preference of $0.001 per share or $0.		-			-
Common stock, $0.001 par value; 100,000,000 shares authorized; 14,414,999 shares issued and 14,291,105  shares outstanding at September 30, 2009, and   10,486,935 shares issued and 10,379,868 shares outstanding at December 31, 2008		14			10
Additional paid-in capital		111,140			108,989
Accumulated deficit		(63,517	)		(60,546	)
Treasury stock; at cost, 123,894 shares at September 30, 2009 and 107,067 shares at December 31, 2008		(243	)		(208	)
Total stockholders' equity		47,394			48,245
Total liabilities and stockholders' equity	$	63,576		$	68,481

See notes to these condensed consolidated financial statements.

1

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(dollars in thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues	$	26,005		$	29,488		$	77,949		$	77,241
Cost of revenues		14,441			16,876			44,033			44,349
Gross profit		11,564			12,612			33,916			32,892
Operating expenses:
Selling and marketing		3,156			3,154			9,465			8,374
General and administrative		8,821			9,801			26,935			31,103
Total operating expenses		11,977			12,955			36,400			39,477
Loss from operations		(413	)		(343	)		(2,484	)		(6,585	)
Other income (expense):
Interest income		9			2			10			24
Interest (expense)		(110	)		(74	)		(497	)		(198	)
Other expense, net		(101	)		(72	)		(487	)		(174	)
Net loss	$	(514	)	$	(415	)	$	(2,971	)	$	(6,759	)
Basic and diluted net loss per share	$	(0.04	)	$	(0.04	)	$	(0.24	)	$	(0.70	)
Weighted average number of common shares outstanding - basic and diluted		13,270,411			9,734,067			12,459,456			9,660,684

See notes to these condensed consolidated financial statements.

2

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders' Equity

For the Nine Months Ended September 30, 2009

(Unaudited)

(dollars in thousands)

										Series D
										Convertible					Additional
	Common Stock				Treasury Shares					Preferred Stock					Paid-in			Accumulated
	Shares		Amount		Shares		Amount			Shares			Amount		Capital			Deficit			Total
Balance, January 1, 2009		10,486,935	$	10		107,067	$	(208	)		55,388.37		$	-	$	108,989		$	(60,546	)	$	48,245
Shares issued upon conversion of Series D convertible preferred stock		3,692,552		4		-		-			(55,388.37	)		-		(4	)		-			-
Shares issued to consultants for services		49,800		-		-		-			-			-		98			-			98
Shares issued upon exercise of stock options		44		-		-		-			-			-		-			-			-
Shares issued in connection with vesting of RSUs		134,274		-		-		-			-			-		-			-			-
Issuance of common stock under employee stock purchase plan		51,394		-		-		-			-			-		69			-			69
Purchase of treasury shares		-		-		16,827		(35	)		-			-		-			-			(35	)
Stock based compensation - restricted stock vested		-		-		-		-			-			-		739			-			739
Stock based compensation - employee stock purchase plan		-		-		-		-			-			-		23			-			23
Amortization of consultant stock option costs		-		-		-		-			-			-		75			-			75
Amortization of employee stock options costs		-		-		-		-			-			-		322			-			322
Amortization of consultant restricted stock unit costs		-		-		-		-			-			-		4			-			4
Amortization of employee restricted stock unit costs		-		-		-		-			-			-		825			-			825
Net loss		-		-		-		-			-			-		-			(2,971	)		(2,971	)
Balance, September 30, 2009		14,414,999	$	14		123,894	$	(243	)		-		$	-	$	111,140		$	(63,517	)	$	47,394

See notes to these condensed consolidated financial statements.

3

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)

	For the Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(2,971	)	$	(6,759	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision (recovery) of bad debts		(245	)		148
Depreciation and amortization		2,543			3,262
Deferred rent		14			439
Stock-based compensation		2,086			3,021
Loss on disposition of equipment		-			27
Changes in operating assets and liabilities:
Accounts receivable		5,458			(5,021	)
Inventories		(897	)		(433	)
Prepaid expenses and other current assets		(131	)		(104	)
Security deposits and other assets		10			40
Accounts payable		(1,607	)		288
Deferred revenues		60			189
Accrued compensation and related benefits		1,442			1,380
Other current liabilities		(105	)		355
Other long-term obligations		(42	)		(41	)
Total adjustments		8,586			3,550
Net cash provided  by (used in) operating activities		5,615			(3,209	)
Cash flows from investing activities:
Purchases of property and equipment		(1,909	)		(921	)
Purchase of intangible assets		(58	)		(42	)
Acquisition of FAIS		-			(2,548	)
Net cash used in investing activities		(1,967	)		(3,511	)

See notes to these condensed consolidated financial statements.

4

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows, continued

(Unaudited)

(dollars in thousands)

	For the Nine Months Ended September 30,
	2009			2008
Cash flows from financing activities:
Net  (repayments) proceeds under line of credit	$	(3,416	)	$	6,000
Repayment of notes payable		(400	)		(700	)
Accretion of OCS discounted notes		-			3
Proceeds from issuance of stock in connection with ESPP		69			10
Repurchase of common stock		(35	)		(50	)
Net cash (used in) provided by financing activities		(3,782	)		5,263
Net decrease  in cash and cash equivalents		(134	)		(1,457	)
Cash and cash equivalents - beginning of period		5,276			4,426
Cash and cash equivalents - end of period	$	5,142		$	2,969
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	575		$	208
Supplemental disclosures of non-cash investing and financing activities:
Common stock issued in exchange for obligation to issue common stock	$	-		$	2,160
Supplemental non-cash investing and financing activity - acquisition of FAIS:
Assets acquired and liabilities assumed:
Accounts receivable	$	-		$	1,201
Property and equipment		-			102
Intangible assets		-			2,790
Accounts payable		-			(17	)
Other current liabilities		-			(322	)
Earnout Liability		-			(1,206	)
Total purchase price, paid in cash	$	-		$	2,548

See notes to these condensed consolidated financial statements.

5

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

1.  Nature of Operations

GlobalOptions Group, Inc. and Subsidiaries (collectively the “Company” or “GlobalOptions Group”) is an integrated provider of risk mitigation and management services to government entities, Fortune 1000 corporations and high net-worth and high-profile individuals. The Company delivers these services through four business units: Preparedness Services; Fraud and Special Investigative Unit (“SIU”) Services; Security Consulting and Investigations; and International Strategies. The Preparedness Services, Fraud and SIU Services, and Security Consulting and Investigations units represent the Company’s three financial reporting segments. The results of the International Strategies business unit, on the basis of its relative materiality, are included in the Fraud and SIU Services segment.

References herein to “GlobalOptions” refer to GlobalOptions, Inc., an operating subsidiary of the Company.

2.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal accruals) considered for a fair presentation have been included. The Company has evaluated subsequent events through November 12, 2009,  the issuance date of this Form 10-Q. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K filed on March 16, 2009 for the year ended December 31, 2008.

3.  Summary of Significant Accounting Policies

Income Taxes

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of the underlying assets and liabilities. The Company establishes a valuation allowance for deferred tax assets when it determines that it is more likely than not that the benefits of deferred tax assets will not be realized in future periods.  The Company was not required to provide for a provision for income taxes for the three and nine months ended September 30, 2009 and 2008, respectively, as a result of losses incurred during this period.

