ITEM 1. BUSINESS
Overview
Bonds.com Group, Inc., a Delaware corporation (together with its subsidiaries, as applicable, “we,” “us,” “our” or the “Company”), through its indirect, wholly-owned subsidiary, Bonds.com, Inc., a Financial Industry Regulatory Authority (“FINRA”) registered broker-dealer and Alternative Trading System (“ATS”), offers access to live liquidity and execution in fixed income securities through BondsPRO. BondsPRO is a platform for odd-lot fixed-income trading which effectively establishes connectivity between traders and provides live and executable order flow, delivered through multiple technology interfaces.
On March 5, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MTS Markets International, Inc., a Delaware corporation and affiliate of the London Stock Exchange Group (“MTS”), and MMI Newco Inc., a Delaware corporation and wholly-owned subsidiary of MTS (“Merger Sub”). The Merger Agreement contemplates a merger in which Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving corporation and as a wholly owned subsidiary of MTS.
Under the terms of the Merger Agreement, MTS will acquire the Company for aggregate cash consideration of approximately $15 million. This amount is subject to adjustment based on transaction expenses, certain closing liabilities, and a working capital adjustment (to the extent the adjustment is outside the agreed upon collar). We refer to this amount, as adjusted, as the “Merger Consideration.”
On completion of the Merger, all shares of our common stock and preferred stock will automatically be cancelled and will cease to exist, and each share of common stock and preferred stock that was outstanding immediately prior to the effective time of the Merger (other than shares (a) for which appraisal rights are properly exercised and not withdrawn under Delaware law and (b) owned by the Company, MTS or Merger Sub) will be automatically converted into the right to receive allocations of the Merger Consideration, if any, on the basis of the Company’s Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”), in each case without interest and subject to any required withholding taxes. Because the amount of Merger Consideration is substantially less than the aggregate liquidation preference of the Company’s most senior series of preferred stock in a transaction of this size, the Series E-2 convertible preferred stock, par value $0.0001 per share, or “Series E-2 Stock” (and less than the aggregate invested capital by the holders of Series E-2 Stock), all Merger Consideration will be paid to the holders of Series E-2 Stock. In particular, holders of the Company’s:
•common stock, par value $0.0001 per share, or “Common Stock”;
•Series A participating preferred stock, par value $0.0001 per share, or “Series A Stock”;
•Series C convertible preferred stock, par value $0.0001 per share, or “Series C Stock”;
•Series E convertible preferred stock, par value $0.0001 per share, or “Series E Stock”; and
•Series E-1 convertible preferred stock, par value $0.0001 per share, or “Series E-1 Stock”;
will not receive any consideration in the Merger for their shares of such stock. Holders of Company options and warrants will have the opportunity to exercise their options and warrants prior to the Merger. From and after the completion of the Merger, holders of options and warrants outstanding immediately prior to the Merger will not receive any consideration in respect thereof.
The holders of shares of our Series E-2 Stock have agreed to place in escrow $1.5 million from the Merger Consideration payable with respect to their shares to cover certain potential indemnity claims that may be made by MTS and certain of its related parties. In the absence of claims, these funds will be released to the holders of Series E-2 Stock in increments of $500,000 beginning on the first anniversary of the closing of the Merger and continuing on the 18- and 24-month anniversaries of closing. In addition, $100,000 (subject to increase to up to $200,000) will be held by a designated stockholder representative as a reserve for expenses.
The Company’s special committee of independent and disinterested directors (the “Special Committee”) approved and recommended to the Company’s board of directors (the “Board of Directors”) the adoption of the Merger Agreement and approval of the Merger and the other transactions contemplated by the Merger Agreement. Upon recommendation of the Special Committee, the Board of Directors unanimously (a) determined that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement are fair to and in the best interests of the Company’s stockholders, (b) approved, adopted and declared advisable the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement and (c) recommended that the stockholders approve and adopt the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.
Under Section 251 of the DGCL and the Company’s Certificate of Incorporation, the adoption of the Merger Agreement and approval of the Merger and other transactions contemplated by the Merger Agreement by the Company’s stockholders required the affirmative vote or written consent of the holders of a majority of the outstanding shares of stock entitled to vote on the matter. In addition, the Certificate of Incorporation of the Company required the approval of stockholders holding: (a) a majority of the outstanding shares of Series A Stock; (b) 67% of the outstanding shares of Series C Stock; (c) 66.6% of the outstanding shares of the Series E Stock, Series E-1 Stock, and Series E-2 Stock, voting together; and (d) 66.6% of the outstanding shares of Series C Stock, Series E Stock, Series E-1 Stock and Series E-2 Stock, all voting together on an as-converted-to-Common Stock basis.