Net Loss Per Common Share

Basic net loss per common share is computed based on the weighted average number of shares of common stock outstanding, as adjusted, during the periods presented. Common stock equivalents, consisting of stock options, restricted stock units (“RSUs”), and Series D convertible preferred stock were not included in the calculation of the diluted loss per share because their inclusion would have been anti-dilutive.  The basic weighted average number of shares was reduced for non-vested restricted stock awards and contingently returnable escrowed shares issued in connection with acquisitions.

6

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

3.  Summary of Significant Accounting Policies, continued

Net Loss Per Common Share, continued

Potentially dilutive securities outlined in the table below have been excluded from the computation of diluted net loss per share, because the effect of their inclusion would have been anti-dilutive.

	September 30 ,
	2009		2008
Stock options		1,037,794		666,923
Restricted stock units		229,526		368,433
Convertible preferred stock		-		3,692,743
Potentially dilutive securities realizable from the vesting of performance based restricted stock		558,063		558,063
Contingently returnable shares related to the   acquisitions of Facticon, Inc. (“Facticon”), James Lee Witt Associates, Inc. and Hyperion Risk, Inc.		-		162,500
Total potentially dilutive securities		1,825,383		5,448,662

Recently Implemented Accounting Guidance

The FASB, in June 2009, issued new accounting guidance that established the FASB Accounting Standards Codification, ("Codification" or “ASC”) as the single source of authoritative GAAP to be applied by nongovernmental entities, except for the rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. This new guidance became effective for interim and annual periods ending after September 15, 2009.  Other than the manner in which new accounting guidance is referenced, the adoption of these changes did not have a material effect on the Company’s consolidated financial statements.

In December 2007, the FASB issued new accounting guidance, under ASC Topic 805 on business combinations, which established principles and requirements as to how acquirers recognize and measure in these financial statements the identifiable assets acquired, the liabilities assumed, noncontrolling interests and goodwill acquired in the business combination or a gain from a bargain purchase.  This guidance is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.   This guidance will have an impact on the Company’s accounting for any future business acquisitions.

In December 2007, the FASB issued new accounting guidance, under ASC Topic 810 on consolidations, which establishes the accounting for noncontrolling interests in a subsidiary and the deconsolidation of a subsidiary. This guidance requires (a) the ownership interest in the subsidiary held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent’s equity, (b) the amount of consolidated net income attributable to the parent and to the noncontrolling interest to be clearly identified and presented on the face of the consolidated statement of operations and (c) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently. Entities must provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. This guidance will have an impact on the Company’s accounting for any future business acquisitions.

7

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

3.  Summary of Significant Accounting Policies, continued

Recently Implemented Accounting Guidance, continued

In April 2008, the FASB issued new accounting guidance, under ASC Topic 350 on intangibles, which outlines the requirements for determining the useful life of an intangible asset.  The new guidance is intended to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for entity-specific factors. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years.  The Company expects the new guidance to have an impact on the accounting for any future business acquisitions.

In June 2008,  the FASB issued new accounting guidance, under ASC Topic 260 on earnings per share, related to the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance clarifies that all outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In June 2008, the FASB issued new accounting guidance, under ASC Topic 815 on derivatives and hedging, as to how an entity should determine whether an instrument (or an embedded feature) is indexed to an entity's own stock. This guidance  provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument's contingent exercise and settlement provisions. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. Early application is not permitted.  The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In November 2008, the FASB issued new accounting guidance, under ASC Topic 323 on investments— equity method and joint ventures, relating to the accounting for equity method investments.  This guidance addresses how the initial carrying value of an equity method investment should be determined, how it should be tested for impairment, and how changes in classification from equity method to cost method should be treated.  This guidance is effective on a prospective basis in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years.  The Company expects this guidance to have an impact on its accounting for any future business acquisitions.

In May 2009, the FASB issued new accounting guidance, under ASC Topic 855 on subsequent events, which sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance was effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

8

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

4.   Acquisition

Acquisition of Omega Insurance Services, Inc. (d/b/a First Advantage Investigative Services) (“FAIS”)

On April 21, 2008, GlobalOptions Group acquired substantially all of the business and net assets of FAIS. The aggregate purchase price paid for the assets and business was $2,548, consisting of cash in the amount of $2,164, a broker fee of $350 and acquisition and related legal expenses of $34.  The Company began consolidating the results of operations of FAIS with its operations beginning April 21, 2008.

The following presents the unaudited pro-forma combined results of operations for the nine months ended September 30, 2008 of the Company with FAIS, as if the acquisition had occurred as of January 1, 2008.

	For the Nine months ended September 30,
	2008
Revenues	$	80,233
Net loss	$	(7,916	)
Pro-forma basic and diluted net loss per common share (not rounded)	$	(0.82	)
Pro-forma weighted average common shares outstanding -  basic and diluted		9,660,684

The pro-forma combined results of operations are not necessarily indicative of the results of operations that actually would have occurred if the acquisition of FAIS had been completed as of the beginning of 2008, nor are they necessarily indicative of future consolidated results.

5. Inventories

Inventories are comprised of the following: 

	As of
	September 30, 2009			December 31, 2008
Raw materials	$	2,152		$	1,373
Work in progress – DNA Analysis		395			304
Finished goods		922			900
		3,469			2,577
Less: Reserve for obsolescence		(50	)		(55	)
Total	$	3,419		$	2,522

9

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

 6.  Intangible Assets and Goodwill

Intangible Assets

Intangible assets are comprised of the following:

	Trade Names		Developed Technology		Non-Compete Agreements		Client Relationships		Patents			Accumulated Amortization			Total
Balance as of  January 1, 2009	$	2,560	$	440	$	1,660	$	8,715	$	115		$	(7,509	)	$	5,981
Additions:
Costs of patents		-		-		-		-		59			-			59
Amortization		-		-		-		-		-			(1,374	)		(1,374	)
Balance as of  September 30, 2009	$	2,560	$	440	$	1,660	$	8,715	$	174		$	(8,883	)	$	4,666
Weighted average amortization period at September 30, 2009 (in years)		5.6		0.6		0.2		2.0		-	(1)

(1)  Patents not yet approved and as such, the amortization period has not yet begun as of September 30, 2009.

The Company recorded amortization expense related to the acquired amortizable intangibles of $358 and $777 for the three months ended September 30, 2009 and 2008, and $1,374 and $2,224 for the nine months ended September 30, 2009 and 2008, respectively.

10

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

7.  Accrued Compensation and Related Benefits

A summary of accrued compensation and related benefits is comprised of the following:

	As of
	September 30, 2009		December 31, 2008
Accrued performance based bonuses	$	1,341	$	1,237
Accrued payroll and commissions		2,194		1,172
Accrued employee benefits		1,062		746
Total	$	4,597	$	3,155

8.  Line of Credit

The Company maintains a working capital line of credit (the “Facility”) which is secured by accounts receivable and is subject to certain liquidity and earnings financial covenants. The Company has granted a first priority security interest in substantially all of its assets to the financial institution that provides this Facility.

Effective as of March 30, 2009, the financial institution that provides the Facility entered into an amendment to the Company’s working capital line of credit to (i) reduce the maximum amount available under the Facility to $10,000 (ii) increase the range of the applicable interest rate with respect to the amount outstanding under the line of credit  to 1.00% to 1.75% based upon the Company’s liquidity, plus the greater of 6.25% or the lender’s most recently announced “prime rate”, and (iii) extend the maturity of the Facility to March 29, 2010.  The Company paid a one-time fee of $55 in connection with the March 30, 2009 modification, which is included in general and administrative expenses.  The interest rate on the line of credit at September 30, 2009 was 7.25%.  As of September 30, 2009, the Company’s net borrowings were $3,677 under the line of credit and based upon the amount of qualifying accounts receivable, the Company was eligible to draw an additional $6,323 for up to a total of $10,000, under the Facility.