As of March 19, 2014, UBS Americas Inc., Daher Bonds Investment Company, Mida Holdings, Oak Investment Partners XII, Limited Partnership, GFINet, Inc., XOL Holdings S.A.L., Plough Penny Partners L.P., Hendrik Iwema, Trimarc Capital Fund, LP, and Montpelier Investment Holdings Ltd., which we collectively refer to as the “Approving Stockholders,” delivered or caused to be delivered to the Company written consents adopting the Merger Agreement and approving the Merger and the other transactions contemplated by the Merger Agreement. Shares held by the Approving Stockholders represent the following percentages of outstanding shares entitled to act by written consent with respect thereto:
•100% of the outstanding shares of Series A Stock;
•87.95% of the outstanding shares of Series C Stock;
•83% of the outstanding shares of Series E Stock, Series E-1 Stock and Series E-2 Stock, voting together;
•83% of the outstanding shares of Series C Stock, Series E Stock, Series E-1 Stock and Series E-2 Stock, all voting together on an as-converted-to-Common Stock basis; and
•70% of the outstanding shares of stock entitled to vote on the matter (which is comprised of our Common Stock, Series C Stock, Series E Stock and Series E-2 Stock), voting together (with the Series C Stock, Series E Stock and Series E-2 Stock voting on an as-converted-to-Common Stock basis).
Accordingly, the Merger Agreement, Merger and other transactions contemplated by the Merger Agreement were adopted and approved as of March 19, 2014. No further approval of the stockholders of the Company is required with respect to the Merger Agreement, Merger and other transactions contemplated by the Merger Agreement. The Merger Agreement, Merger and other transactions contemplated by the Merger Agreement remain subject to certain additional conditions and approval of regulatory authorities. There are no assurances that the Merger will be consummated on the expected timetable (during the second quarter of 2014), or at all.
BondsPRO
BondsPRO provides professional traders and large institutional investors live prices on U.S. corporate and emerging market debt issues from contributing counterparties. BondsPRO posts live, anonymous, and executable orders on a single bond or on a list basis, and permits price negotiation. Its all-to-all connectivity allows supply to meet demand, thereby increasing efficiency and reducing spread. We are a neutral counterparty to all trades, acting as a riskless principal.
The BondsPRO platform is an alternative trading system for trading odd-lot fixed-income securities. Users are able to customize screens and utilize dynamic filtering capabilities to quickly and easily select and view only those market areas that meet their trading criteria. The connectivity between traders on the platform supports a broad range of liquidity and execution opportunities. Users can access the system and submit orders via a variety of mechanisms, including Application Programming Interface (“API”), BondsPRO’s proprietary GUI, Bloomberg ETOMS, and Microsoft Excel.
The BondsPRO platform provides users the ability to obtain real-time executable bids or offers on thousands of bond offerings sourced directly from broker-dealers and other end users. Unlike other electronic trading platforms that charge subscription fees, access charges, ticket fees, or commissions in order to generate revenue, our model allows us to generate revenue through mark-ups or mark-downs on secondary market securities. BondsPRO is available free of charge, customers who initiate trades on the platform are subject to a charge.
BondsPRO provides a direct channel between institutional clients and the trading desks at our participating broker-dealers. We expect this will reduce sales and marketing costs, and eliminate layers of intermediaries between dealers and end investors.
Industry Background
Fixed Income Securities Trading Market
There are several types of fixed-income securities traded in the U.S. and global securities markets. The types of fixed-income securities on which our business is currently focused are:
• U.S. Corporate Bonds; and
• Emerging Market Debt.
The Securities Industry and Financial Markets Association (“SIFMA”), formerly The Bond Market Association, estimated that as of December 31, 2013, there was nearly $40 trillion of fixed-income securities outstanding in the U.S. trading market. The following tables set forth reported market and average trading volumes for various fixed-income securities in the U.S. market for the periods indicated:
Table 1. Outstanding U.S. Bond Market Debt ($ Billions)
1 Interest bearing marketable public debt.
2 Includes GNMA, FNMA, and FHLMC MBS/CMOs; and private-label MBS/CMOs.
3 Includes commercial paper, bankers acceptances, and large time deposits.
4 Includes auto, credit card, home equity, manufacturing, student loans and other; CDOs of ABS are included.
Sources: U.S. Department of Treasury, Federal Reserve System, Federal agencies, Dealogic, Thomson Reuters, Bloomberg, Loan Performance and SIFMA
Table 2: Average Daily Trading Volume in the U.S. Bond Markets ($ Billions)
1 Primary dealer activity.
2 Excludes all issues with maturities of one year or less and convertible securities.
3 Monthly trading data only captures the publicly traded TRACE eligible issues.
4 As of May 2011, agency trading activity is no longer limited to primary dealer activity.
5 Includes non-agency RMBS and CMBS.
6 Includes ABS, CDOs, and other.
7 Totals may not add due to rounding.
Sources: Federal Reserve Bank of New York, Municipal Securities Rulemaking Board, and FINRA TRACE
Corporate Bonds
Corporate debt securities are obligations issued by corporations for capital and operating cash flow purposes. Corporate debt is issued by a wide variety of corporations involved in the financial, industrial and service-related industries. Most corporate bonds trade in the over-the-counter (“OTC”) market, which is not centrally located. It is comprised of brokers and dealers nationwide who trade debt securities over the telephone or electronically. We believe participants are increasingly utilizing electronic transaction systems to assist in the trade execution process. The OTC market is much larger than the exchange markets, and the vast majority of bond transactions, even those involving exchange-listed issues, take place in the OTC market. Investors in corporate bonds typically include large financial institutions, such as pension funds, endowments, mutual funds, insurance companies and banks. Additionally, individuals of various financial means also invest in corporate bonds.
High-grade new issues of corporate bonds decreased from approximately $1 trillion in 2012 to approximately $336 billion in 2013.
Institutional Investors
The primary institutional investors in fixed income securities include 1940 Act Institutional Investors and Fund Management Firms, large private and public pension funds, traditional buy side institutions with substantial assets under management (such as mutual fund companies), hedge funds, corporations, insurance companies, and government, educational and not-for-profit organizations. These investors actively seek alternative means to access enhanced product offerings, pricing efficiency, and improved service. Until recently most institutional investors had to satisfy their fixed income securities trading requirements by executing trades with regional broker-dealers over the telephone. Based on our management’s fixed-income trading experience, we believe that several of these regional brokers offer limited proprietary securities inventory, as well as limited research and analysis for their institutional investor clients. We believe that institutional investors are an underserved segment of the fixed income marketplace, and that they have been, for the most part, unable to efficiently access the liquidity provided by other platforms because of the restrictive costs associated with such marketplaces.
Strategy
Our objective is to provide the market a leading electronic trading platform for fixed-income securities connecting broker-dealers and institutional investors more easily and efficiently. On January 29, 2014, we announced that our Board of Directors was exploring and evaluating strategic alternatives for the Company, including a possible strategic investment, merger or sale of the Company. On March 5, 2014, we entered into the Merger Agreement with MTS and Merger Sub, pursuant to which Merger Sub is expected to merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly owned subsidiary of MTS.
Absent completion of the merger with MTS, we intend to capitalize on the long-term growth in fixed-income securities trading by providing traders, broker-dealers and institutional investors a variety of trading platform products that, we believe, will transform a trading market that historically has been conducted in a decentralized and inefficient manner. Our growth strategy includes expanding the types of securities that can be traded on our BondsPRO electronic trading platform as well as increasing the number of broker-dealers and institutional investors that utilize our platform.
Products and Services
Overview - BondsPRO
BondsPRO has been developed primarily for the sophisticated institutional investor and trader. The platform provides users a fully interactive, anonymous, electronic market place for transacting a diverse range of fixed income products. Securities available on BondsPRO include corporate bonds and emerging markets. The higher-level functionality that has been added to the BondsPRO platform includes: depth of book visibility, live TRACE integration, and proprietary scatter graph technology.
Service and Support
Our goal is to provide a high level of support for all of our clients. For clients requiring more personalized attention, customer service is available via e-mail and telephone. Client e-mail inquiries are routed by managers to the appropriate business area for timely and accurate response. Communications with clients are reviewed and critiqued for quality assurance.
Client questions will be tracked and, if repeated, analyzed to determine how best to clarify the point or answer the inquiry during the client’s online experience. This analysis will be used to improve and enhance our product.
Source of Revenue
Fixed Income Securities
In 2013, we generated approximately $7.5 million in revenue, a 1% decrease from 2012. Unlike other fixed-income trading platforms, we do not currently charge fees to contributing dealers for access to BondsPRO and the liquidity provided by our client base. We do not charge monthly subscription fees, ticket fees, access fees or set-up charges to any of our investor clients. Instead, we expect to generate revenues from mark-ups on secondary market securities relating to trading of fixed income securities executed on our electronic trading platforms. Mark-ups on securities traded will be based on various terms of such securities, including (1) maturity date; (2) asset class; (3) other financial terms of the securities; and (4) then current market conditions. We believe that our sources of revenue differentiate our business model from other electronic trading platforms. However, there is no assurance that our clients will fully accept our pricing method or that it will result in greater profitability than other pricing methods employed by our competitors.
Sales
Sales Staff
We currently employ 8 sales and facilitation desk personnel who function as marketers and business account managers to assist us in acquiring and retaining clients.
Key Relationships
InterDealer Information Technologies, LLC
We license software and related intellectual property comprising the bulk of the technology behind our BondsPRO platform from InterDealer Information Technologies and its affiliates (collectively, “InterDealer”) pursuant to a Software License, Hosting, Joint Marketing and Services Agreement, as amended (the “InterDealer Agreement”). The InterDealer Agreement requires us to pay a monthly licensing fee to use the InterDealer software and intellectual property. Additionally, we reimburse InterDealer for the fees for third party services provided to the BondsPRO platform. InterDealer also maintains and houses our servers and related hardware. The InterDealer Agreement was most recently amended on February 28, 2014, to amend the initial term of the InterDealer Agreement so that is remains in effect until March 27, 2016 (after which the InterDealer Agreement will automatically renew for one-year periods unless the Company notifies InterDealer at least six months prior to the end of the then-current term of its intent not to renew the InterDealer Agreement), and provide a framework for future service level agreements, among other things.
We are heavily reliant on the software, intellectual property and other services provided by InterDealer. An interruption in services from InterDealer could have a material, adverse impact on our business, financial condition and results of operations.