Effective as of August 26, 2009, the financial institution that provides the Facility entered into an amendment to the Company’s working capital line of credit to modify certain collateral requirements.  The maximum amount available under the Facility remains $10,000.

11

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

9.  Notes Payable

Notes payable, which matured at various dates through 2009, consisted of the following:

	As of
	December 31, 2008
Note payable to seller for acquisition of Secure Source, Inc. (“Secure Source”)	$	250
Notes payable to seller for acquisition of SPZ Oakland Corporation dba On Line Consulting Service, Inc. (“On Line Consulting”)		150
Total	$	400

On January 6, 2009, the Company repaid $150 in satisfaction of a note payable issued in connection with the purchase of On Line Consulting.

On May 6, 2009, the Company repaid $288, consisting of $250 and $38 of principal and interest, respectively, in satisfaction of a note payable issued in connection with the purchase of Secure Source.

10.  Commitments and Contingencies

           Employment Agreements

On April 1, 2009, the Company entered into an amendment of an employment agreement with one of its key executives, at an annual salary of $375, expiring March 31, 2010. The agreement provides, among other things, for the payment of an annual performance bonus.

On August 13, 2009, the Company entered into employment agreement modifications with Harvey W. Schiller, the Company’s Chairman and Chief Executive Officer, and Jeffrey O. Nyweide, the Company’s Chief Financial Officer.    These modified agreements clarified the employment and compensation provisions upon a termination of employment or a change of control.   Aggregate annual salary compensation levels of $425 and $375 for each of Dr. Schiller and Mr. Nyweide, respectively, will remain in effect for the remaining term of the agreements, which currently is through January 31, 2011, as will the terms of the bonus program in effect prior to the modification.

Operating Leases

The Company has obligations for various office and laboratory leases.  Such lease obligations expire at various dates through August 2016.

Rent expense charged to operations amounted to $894 and $918, for the three months ended September 30, 2009 and 2008, and $2,748 and $2,805 for the nine months ended September 30, 2009 and 2008, respectively.

The terms of certain of the Company’s lease obligations provide for scheduled escalations in the monthly rent. The non-contingent rent increases are being amortized over the life of the leases on a straight line basis. Deferred rent of $789 and $784 represents the long-term unamortized rent adjustment amount at September 30, 2009 and at December 31, 2008 and is reflected within other long-term obligations in the condensed consolidated balance sheet. In addition, the current portion of deferred rent was $62 and $40 as of September 30, 2009 and December 31, 2008, respectively, and is reflected within other current liabilities in the condensed consolidated balance sheets.

12

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

10.  Commitments and Contingencies, continued

Litigation, Claims and Assessments

From time to time, in the normal course of business, the Company may be involved in litigation.  Except for certain claims as described below, the Company’s management has determined any asserted or unasserted claims to be immaterial to the consolidated financial statements. 

The Company was added as a defendant in federal and state litigation matters related to Facticon, which were initially filed by the plaintiffs prior to the Company’s acquisition of the assets of  Facticon, under the successor liability theory.  The federal matter was settled in full on December 22, 2008 with a cash payment of $657.  In the State Court Matter, Wonsch, et al. vs. Facticon Inc. and GlobalOptions Group, Inc., filed in the State Court for the Central District of California, the plaintiffs in a class action (the “State Plaintiffs”), alleged that Facticon failed to pay overtime wages under the California Civil Code.  The State matter was settled in full on May 12, 2009 with a cash payment of $118.

11. Stockholders’ Equity

Common Stock Issued

On February 17, 2009, the Company issued 2,817,235 shares of its common stock upon the conversion of 42,258.53 shares of  Series D convertible preferred stock.

On April 14, 2009, the Company issued 36,900 shares valued at $75 for services rendered during 2008, and 12,900 shares valued at $22 for services rendered during the three months ended March 31, 2009, to Lippert/Heilshorn and Associates.

On May 1, 2009, the Company issued 398,000 shares of its common stock upon the conversion of 5,970 shares of Series D convertible preferred stock.

During July  2009, the Company issued 44 shares of its common stock in connection with the exercise of a stock option.

During September 2009, the Company issued 477,317 shares of its common stock upon the conversion of the remaining outstanding 7,159.75 shares of Series D convertible preferred stock.  After this conversion, no shares of Series D convertible stock were outstanding.

During the nine months ended September 30, 2009, the Company issued 134,274 shares of its common stock pursuant to the vesting of RSUs under the 2006 Long Term Incentive Plan (the “Incentive Plan”).  Of the 134,274 shares issued, 31,912 and 14,094 shares were issued to the Chief Executive Officer and Chief Financial Officer, respectively.  The Chief Executive Office and Chief Financial Officer elected to have the Company withhold 12,063 and 4,764 shares, respectively, in satisfaction of their tax obligations in connection with the vesting of these RSUs.  Such withheld shares valued at $25 and $10, respectively are reflected as treasury shares in the Company’s books and records.

During the nine months ended September 30, 2009, the Company issued 51,394 shares of its common stock under the Amended and Restated 2006 Employee Stock Purchase Plan (the “Stock Purchase Plan”).  The Company realized proceeds of $69 and recognized stock based compensation of $ $23 in connection with the issuance of these shares.

Restricted Stock Issued Under Performance Based Executive Bonus Plan

On December 19, 2006, the Company awarded 100,000 and 75,000 shares of unvested restricted stock to its Chief  Executive Officer and Chief Financial Officer, respectively, in connection with the extension of their respective employment and consulting agreements. On July 24, 2008 the Company awarded an additional 250,000 and 187,500 shares of unvested restricted stock to its Chief Executive Office and Chief Financial Officer, respectively, in connection with the 2006 Executive Compensation Performance Bonus Plan.

13

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

12.  Stock Based Compensation

Restricted Stock Issued Under Performance Based Executive Bonus Plan, continued

At September 30, 2009, an aggregate of 558,063 of the restricted shares awarded to these executives remain subject to vesting based on certain performance and stock price targets that have been established by the Compensation Committee.

Amended and Restated 2006 Long-Term Incentive Plan

Under the Company’s Amended and Restated 2006 Long-Term Incentive Plan (the “Incentive Plan”), the Company may issue up to 3,000,000 shares of the Company’s common stock.  The Compensation Committee has the authority to determine the amount, type and terms of each award, but may not grant awards under the Incentive Plan, in any combination, for more than 625,000 shares of the Company’s common stock to any individual during any calendar year, increased from 312,500 under the Company’s original 2006 Long-Term Incentive Plan.

As of September 30, 2009, 993,857 shares of common stock remain eligible to be issued under the Incentive Plan.

Amended and Restated 2006 Employee Stock Purchase Plan

Under the Company’s Amended and Restated Employee Stock Purchase Plan (the “Stock Purchase Plan”), eligible employees of the Company are permitted to automatically purchase at the end of each month at a discounted price, a certain number of shares of the Company’s common stock by having the effective purchase price of such shares withheld from their base pay.  The Stock Purchase Plan provides for the issuance of up to 2,000,000 shares of the Company’s common stock.

As of September 30, 2009, 1,926,488 shares of common stock remain unissued under the Stock Purchase Plan.

Stock Based Compensation

Equity instruments issued to employees are recorded at their fair value on the date of grant and are amortized over the vesting period of the award.  Stock based compensation for employees was approximately $634 and $734 for the three months ended September 30, 2009 and 2008, respectively, and $1,909 and $2,759 for the nine months ended September 30, 2009 and 2008, respectively.   For the three months ended September 30, 2009 and 2008, $130 and $85, respectively, were reflected in selling and marketing expenses, and $504 and $649, respectively, were reflected in general and administrative expenses. For the nine months ended September 30, 2009 and 2008, $245 and $189 respectively, were reflected in selling and marketing expenses, and $1,664 and $2,570, respectively, were reflected in general and administrative expenses.

Equity instruments issued to non-employees are recorded at their fair value on the grant date. The non-vested portions of the award are adjusted based on market value on a quarterly basis and the adjusted value of award is amortized over the expected service period.  Stock based compensation for non-employees was approximately $20 and $24 for the three months ended September 30, 2009 and 2008 respectively, and $177 and $263 for the nine months ended September 30, 2009 and 2008, respectively. For the three months ended September 30, 2009 and 2008, all stock based compensation for non-employees was reflected in general and administrative expenses.  For the nine months ended September 30, 2009 and 2008, $98 and $0, respectively, were reflected in selling and marketing expenses, and $79 and $263, respectively, were reflected in general and administrative expenses.

14

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

12. Stock Based Compensation, continued

Stock Based Compensation, continued

The following table summarizes total stock based compensation costs recognized for the three and nine months ended September 30, 2009 and 2008, respectively.

	For the Three Months Ended September 30,
	2009						2008
	Non- employees		Employees		Total		Non- employees		Employees		Total
Stock options	$	20	$	103	$	123	$	22	$	133	$	155
RSUs		-		247		247		2		256		258
Stock purchase plan		-		8		8		-		3		3
Vesting of restricted shares under  performance based executive bonus award		-		276		276		-		342		342
Total	$	20	$	634	$	654	$	24	$	734	$	758

	For the Nine months ended September 30,
	2009						2008
	Non- employees		Employees		Total		Non- employees		Employees		Total
Stock options	$	75	$	322	$	397	$	93	$	1,558	$	1,651
RSUs		4		825		829		2		272		274
Stock purchase plan		-		23		23		-		3		3
Vesting of restricted shares under performance based executive bonus award		-		739		739		-		926		926
Shares issued to consultants for services		98		-		98		168		-		168
Total	$	177	$	1,909	$	2,086	$	263	$	2,759	$	3,022

15

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

12. Stock Based Compensation, continued

Stock Options

The fair value of each option grant during the nine months ended September 30, 2009 and three and nine months ended September 30, 2008 was estimated on the date of grant using the Black-Scholes option pricing model.  No options were granted by the Company during the three months ended September 30, 2009.  The weighted average assumptions used to compute the grant date value of the options granted during the nine months ended September 30, 2009 and thee and nine months ended September 30, 2008 were as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2009		2008		2009			2008
Dividend yield		-		0%		0%	%		0%
Expected volatility		-		99.8%		104%	%		87.0%
Risk-free interest rate		-		3.37%		1.86%	%		2.97%
Expected lives		-	4 years		3.6 years			5 years

The Company has determined that the expected life of options granted is the same as the contractual term for options granted prior to July 1, 2008, because the employees were expected to remain with the Company for the full term of the option award.  The expected life of options granted after June 30, 2008 was calculated using the simplified method, calculating the expected life as the average of the contractual term and the vesting period.

The weighted average fair value of the options on the date of grant, using the fair value based methodology was $1.24 per share for the nine months ended September 30, 2009, and was $1.64 and $1.80 per share for the three and nine months ended September 30, 2008, respectively.

On January 1, 2009, the Company granted, in the aggregate, options for the purchase of 75,000 shares of its common stock at an exercise price of $1.99 per share, under the Incentive Plan, to three members of the Board of Directors. The options have a five year term and vest ratably at the end of each of the four quarterly periods following the date of grant.  In the aggregate, these options have a value of approximately $96 utilizing the Black-Scholes option pricing model with the following assumptions used: expected life of three years, volatility of 104%, dividends of 0%, and a risk free interest rate of 1.55%.

On January 1, 2009, the Company granted, in the aggregate, options for the purchase of 100,000 shares of its common stock at an exercise price of $1.99 per share, under the Incentive Plan, to certain members of its advisory boards for their advisory services to the Company.  The options have a five year term and vest ratably at the end of each of the four quarterly periods following the date of grant.  In the aggregate, these options have a value of approximately $128 utilizing the Black-Scholes option pricing model with the following assumptions used: expected life of three years, volatility of 104%, dividends of 0%, and a risk free interest rate of 1.55%.

On February 25, 2009, the Company granted, in the aggregate, options for the purchase of 267,500 shares of its common stock at an exercise price of $1.70 per share, under the Incentive Plan, to certain officers and employees.  The options have a five year term and vest ratably upon the first, second and third anniversaries of the date of grant.  In the aggregate, these options have a value of approximately $325 utilizing the Black-Scholes option pricing model with the following assumptions used: expected life of four years, volatility of 104%, dividends of 0%, and a risk free interest rate of 2.06%.

16

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

12. Stock Based Compensation, continued

Stock Options, continued

At September 30, 2009, the unamortized value of stock options held by employees was approximately $562.  The unamortized portion will be expensed over a weighted average period of 1.2 years.

 A summary of the status of the Company’s stock option plans and the changes during the nine months ended September 30, 2009, is presented in the table below:

	Number of  Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life		Intrinsic Value
				(per share)		(in years)
Options outstanding at December 31, 2008		634,687		$	3.62		4.1
Exercised		(44	)
Granted		442,500
Forfeited		(39,349	)
Options outstanding at September 30, 2009		1,037,794		$	2.58		3.7	$	46
Exercisable at September 30, 2009		454,812		$	3.41		3.5	$	8

Restricted Stock Units (“RSUs”)

At September 30, 2009, the unamortized value of RSUs held by employees was approximately $1,515. The unamortized portion will be expensed over a weighted average period of 1.6 years.

A summary of the activity related to RSUs for the nine months ended September 30, 2009 is presented below:

	Total			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2009		366,087		$	2.12
RSUs vested		(134,274	)
RSUs forfeited		(2,287	)
Nonvested at September 30, 2009		229,526		$	2.12

17

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

12. Stock Based Compensation, continued

Stock Purchase Plan

The Stock Purchase Plan was established for eligible employees to purchase shares of the Company’s common stock on a monthly basis at 85% of the lower of the market value of the Company’s common stock on the first or last business day of each month. Under the Stock Purchase Plan, employees may authorize the Company to withhold up to 15% of their compensation during any monthly offering period for common stock purchases, subject to certain limitations. The Stock Purchase Plan was implemented during July 2008 and is qualified under Section 423 of the Internal Revenue Code.

For the three months ended September 30, 2009 and 2008 14,770 and 6,140 shares respectively were issued under the Stock Purchase Plan.  The Company recognized $8 and $3, respectively of stock based compensation in connection with the issuance of these shares.