The foregoing description of the InterDealer Agreement is a summary only and is qualified in its entirety by the agreement and amendments thereto themselves, which are incorporated herein by reference to the text of such agreement and amendments which are included as exhibits to this and other filings with the SEC and referenced as exhibits to this Annual Report.
UBS Securities LLC
We are parties to a strategic relationship with UBS Securities LLC pursuant to which we provide them with a “white label” version of our BondsPRO platform. Revenue generated through this relationship is included within our consolidated revenue.
Pershing, LLC
We are party to a clearing and custody agreement with Pershing, LLC (“Pershing”), a major back office clearing and custody firm and subsidiary of The Bank of New York, to provide trade clearing and customer relationship management (“CRM”) software for our clients. Through our relationship with Pershing, we access sophisticated and proprietary technology that automates traditionally labor-intensive securities transactions. Pershing provides execution, clearing and business enhancement services for broker-dealers nationwide and abroad.
Competition
The market for online trading services in fixed-income securities is rapidly evolving and highly competitive. Our competitive success will depend to a large degree on the overall customer experience that we are able to deliver.
We believe our ability to compete will depend upon many factors both within and outside our control. These factors include: regulation; price pressure; the timing and market acceptance of new products, services and enhancements developed by us and our competitors; our ability to design and support efficient, materially error-free Internet-based systems; economic and market conditions, such as recession and volatility; the size of the active investor market today and in the future; the extent to which institutional investors are willing to use electronic trading platforms offered by firms that have traditionally served mostly individual customers; product and service functionality; data availability and cost; clearing costs; ease of use; reliability; customer service and support; and sales and marketing decisions and efforts. We also believe that competitive pressures among the large dealers will inhibit the development of an inventory aggregation model, such as BondsPRO, for common use by these large dealers. We believe that larger dealers are normally unwilling to cooperate and share offerings and market making for fixed income securities.
We currently face direct competition from other companies that focus primarily on online trading of fixed income securities, including MarketAxess Holdings Inc., a publicly-traded company, The Municenter LLC, Bond Desk (a division of TradeWeb Markets) and TradeWeb Markets, LLC, all privately-held companies. Additionally, there are several other publicly-traded and privately-held companies which provide online trading platforms, including providers of direct-access order execution services. Many of our existing and potential competitors, which include large, online discount and traditional national brokerages and futures commission merchants, and financial institutions that are focusing more closely on online services, including electronic trading services for active traders, have longer operating histories, significantly greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than we do. Further, there is the risk that larger financial institutions which offer online brokerage services as only one of many financial services may decide to use extremely low commission pricing or free trades as a “loss leader” to acquire and accumulate customer accounts and assets to derive interest income and income from their other financial services. We do not offer other financial services, and have no plans to do so; therefore, such pricing techniques, should they become common in our industry, could have a material adverse effect on our results of operations, financial condition and business model.
Generally, competitors may be able to respond more quickly to new or emerging technologies or changes in customer requirements or to devote greater resources to the development, promotion and sale of their products and services. There can be no assurance that our existing or potential competitors will not develop products and services comparable or superior to those developed and offered by us or adapt more quickly to new technologies, evolving industry trends or changing customer requirements, or that we will be able to timely and adequately complete the implementation, and appropriately maintain and enhance the operation, of our business model. Recently, some of our larger competitors have been adding or emphasizing rule-based or strategy trading products and features to the active trader market. Although we believe it is less likely to occur in the fixed income trading market due to its more fragmented nature, increased competition could result in price reductions, reduced margins, failure to obtain any significant market share, or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. There can be no assurance that we will be able to compete successfully against current or future competitors, or that competitive pressures faced by us will not have a material adverse effect on our business, financial condition and results of operations.
Technology
The BondsPRO electronic trading platform operates using technology licensed from InterDealer. For more information on our relationship with InterDealer Securities, please see Business - Key Relationships elsewhere in this Annual Report.
Based on agreements with InterDealer, costs incurred for utilizing the licensed technology are paid via monthly licensing fees.
The Company also maintains a small technology group to support our customers and to liaise with InterDealer on technology projects.
Intellectual Property
General
Our intellectual property is critical to our success and ability to compete, and if we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology. We rely primarily on a combination of copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements, third-party non-disclosure and other agreements and other contractual provisions and technical measures to protect our intellectual property rights. We attempt to negotiate beneficial intellectual property ownership provisions in our contracts and also require employees, consultants, advisors and collaborators to enter into confidentiality agreements in order to protect the confidentiality of our proprietary information.
Domain Name
We believe that the “Bonds.com” domain name assists with the marketing of our business by directing potential clients to our website. Under current domain name registration practices, no one else can obtain an identical domain name, but someone might obtain a similar name, or the identical name with a different suffix (e.g., .org) or with a country designation. The Trademark Trial and Appeal Board of the United States Patent and Trademark Office (“USPTO”) in the matter In re CyberFinancial.Net, Inc. in August 2002, held that “bonds.com” is generic and cannot be registered as a trademark. As a result, it is likely that we would not be able to obtain a trademark registration with the USPTO to protect our domain name under U.S. trademark laws.
Regulation
The securities industry is subject to extensive regulation under federal and state law. In general, broker-dealers are required to register with the Securities and Exchange Commission (“SEC”) and to be members of FINRA or the New York Stock Exchange (“NYSE”). Our affiliated broker-dealer is subject to certain regulations promulgated under the Exchange Act and FINRA. These regulations establish, among other things, minimum net capital requirements for our broker-dealer subsidiary. We are also subject to regulation under various state laws in all 50 states and the District of Columbia and various U.S. Territories, including registration requirements.
Bonds.com, Inc. is a broker-dealer registered with FINRA, the SEC, and all states that require registration. It is also a member of the Municipal Securities Rulemaking Board (“MSRB”) and the Securities Investor Protection Corporation (“SIPC”). As a member firm of FINRA, Bonds.com, Inc. is subject to all rules and regulations of FINRA, MSRB, SEC, and all states where it is registered. All sales representatives are, likewise, registered with FINRA and the states that require registration. All transactions in corporate bonds and municipal bonds are reportable to FINRA and MSRB, respectively. Bonds.com, Inc. is currently required to file monthly FOCUS Reports with FINRA and is subject to minimum net capital requirements on a continuous basis.
Our disclosed trading system, BondsPRO, is subjected to regulation as an alternative trading system under Regulation ATS. Under Regulation ATS, the Company is required to follow additional reporting obligations and other limitations in the conduct of our business. Being regulated as an alternative trading system subject to Regulation ATS includes following requirements related to, but not limited to, access, fees, operating standards and record keeping.
Additionally, we use the Internet as a distribution channel to provide services to our clients. A number of regulatory agencies have recently adopted regulations regarding customer privacy and the use of customer information by service providers. Additional laws and regulations relating to the Internet may be adopted in the future, including regulations regarding the pricing, taxation, content and quality of products and services delivered over the Internet. Complying with these laws and regulations is expensive and time consuming and could limit our ability to use the Internet as a distribution channel.
Employees
As of March 21, 2014, we had 19 employees, which were all full-time. We consider our relationships with our employees to be good and have not experienced any interruptions of operations due to employee disagreements.
From time to time, we may enter into consulting agreements with individuals or firms to provide a specific and defined service.
Organizational Matters
Bonds.com Group, Inc. is a Delaware corporation and was incorporated on April 1, 2002.
On April 25, 2013, the Company implemented a 1-for-400 reverse split of the Company’s common stock, $0.0001 par value per share (“Reverse Stock Split”), which in accordance with the Company’s Certificate of Incorporation, also resulted in a 1-for-400 reverse split of the Company’s Series A Stock. Trading of the common stock on a post-Reverse Stock Split adjusted basis on the OTCQB Market began on April 26, 2013. All historic share and per-share information, including earnings per share, in this Form 10-K have been retroactively adjusted to reflect the Reverse Stock Split.
Additional Company Information
We maintain an Internet website at www.bonds.com. Through our Internet website, we will make available, free of charge, the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our annual report on Form 10-K; our quarterly reports on Form 10-Q; our current reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act. Our Proxy Statements for our Annual Meetings are also available through our Internet website. You may also obtain copies of our reports without charge by writing to: Bonds.com Group, Inc., 1500 Broadway, 31st Floor, New York, NY 10036, Attention: Investor Relations.
We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K relating to any future amendments to or waivers from any provision of our Code of Ethics that relate to one or more of the items set forth in Item 406(b) of Regulation S-K by describing such amendments and/or waivers on our above-referenced website within four business days following the date of a waiver or a substantive amendment.
Information on our Internet website is not, and shall not be deemed to be, a part of this Annual Report or incorporated into any other filings we make with the SEC.
You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an Internet website that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The SEC’s internet website is www.sec.gov.
Our telephone number is 212-257-4062.
ITEM 1A.
ITEM 1A. RISK FACTORS
Risks Related to Our Business
Substantial doubt exists concerning our ability to continue as a going concern.
The Company has seven years of operating history. We have had operating losses, since operations began, and had a working capital deficiency of approximately $0.6 million, an accumulated deficit of approximately $55.2 million and stockholders’ equity of approximately $0.6 million at December 31, 2013, all of which raises substantial doubt about the Company’s ability to continue as a going concern. We expect to continue to incur operating losses, in the aggregate and on a per share basis. There is no assurance that we will be able to achieve or sustain positive cash flows or profitability and we may continue to incur losses in future periods. If we are not able to achieve or sustain positive cash flows or profitability, our stock price may decline. Our independent auditors have expressed substantial doubt as to our ability to continue as a going concern. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Going Concern,” elsewhere in this Annual Report.
Our proposed merger with MTS may cause disruption in our business and, if the proposed merger does not occur, we will have incurred significant expenses, may need to pay a termination fee under the merger agreement, will not have adequate capital to continue operations absent another strategic transaction and may be unable to continue as a going concern.