For the nine months ended September 30, 2009 and 2008, 51,394 and 6,140 shares respectively were issued under the Stock Purchase Plan.  The Company recognized $23 and $3 of stock based compensation in connection with the issuance of these shares.

13.   Client and Segment Data

The Company’s reportable operating segments consist of the following three business segments: Preparedness Services, Fraud and SIU Services, and Security Consulting and Investigations. The Company’s reportable segments are organized, managed and operated along key product and service lines. These product and service lines provided to similar clients are offered together as packaged offerings, generally produce similar margins and are managed under a consolidated operations management.

The Preparedness Services segment develops and implements crisis management and emergency response plans for disaster mitigation, continuity of operations and other emergency management issues for governments, corporations and individuals.

The Fraud and SIU Services segment provides investigative surveillance, anti-fraud solutions and business intelligence services to the insurance industry, law firms and multinational organizations. The results of the Company’s International Strategies business unit, on the basis of its relative materiality, are included in the Fraud and SIU Services segment.

The Security Consulting and Investigations segment delivers specialized security and investigative services to governments, corporations and individuals.

Total revenues by segment include revenues to unaffiliated clients. The Company evaluates performance based on income (loss) from operations. Operating income (loss) is gross profit less operating expenses.

The following tables summarize financial information about the Company’s business segments for the three and nine months ended September 30, 2009 and 2008.   

For the Three Months Ended September 30, 2009
	Preparedness Services		Fraud & SIU Services-			Security Consulting & Investigations			Corporate		Consolidated
Revenues	$	9,461	$	7,806		$	8,738		$	-	$	26,005
Income (loss) from Operations	$	735	$	(680	)	$	(468	)	$	-	$	(413	)
Depreciation and Amortization	$	62	$	269		$	440		$	-	$	771
Interest Expense, net	$	-	$	-		$	-		$	101	$	101

18

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

13.   Client and Segment Data, continued

For the Three Months Ended September 30, 2008
	Preparedness Services			Fraud & SIU Services-			Security Consulting & Investigations			Corporate		Consolidated
Revenues	$	11,820		$	8,657		$	9,011		$	-	$	29,488
Income (loss) from Operations	$	(1,191	)	$	(1,117	)	$	(417	)	$	-	$	(343	)
Depreciation and Amortization	$	320		$	383		$	432		$	-	$	1,135
Interest Expense, net	$	-		$	-		$	-		$	72	$	72

For the Nine months ended September 30, 2009
	Preparedness Services		Fraud & SIU Services-			Security Consulting & Investigations			Corporate		Consolidated
Revenues	$	30,450	$	22,391		$	25,108		$	-	$	77,949
Income (loss) from Operations	$	2,197	$	(2,533	)	$	(2,148	)	$	-	$	(2,484	)
Depreciation and Amortization	$	375	$	835		$	1,333		$	-	$	2,543
Interest Expense, net	$	-	$	-		$	-		$	487	$	487

For the Nine months ended September 30, 2008
	Preparedness Services		Fraud & SIU Services-			Security Consulting & Investigations			Corporate		Consolidated
Revenues	$	27,070	$	24,173		$	25,998		$	-	$	77,241
Income (loss) from Operations	$	962	$	(3,466	)	$	(4,081	)	$	-	$	(6,585	)
Depreciation and Amortization	$	948	$	1,036		$	1,278		$	-	$	3,262
Interest Expense, net	$	-	$	-		$	-		$	174	$	174

19

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(In thousands except share and per share amounts)

14.  Major Clients/Customers

Revenues from the Company’s services to a limited number of clients have accounted for a substantial percentage of the Company’s total revenues. The Company’s largest client, which is within the Preparedness Services segment and represents work performed under a government contract, accounted for approximately 23% and 26% of the Company’s revenues for the three months ended September 30, 2009 and 2008, and 25% and 25% for nine months ended September 30, 2009 and 2008, respectively.

For the three months ended September 30, 2009 and 2008 work performed under government contracts represented 51% and 51% of the Company’s revenues, respectively, the most significant of which, in 2009 and 2008, represented 64% and 64%, respectively, of the Company’s revenues within the Preparedness Services segment.

For the nine months ended September 30, 2009 and 2008 work performed under government contracts represented 53% and 47% of the Company’s revenues, respectively, the most significant of which, in 2009 and 2008, represented 64% and 71%, respectively, of the Company’s revenues within the Preparedness Services segment.

On July 22, 2009, the Company was notified that the State of Louisiana, Governor's Office of Homeland Security and Emergency Preparedness ("GOHSEP") exercised its option in the Company’s Consulting Services Contract with GOHSEP (the “Louisiana Contract”) to extend the term of the Louisiana Contract, which provides for up to $34 million in potential revenue per contract year, through August 23, 2010. The Louisiana Contract established the Company as the lead provider of relief and recovery efforts related to all State of Louisiana (the "State") disasters. Under the Louisiana Contract, the State chose to expand the Company's role to be the State's lead disaster advisor and recovery manager. The Company also continues to provide recovery relief to the State in the aftermath of Hurricanes Katrina and Rita, as well as Hurricanes Gustav and Ike, and provides these same services for other new and/or pre-existing disasters.  The Company also provides programmatic and policy advice regarding the Federal Emergency Management Agency (“FEMA”) and assists with the development and dissemination of the State's disaster-related policies and procedures. As described above, the term of the Louisiana Contract is through August 23, 2010 and is terminable by GOHSEP upon 30 days' written notice.

15.  Subsequent Events

On October 31, 2009, the Company issued 8,245 shares of its common stock under the Stock Purchase Plan.  The Company realized proceeds of $11 and recognized stock based compensation of $4 in connection with the issuance of these shares.

20

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 (Amounts contained in this Item 2 are in thousands, except share and per share amounts).

The following discussion of results of operations and financial condition is based upon, and should be read in conjunction with, our condensed consolidated financial statements and accompanying notes thereto included elsewhere herein.

Forward-Looking Statements

Information included or incorporated by reference in this Quarterly Report on Form 10-Q may contain forward-looking statements. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "should," "expect," "anticipate," "estimate," "believe," "intend" or "project" or the negative of these words or other variations on these words or comparable terminology.

Overview

GlobalOptions Group, Inc. and Subsidiaries (collectively the “Company” or “GlobalOptions Group”) is an integrated provider of risk mitigation and risk management services to government entities, Fortune 1000 corporations and high net-worth and high-profile individuals. We enable clients to identify, assess and prevent natural and man-made threats to the well-being of individuals and the operations of governments and corporations. In addition, we assist our clients in recovering from the damages or losses resulting from the occurrence of acts of terror, natural disasters, fraud and other risks. We have established operating platforms for each of our business units that leverage our experienced senior management team and our proprietary business processes and technology solutions.  We have an established base of key clients, forming a base upon which we intend to grow both vertically and horizontally.

We believe our reputation, credentials and personal relationships provide us with a competitive advantage in both expanding business with our existing clients as well as securing new business. Our senior management team and advisory boards have extensive industry backgrounds and include former generals in the military, top government officials and corporate officers, intelligence and law enforcement officers, professional investigators and legal and crisis communications specialists.

We deliver risk mitigation and management services through the following four business units:

• Preparedness Services develops and implements crisis management and emergency response plans for disaster mitigation, continuity of operations and other emergency management issues for governments, corporations and individuals. Services we provide include preparedness, response and recovery services, threat and impact assessments, business continuity plans and emergency exercises and training programs. The Preparedness Services unit is led by former Federal Emergency Management Agency Director James Lee Witt.