As previously disclosed, on March 5, 2014, the Company entered into a Merger Agreement with MTS, part of the London Stock Exchange Group, pursuant to which a wholly-owned subsidiary of MTS will merge with and into the Company, resulting in the Company becoming a subsidiary of MTS. See the additional disclosures related to the Merger in Part I, Item 1 (Business) of this Annual Report.
The Merger, whether or not consummated, may result in a loss of existing key personnel and failure to attract new personnel, and may disrupt our sales, marketing and other key business activities, which may have an impact on our financial performance. The Merger Agreement in general requires us to operate our business in the ordinary course pending consummation of the Merger, but includes certain contractual restrictions on the conduct of our business that may affect our ability to execute on our business strategies and attain our financial goals. Additionally, the Merger, whether or not consummated, may impact our relationships with third parties, including suppliers, customers and others.
As more fully described in the Merger Agreement, completion of the Merger is subject to several conditions and regulatory approval.
The Merger Agreement may be terminated by either the Company or MTS, among other reasons, if the Merger has not been consummated by June 30, 2014. In addition, the Merger Agreement also includes customary fiduciary out and termination provisions for the Company and MTS and provides that, in connection with the termination of the Merger Agreement under specified circumstances (including, without limitation, the Company’s Board of Directors changing its approval or recommendation of the Merger or the Merger Agreement), the Company will be required to pay MTS a termination fee of 5% of the Company’s enterprise value based on the transaction.
If the Merger is not effected, we will have inadequate capital to continue operations absent another strategic transaction which may not be available. If another strategic transaction is not available, we may be unable to continue as a going concern.
We have relied on short-term bridge loans from certain holders of our preferred stock to support our business operations, and if the loans mature or are accelerated because of a default prior to the closing of our proposed merger with MTS, or if our proposed merger does not close, we may not have sufficient funds to repay the loans.
On February 26, 2014, Bonds.com Holdings, Inc. (“Holdings”), the wholly-owned subsidiary of the Company, issued secured promissory notes in the aggregate principal amount of $1,500,000 to Mida Holdings, Daher Bonds Investment Company, Oak Investment Partners XII, Limited Partnership, GFINet Inc. and Trimarc Capital Fund, L.P. (each of the notes, a “Bridge Note,” and collectively, the “Bridge Notes”). The proceeds from the Bridge Notes are intended to pay-down intercompany balances between the Company and its operating subsidiary and provide working capital funds to help support the operations of Holdings and its major operating subsidiary, Bonds.com, Inc.
The Bridge Notes accrue simple interest at a rate of 10% per annum, payable upon maturity. Each Bridge Note has a maturity date of the earlier of (i) May 26, 2014 and (ii) the date of any change of control of Holdings or the Company. If the proposed merger with MTS does not close by May 26, 2014, the Company may not have sufficient funds to repay the loans and will need to pursue a forbearance arrangement with the lenders or some other arrangement to meet its obligations under the Bridge Notes.
The Bridge Notes are subject to customary events of default, provide customary remedies upon an event of default, and restrict the incurrence of additional indebtedness. The Bridge Notes are secured by a first priority security interest and lien in the capital stock of Holdings’ and the Company’s major operating subsidiary, Bonds.com, Inc.
We face substantial competition that could reduce or prevent us from expanding our market share and harm our financial performance.
The fixed-income securities industry generally, and the electronic financial services markets in which we operate in particular, are highly competitive, and we expect competition to intensify in the future. We will continue to compete with bond trading conducted directly between broker-dealers and their institutional and individual investor clients over the telephone, e-mail or electronically. In addition, our current and prospective competitors are numerous and include:
• traditional regional or primary dealer bond sales services;
• other multi-dealer trading companies;
• market data and information vendors;
• securities and futures exchanges;
• inter-dealer brokerage firms;
• electronic communications networks;
• technology, software, information and media or other companies that have existing commercial relationships with broker-dealers or institutional and individual customers and investors; and
• other electronic marketplaces that are not currently in the securities business.
Many of our current and potential competitors are more established and substantially larger than we are, and have substantially greater market presence, as well as greater financial, engineering, technical, marketing and other resources. These competitors may aggressively augment their business and pricing model to enter into market segments in which we have a position today, potentially subsidizing any losses with profits from trading in other fixed-income or equity securities. In addition, many of our competitors offer a wider range of services, have broader name recognition and have larger customer bases than we do. Some of them may be able to respond more quickly to new or evolving opportunities, technologies and customer requirements than we can and may be able to undertake more extensive promotional activities.
Any combination of our competitors may enter into joint ventures or consortia to provide services similar to those we provide. Current and new competitors can launch new platforms at a relatively low cost. Others may acquire the capabilities necessary to compete with us through acquisitions. We expect that we will potentially compete with a variety of companies with respect to each product or service we offer. If we are not able to compete successfully in the future, our business, financial condition and results of operations would be adversely affected.
The sustainability of our current level of business cannot be assured. Even if we experience growth, we cannot assure you that we will grow profitably.
The use of our BondsPRO electronic trading platform is relatively new. The success of our business strategy depends, in part, on our ability to maintain and expand the network of broker-dealers and liquidity providers as well as institutional and individual investor clients that use our electronic trading platform. Our business strategy also depends on increasing the use of our platform by these clients. Individuals at broker-dealers or institutional investors may have conflicting interests, which may discourage their use of our platform.
Our plans to pursue other opportunities for revenue growth are at an early stage, and we cannot assure you that our plans will be successful or that we will actually proceed with them as described.
Because we have a limited operating history, it is very difficult to evaluate our business and prospects.
Our current trading platform, BondsPRO, was launched in early 2010. As a result, we have a limited operating history from which you can evaluate our business and our prospects. Also, as we evaluate and adjust our business strategy and focus to meet the demands of the market, there is no assurance our efforts will be successful. We expect to encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving industries, such as the electronic financial services industry. We may face risks that our relationship with our technology provider may change in such a manner that requires us to seek another vendor or build our own technology. These risks and difficulties that are specific to our business or the electronic financial services industry are described throughout the Risk Factors in this Annual Report.
If we are unsuccessful in addressing these risks or in executing our business strategy, our business, financial condition and results of operations may suffer.
Decreases in trading volumes in the fixed-income markets generally or on our platform in particular could harm our business and profitability.
We have experienced decreases in overall trading volume in certain periods in the past, and may experience decreases in trading volume in the future. Declines in the overall volume of fixed-income securities trading and in market liquidity generally, as well as declines in interest rate volatility, result in lower revenues from trading mark-ups for trades executed on our electronic trading platform.
Likewise, decreases in volume in the segments of the fixed-income trading markets in which we operate, or shifts in trading volume to segments of clients which we have not penetrated, could result in lower trading volume on our platform and, consequently, lower income from mark ups and mark-downs. During periods of increased volatility in credit markets, the use of electronic trading platforms by market participants may decrease dramatically as institutional and individual investors may seek to obtain additional information during the trade process through conversations with broker-dealers. In addition, during rapidly moving markets, broker-dealers and liquidity providers may be less likely to post prices electronically.
A decline in trading volumes on our platform for any reason may have a material adverse effect on our business, financial condition and results of operations.
Our BondsPRO fee plans are different than those used by other fixed income electronic trading platforms and their impact may be difficult to evaluate.
Our BondsPRO fee plans, which charge clients a nominal mark-up on each transaction rather than a monthly subscription fee or transaction fee are different than the fee plans currently utilized by other alternative trading systems. Since these fee plans are relatively new, we have not yet had the ability to evaluate their market acceptance and economic viability. In addition, we, from time to time, may introduce new mark-up plans or commission-based plans, which may include different fee structures than currently addressed in our business plan. We cannot assure you that our BondsPRO fee plans will be fully accepted by our broker-dealer, institutional and/or individual clients or that these clients will accept any new fee plans adopted by us in the future. We also cannot assure that any new fee plans we may adopt in the future will result in an increase in the volume of transactions effected on our platform or that our revenues will increase as a result of the implementation of any such plans. Furthermore, resistance to our BondsPRO fee plans and/or any new fee plans by more than a nominal portion of our clients could have a material adverse effect on our business, financial condition and results of operations.
We are exposed to risks resulting from non-performance by counterparties to transactions executed between our clients in which we act as an intermediary in matching back-to-back trades.
We execute transactions between our clients and liquidity providers through our subsidiary Bonds.com, Inc. We act as an intermediary in these transactions by serving as a trading counterparty to both the buyer and the seller in matching back-to-back trades, which are then settled through another brokerage firm that provides services to us in respect of clearing these trades. Settlement typically occurs within one to three trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded.
We are exposed to credit risk in our role as a trading counterparty to liquidity providers and institutional and individual clients executing trades. We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Adverse movements in the prices of securities that are the subject of these transactions can increase our risk. Where the unmatched position or failure to deliver is prolonged there may also be regulatory capital charges required to be taken by us. There can be no assurance that our policies and procedures will effectively mitigate our exposure to credit risk.
If we experience significant fluctuations in our operating results or fail to meet revenues and earnings expectations, our stock price may fall rapidly and without advance notice.
Due to our limited operating history, our evolving business and the unpredictability of our industry, we may experience significant fluctuations in our operating results. We base our current and future expense levels and our investment plans on estimates of future revenues and future rate of growth. Our expenses and investments are, to a large extent, fixed and we expect that these expenses will increase in the future. We may not be able to adjust our spending quickly enough if our revenues fall short of our expectations.
Our revenues and operating results may also fluctuate due to other factors, including:
• our ability to retain or attract new broker-dealers, liquidity providers and institutional and individual investor clients and attract new broker-dealers and institutional investor clients;
• our ability to drive an increase in use of our electronic trading platform by new and existing broker-dealer and institutional investor clients;
• changes in our pricing policies;
• the introduction of new features on our electronic trading platform;
• the effectiveness of our sales force;
• new product and service introductions by our competitors;
• fluctuations in overall market trading volume;
• technical difficulties or interruptions in our service;
• general economic conditions in our geographic markets;
• additional investment in our personnel, services or operations;
• regulatory compliance costs; and
• inability to obtain needed capital.