• Fraud and Special Investigative Unit (“SIU”) Services provides investigative surveillance, anti-fraud solutions and business intelligence services to the insurance industry, law firms and multinational organizations. Services we provide include fraud reporting, anti-fraud training, insurance claims investigations, surveillance, background investigations, corporate investigations for liability, on-scene accident investigations and regulatory compliance. The Fraud and SIU Services unit is led by Halsey Fischer, an 19-year industry veteran and former President and Chief Executive Officer of Confidential Business Resources (“CBR”).

• SecurityConsulting and Investigations delivers specialized security and investigative services to governments, corporations and individuals. Services we provide include forensic DNA analysis, facilities and IT security, litigation support, business intelligence, IT and accounting forensics, executive protection, independent monitoring and regulatory compliance. The Security Consulting and Investigations unit is led by Howard Safir, former New York City Police Commissioner.

• International Strategies provides multidisciplinary, international risk management and business solutions to foreign and domestic governments, corporations and individuals. Services we provide include crisis management, facilities security, investigations and litigation support, global business intelligence, corporate governance compliance, personal protection and emerging market services. The International Strategies unit is led by Thomas Ondeck, a founder of GlobalOptions, Inc.

21

Our Preparedness Services, Fraud and SIU Services, and Security Consulting and Investigations units represent our three financial reporting segments. Our International Strategies business unit, on the basis of its relative materiality, is included in our Fraud and SIU Services segment.

The following table represents the revenue contribution by each of these three reporting segments as a percentage of our total revenues:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
Segment	2009			2008			2009			2008
Preparedness Services		36.4	%		40.1	%		39.1	%		35.0	%
Fraud and SIU Services		30.0			29.4			28.7			31.3
Security Consulting and Investigations		33.6			30.5			32.2			33.7
Total		100.0	%		100.0	%		100.0	%		100.0	%

Growth Strategy

Our goal is to build a company with the risk mitigation industry’s most comprehensive solutions offering through a balance of organic growth and acquisitions. We intend to grow our business in the following manner.

 Leverage Our Relationships and Expertise. Our highly trained professionals have deep domain expertise and exceptional credentials. Further, our advisory boards are comprised of thought leaders in their respective fields. Since our industry relies heavily on reputation and trust, we believe our senior management team’s and advisory boards’ experience and relationships will help us gain access to an increasing number of opportunities.

Cross-sell and Integrate Businesses. We intend to continue our aggressive efforts to integrate the operations of companies we have acquired and will acquire, providing the framework necessary for our senior managers to focus on identifying, prospecting and winning new opportunities across all business units. We believe our operational expertise and comprehensive service offerings enable us to cross-sell over industry verticals as well as leverage our existing client base, thereby enhancing our ability to execute on our organic growth initiatives.

Selectively Acquire Companies. We will continue to pursue complementary acquisitions of companies that enable us to increase our share of those markets in which we already operate and to enter new markets and service segments. We believe there are numerous opportunities to acquire quality companies because of the fragmented nature of our industry and that our past acquisitions track record will assist us in executing this strategy. We expect these acquisitions to be geographically diverse, provide synergies within units and allow for cross-selling opportunities across all of our business units. We structure our acquisitions to ensure that key selected individuals from the acquired company are retained and integrated after the transaction is consummated.

Develop New Solutions. We will continue to develop and seek solutions to meet unique client and dynamic market segment needs by expanding and bundling our product and service offerings. As we continue to grow both organically and through acquisitions, we expect to meet additional needs of our clients. Evidence of this strategy is our enterprise-oriented solution, GlobalTrak, and the DNA technology service we offer through The Bode Technology Group, Inc. (“Bode”).

Expand Internationally. We intend to pursue additional opportunities to offer our services outside the United States. We believe international markets provide a substantial opportunity for growth given the increasing risks that businesses and governments face around the world. We expect that by expanding our offerings to other countries we will also enhance our ability to compete in the United States for the business of global organizations.

22

Corporate Developments

Conversion of Series D Convertible Preferred Stock

On February 17, 2009, the Company issued 2,817,235 shares of its common stock upon the conversion of 42,258.53 shares of Series D convertible preferred stock.   

On May 1, 2009, the Company issued 398,000 shares of its common stock upon the conversion of 5,970 shares of Series D convertible preferred stock.

During September 2009, the Company issued 477,317 shares of its common stock upon the conversion of  the remaining 7,159.75 shares of  Series D convertible preferred stock.   At September 30, 2009, there were no shares of Series D convertible preferred stock outstanding.

Extension of Agreement with the State of Louisiana

On July 22, 2009, the Company was notified that the State of Louisiana, Governor's Office of Homeland Security and Emergency Preparedness ("GOHSEP") exercised its option in the Company’s Consulting Services Contract with GOHSEP (the “Louisiana Contract”) to extend the term of the Louisiana Contract, which provides for up to $34 million in potential revenue per contract year, through August 23, 2010. The Louisiana Contract established the Company as the lead provider of relief and recovery efforts related to all State of Louisiana (the "State") disasters. Under the Louisiana Contract, the State chose to expand the Company's role to be the State's lead disaster advisor and recovery manager. The Company also continues to provide recovery relief to the State in the aftermath of Hurricanes Katrina and Rita, as well as Hurricanes Gustav and Ike, and provides these same services for other new and/or pre-existing disasters.  The Company also provides programmatic and policy advice on FEMA and assists with the development and dissemination of the State's disaster-related policies and procedures. As described above, the term of the Louisiana Contract is through August 23, 2010 and is terminable by GOHSEP upon 30 days' written notice.

Modifications to Employment Agreements

On August 13, 2009, the Company entered into Employment Agreement Modifications with Harvey W. Schiller, the Company’s Chairman and Chief Executive Officer and Jeffrey O. Nyweide, the Company’s Chief Financial Officer.

Statements of Operations

Revenues

Principally, we generate our revenues through providing risk mitigation solutions to our clients. For our Preparedness Services and Security Consulting and Investigations engagements, we typically invoice on a time and materials basis. For most of our Fraud and SIU Services engagements, we invoice on a fixed fee basis. We enter into contractual arrangements with most of our clients, on both an exclusive and non-exclusive basis. The duration of our engagements range from one week to two or more years. Over half of our revenues are generated from repeat client relationships that we have had for more than one year. In addition to our services, we also generate revenues from the sale of kits and supplies principally used by law enforcement to collect DNA materials. Generally, we must compete in the market for our clients based upon our reputation, service history and relationships. There are limited cases within all of our business segments in which we are considered by our clients to be the sole source provider, based principally upon the experience of our personnel or, in the case of Bode and certain DNA investigations, our technical expertise. Our clients consist of government entities, corporations and high net-worth and high-profile individuals. We provide our services domestically through our own employees and through a network of approved subcontractors to achieve scale, geographic coverage and specialized expertise. Currently, a small portion of our revenues are generated by services provided outside the United States.

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Gross Profit

Our gross profit represents our revenues less the costs of revenues incurred to provide services to our clients. The most significant components of our costs of revenues are the costs of our direct labor, our third-party consultants and our reimbursable costs, which principally consist of travel expenses. For the most part, our costs of revenues are variable and based upon the type of services performed or the amount of revenues generated. Where possible, we structure our personnel arrangements to compensate our employees and our consultants on the basis of work performed. This enables us to maintain a variable cost structure and relatively consistent gross margins in our business segments from year to year. The variability in our gross margins results primarily from changes in our client mix. For our DNA analysis business, we incur fixed costs for our equipment and dedicated personnel.

Operating Expenses

Our selling and marketing expenses primarily include salaries, commissions, stock based compensation, as well as travel and other expenses, incurred by our employees who are involved in selling and promoting our services. Our general and administrative expenses consist primarily of salaries, bonuses and stock-based compensation for our employees not performing work directly for our clients, as well as depreciation expense of facilities and amortization of intangible assets. Also included in general and administrative expenses are corporate support expenses such as legal and professional fees, investor relations, human resources, facilities, telecommunication support services, information technology, and impairment losses recognized on goodwill and intangibles.

Results of Operations

The following is a summary of our operating results as a percentage of our total condensed consolidated revenues for the periods indicated:   

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2009		2008		2009		2008
Revenues		100%		100%		100%		100%
Cost of revenues		56		57		56		57
Gross profit		44		43		44		43
Operating expenses:
Selling and marketing expenses		12		11		12		11
General and administrative		34		33		35		40
Total operating expenses		46		44		47		51
Loss from operations		(2)		(1)		(3)		(8)
Other income (expense), net		-		-		(1)		-
Net loss		(2)%		( 1)%		(4)%		(8)%

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GlobalOptions Group Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008

Revenues

We had overall revenues of $26,005 for the three months ended September 30, 2009, as compared to revenues of $29,488 for the three months ended September 30, 2008, for an overall decrease of  $3,483 or 12%.

Preparedness Services revenues were $9,461 for the three months ended September 30, 2009, as compared to $11,820 for the three months ended September 30, 2008. The $2,359 or 20% decrease in revenues, was primarily attributable to the winding down of our relief and recovery efforts in Texas, Indiana and Iowa, the revenues of which were not replaced with the same level of relief work in 2009.

Fraud and SIU Services revenues were $7,806 for the three months ended September 30, 2009, as compared to $8,657 for the three months ended September 30, 2008.  The $851 or 10% decrease in revenues was primarily due to a decline in our investigations business resulting from lower demand for investigation, resulting from a reduction in fraud claims processed by our third party claims administrators and the elimination of certain lower margin accounts.

Security Consulting and Investigations revenues were $8,738 for the three months ended September 30, 2009, as compared to $9,011 for the three months ended September 30, 2008, reflecting a  decrease of $273, or 3%.

Gross Profit

Our consolidated gross profit for the three months ended September 30, 2009 and 2008 was $11,564 and $12,612 respectively, reflecting a decrease of $1,048 or 8%.  This decrease was principally due to a decrease in revenue, as discussed above.  For the three months ended September 30, 2009 and 2008, our gross profit margins were 44% and 43%, respectively.

Preparedness Services gross profit was $4,355 or 46% of this segment’s revenues for the three months ended September 30, 2009, as compared to $5,225 or 44% of this segment’s revenues for the three months ended September 30, 2008.  The improvement in gross margin is the result of improvements in efficiency resulting from the decreased use of outside consultants.  Fraud and SIU Services gross profit was $3,341 or 43% of this segment’s revenues for the three months ended September 30, 2009, as compared to $3,285 or 38% of this segment’s revenues for the three months ended September 30, 2008.  The increase in gross profit margin was primarily due to a revenue shift to higher margin customer accounts.   Security Consulting and Investigations gross profit was $3,868 or 44% of this segment’s revenues for the three months ended September 30, 2009, as compared to $4,102 or 46% of this segment’s revenues for the three months ended September 30, 2008.  The decrease in profit margin was primarily a result of lower utilization of labor costs.

Operating Expenses

Selling and marketing expenses were $3,156 or 12% of revenues for the three months ended September 30, 2009, as compared to $3,154 or 11% of revenues for the three months ended September 30, 2008. General and administrative expenses were $8,822 or 34% of revenues for the three months ended September 30, 2009, as compared to $9,801 or 33% of revenues for the three months ended September 30, 2008.  The decrease of $978 or 10% is attributable to improved efficiencies resulting from headcount reductions and the further integration of operations.

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GlobalOptions Group Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008

Revenues

We had overall revenues of $77,949 for the nine months ended September 30, 2009, as compared to revenues of $77,241 for the nine months ended September 30, 2008, for an overall increase of $708 or 1%.

Preparedness Services revenues were $30,450 for the nine months ended September 30, 2009, as compared to $27,070 for the nine months ended September 30, 2008.  The $3,380 or 12% increase in revenues was primarily attributable to our relief and recovery efforts in  Texas, Indiana and Iowa.

Fraud and SIU Services revenues were $22,391 for the nine months ended September 30, 2009, as compared to $24,173 for the nine months ended September 30, 2008.  The $1,782 or 7% decrease in revenues was primarily attributable to decreased demand for investigative services at this segment, resulting from a reduction in fraud claims processed by our third party claims administrators and the elimination of certain lower margin accounts.

Security Consulting and Investigations revenues were $25,108 for the nine months ended September 30, 2009, as compared to $25,998 for the nine months ended September 30, 2008.  The $890, or 3% decrease in revenues resulted from a reduction in demand for investigation services, litigation support and computer forensic services, due to the changes in the economic environment.

Gross Profit

Our consolidated gross profit for the nine months ended September 30, 2009 and 2008 was $33,916 and $32,891, respectively, reflecting an increase of $1,025 or 3%.  This increase was principally due to an increase in gross margin percentages, as discussed below.  For the nine months ended September 30, 2009 and 2008, our gross profit margins were 44% and 43%, respectively.

Preparedness Services gross profit was $14,045 or 46% of this segment’s revenues for the nine months ended September 30, 2009, as compared to $12,050 or 45% of this segment’s revenues for the nine months ended September 30, 2008.  The improvement in gross margin is the result of improvements in efficiency resulting from the decreased use of outside consultants.  Fraud and SIU Services gross profit was $9,094 or 41% of this segment’s revenues for the nine months ended September 30, 2009, as compared to $10,118 or 42% of this segment’s revenues for the nine months ended September 30, 2008.  The decrease in gross profit margin was primarily due to changes in client mix related to our 2008 acquisition of FAIS. Security Consulting and Investigations gross profit was $10,777 or 43% of this segment’s revenues for the nine months ended September 30, 2009, as compared to $10,724 or 41% of this segment’s revenues for the nine months ended September 30, 2008.  The increase in profit margin was the result of improved utilization of labor and the increase in sales of our DNA related products.

Operating Expenses

Selling and marketing expenses were $9,465 or 12% of revenues for the nine months ended September 30, 2009, as compared to $8,374 or 11% of revenues for the nine months ended September 30, 2008. The $1,091 or 13% increase in selling expenses for the nine months ended September 30, 2009 related to an increased emphasis on our selling and marketing activities, including the re-assignment of internal personnel and the utilization of marketing consultants, as well as the expansion of our client forum marketing event held in February. General and administrative expenses were $26,935 or 35% of revenues for the nine months ended September 30, 2009, as compared to $31,103 or 40% of revenues for the nine months ended September 30, 2008.  The decrease of $4,167 or 13% is attributable to a decrease in stock based compensation, as well as improved efficiencies resulting from headcount reductions and the further integration of operations.

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Liquidity and Capital Resources

For the Nine months ended September 30, 2009

We had a cash and cash equivalent balance of  $5,142 as of September 30, 2009.

Cash  provided by (used in) operating activities was approximately $5,615 and $(3,209) for the nine months ended September 30, 2009 and 2008, respectively.  Cash provided by operating activities for the nine months ended September 30, 2009 resulted primarily from a reduction in accounts receivable of $5,458 resulting primarily from collections, offset by an increase in inventories of $897 as well as our net loss $2,971 as adjusted for non-cash charges for depreciation and amortization of $2,543 and for stock based compensation of  $2,086.

Cash used in investing activities was $1,967 and $3,511 for the nine months ended September 30, 2009 and 2008, respectively.  Of the cash used in investing activities for the nine months ended September 30, 2009, $1,909 represented purchases of property, plant and equipment and capitalization of internally developed software costs.

Cash (used in) provided by financing activities was $(3,782) and $5,263, respectively, and consisted principally of the net (repayments) and borrowings under the line of credit of $(3,416) and $6,000, for the nine months ended September 30, 2009 and 2008, respectively.

Effective March 30, 2009, the financial institution that provides a line of credit for us and our wholly owned subsidiaries entered into an amendment to our working capital line of credit, reducing the applicable interest rate range with respect to the line of credit to 1.00% to 1.75%, based on our liquidity, plus the greater of 6.25% or the lender’s most recently announced “prime rate.”  As of September 30, 2009 our net borrowings were $3,677 under the line of credit, and based upon the amount of qualifying accounts receivable, we were eligible to draw up to a total of $10,000 under the line of credit.  The line of credit and all obligations outstanding thereunder are due and payable not later than March 29, 2010.

For the nine months ended September 30, 2009, we have met our cash needs through operating cash flows and through borrowings under our line of credit arrangement. At September 30, 2009, we had working capital of $16,445. We believe that a combination of cost reductions that we have implemented to date, and will continue to implement, along with anticipated revenue improvements resulting from both new products and from new relationships will allow us to generate improvements in cash flows from operations. Furthermore, we believe that these improved operating cash flows, along with the proceeds from our line of credit arrangement will be sufficient to finance our operations through September 30, 2010.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

Critical Accounting Policies

Our significant accounting policies, including the assumptions and judgments underlying them, are more fully described in our “Notes to Consolidated Financial Statements” included in the Annual Report on Form 10-K for the year ended December 31, 2008. Some of our accounting policies require the application of significant judgment by management in the preparation of the consolidated financial statements and, as a result, they are subject to a greater degree of uncertainty. In applying these policies, management uses its judgment to determine the appropriate assumptions to be used in calculating estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. We have identified certain of our accounting policies as the ones that are most important to the portrayal of our consolidated financial condition and results of operations and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our critical accounting policies include the following:

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Revenue Recognition and Related Costs

For investigation, crisis management and non-DNA related security, revenue is recognized on a time and materials or fixed price arrangement and is recognized as the services are performed pursuant to the applicable contractual arrangements. Revenue related to time and materials arrangements is recognized in the period in which the services are performed. Revenue related to fixed price arrangements is recognized based upon the achievement of certain milestones or progress points within the project plan. The impact of any revisions in estimated total revenue and direct contract costs is recognized in the period in which they become known. Expenses incurred by professional staff in the generation of revenue are billed to the client and recorded as revenue when incurred.

For DNA related revenues, revenue is recognized when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence that an agreement exists, prices are fixed or determinable, services and products are provided to the client, and collectibility is reasonably assured. The Company reduces revenue for estimated discounts and other allowances.

Revenues earned on DNA related services are derived from the following sources: (1) forensic DNA analysis; (2) research and development projects; and (3) sales of DNA collection products. The Company recognizes revenues from forensic DNA analysis at the time tests are completed and the results are reported to the client. Revenues from research and development projects are recognized as the related research is completed and when the Company has satisfied specific obligations under the terms of the respective agreements. Revenues from the sales of DNA collection products are recognized upon delivery of the products to the client.

Forensic DNA analysis is billed on a per sample fixed fee arrangement. Research and development projects are billed on a cost plus fixed fee arrangement.

Costs incurred in the performance of forensic DNA analysis are recorded as inventories and charged to cost of revenues upon the completion of the project, which generally ranges from one to three months. Costs related to research and development projects are expensed as incurred and costs related to DNA collection products are maintained as inventory and charged to operations when the products are delivered.

Intangible Assets, Goodwill and Impairment

In accordance with the accounting standards, we recognize certain intangible assets acquired in acquisitions, primarily goodwill, trade names, covenants not to compete and client relationships. In accordance with the provisions within the Intangibles Topic of the FASB Accounting Standards Codfication, on a regular basis, we perform impairment analysis of the carrying value of goodwill and certain other intangible assets by assessing the recoverability when there are indications of potential impairment based on estimates of undiscounted future cash flows.

Allowance for Doubtful Accounts

The number of clients that comprise our client base, along with the different industries, governmental entities and geographic regions, including foreign countries, in which our clients operate, limits concentrations of credit risk with respect to accounts receivable. We do not generally require collateral or other security to support client receivables, although we do require retainers, up-front deposits or irrevocable letters of credit in certain situations. We have established an allowance for doubtful accounts based upon facts surrounding the credit risk of specific clients and past collections history. Credit losses have been within management’s expectations.

Stock-Based Compensation

The Company has adopted the fair value recognition provisions Accounting Standards Codification 718 “Compensation—Stock Compensation” (“ASC 718”).  Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions ASC 718. The Company recognizes these compensation costs over the requisite service period of the award, which is generally the vesting term of the options associated with the underlying employment agreement, where applicable.

ASC 718 also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. Prior to the adoption of ASC 718, the Company accounted for forfeitures as they occurred.

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We account for equity instruments issued to non-employees in accordance with the provisions of ASC 718 which requires that such equity instruments be recorded at their fair value on the measurement date, which is typically the date the services are performed. Stock-based compensation for non-employees is accounted for under ASC 718 and is reflected within general and administrative expenses.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 4T. Controls and Procedures.

Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13(a)-15(e)) are controls and other procedures that are designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow for timely decisions regarding required disclosure. Disclosure controls and procedures include many aspects of internal control over financial reporting.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act and have determined that such controls and procedures were effective as of  September 30, 2009.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls or in other factors that could significantly affect these controls, during our third quarter ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

(Amounts contained in this Part II are in thousands, except for share amounts).

Item 1.   Legal Proceedings.

From time to time, we are involved in litigation arising in the ordinary course of business. We do not believe that we are involved in any litigation that is likely, individually or in the aggregate, to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 1A. Risk Factors.

Not Applicable.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.  Default Upon Senior Securities.

None.

Item 4.   Submission of Matters to a Vote of Security Holders.

None.

Item 5.  Other Information.

None.

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Item 6. Exhibits.

The exhibits listed in the following Exhibit Index are filed as part of this Report.

EXHIBIT INDEX

Exhibit No.	Description
31.1	Certification of Principal Executive Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer pursuant to Section 302 of The Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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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.

	GLOBALOPTIONS GROUP, INC.
Dated:   November 12, 2009	By:	/s/ Harvey W. Schiller
		Harvey W. Schiller Chairman, Chief Executive Officer and Director (Principal Executive Officer)
Dated:   November 12, 2009	By:	/s/ Jeffrey O. Nyweide
		Jeffrey O. Nyweide  Executive Vice President-Corporate Development, Chief Financial Officer, Secretary (Principal Financial Officer and Principal Accounting Officer)

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