As a result, our operating results may experience material fluctuations, and any downward movement could result in decreases in our stock price.
We may not be able to introduce enhanced versions of our electronic trading platform, new services and/or service enhancements in a timely or acceptable manner, which could harm our competitive position.
Our business environment is characterized by rapid technological change, changing and increasingly sophisticated client demands and evolving industry standards. Our future will depend on our ability to develop and introduce new features to, and new versions of, our electronic trading platform. The success of new features and versions depends on several factors, including the timely completion, introduction and market acceptance of the features or versions. In addition, the market for our electronic trading platform will be limited if prospective clients require customized features or functions that we are unable or unwilling to provide. If we are unable to anticipate and respond to the demand for new services, products and technologies and develop new features and enhanced versions of our electronic trading platform that achieve widespread levels of market acceptance on a timely and cost-effective basis, it could have a material adverse effect on our business, financial condition and results of operations.
As we enter new markets, we may not be able to successfully attract clients and adapt our technology and marketing strategy for use in those markets.
We cannot assure you that we would be able to successfully adapt our software and technology for use in other markets. Even if we were able to adapt our software and technology, we cannot assure you that we would be able to attract clients and compete successfully in any such new markets. We cannot assure you that our marketing efforts or our pursuit of any of these opportunities would be successful. If these efforts were not successful, we could realize losses which in turn could result in a decrease in the market value of our common stock. Furthermore, these efforts could divert management attention or inefficiently utilize our resources.
Rapid technological changes may render our technology obsolete or decrease the attractiveness of our products and services to our broker-dealer and institutional and individual investor clients.
The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. If new industry standards and practices emerge, our existing technology, systems and electronic trading platforms may become obsolete, or our existing business may be harmed. Our future success will depend on our ability to:
• enhance our existing products and services;
• develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our broker-dealer, liquidity provider and institutional and individual investor clients and prospective clients; and
• respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.
Developing our electronic trading platforms and other technologies entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our electronic trading platforms, information databases and network infrastructure to broker-dealer, liquidity provider or institutional and individual investor client requirements or emerging industry standards. For example, our electronic trading platform functionality that allows searches and inquiries on bond pricing and availability is a critical part of our service, and it may become out-of-date or insufficient from our broker-dealer clients’, liquidity providers’ or institutional and individual investor clients’ perspective and in relation to the inquiry functionality of our competitors’ systems. If we face material delays in introducing new services, products and enhancements, our broker-dealer, liquidity provider and institutional and individual investor clients may forego the use of our products and use those of our competitors.
Further, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services. We cannot assure you that we will be able to successfully implement new technologies or adapt our proprietary or licensed technology and transaction-processing systems to client requirements or emerging industry standards. We cannot assure you that we will be able to respond in a timely manner to changing market conditions or client requirements.
The Company needs to expend significant resources to enhance its platform, and such capital is not available to the Company. Any technological changes may cause such amounts to be charged to operations sooner than anticipated.
We depend on third-party suppliers for key products and services.
We rely on a number of third parties to supply elements of our trading, information and other systems, as well as computers and other equipment, and related support and maintenance. We cannot assure you that any of these providers will be able to continue to provide these services in an efficient, cost-effective manner, if at all, or that they will be able to adequately expand their services to meet our needs. If we are unable to make alternative arrangements for the supply of critical products or services in the event of a malfunction of a product or an interruption in or the cessation of service by an existing service provider, or, if we are unable to build a viable alternative internally with the help of third party consultants, then our business, financial condition and results of operations could be materially adversely affected.
In particular, we depend on two third-party vendors for our bond reference database, and we rely on InterDealer for the technology and hardware that operate our BondsPRO trading platform. Disruptions in the services provided by those third parties to us, including as a result of their inability or unwillingness to continue to license products that are critical to the success of our business at favorable terms or at all, could have a material adverse effect on our business, financial condition and results of operations.
We also rely, and expect in the future to continue to rely, on third parties for various computer and communications systems, such as telephone companies, online service providers, data processors, and software and hardware vendors. Other third parties provide, for instance, our data center, telecommunications access lines and significant computer systems and software licensing, support and maintenance services. Any interruption in these or other third-party services or deterioration in their performance could impair the quality of our service.
We license software from third parties, much of which is integral to our electronic trading platforms and our business. We also hire contractors to assist in the development, quality assurance testing and maintenance of our electronic trading platform and other systems. Continued access to these licensors and contractors on favorable contract terms or access to alternative software and information technology contractors is important to our operations. Adverse changes in any of these relationships could have a material adverse effect on our business, financial condition and results of operations.
We attempt to negotiate favorable pricing, service, confidentiality and intellectual property ownership or licensing and other terms in our contracts with our service providers. These contracts usually have multi-year terms. However, there is no guarantee that these contracts will not terminate and that we will be able to negotiate successor agreements or agreements with alternate service providers on competitive terms. Further, the existing agreements may bind us for a period of time to terms and technology that become obsolete as our industry and our competitors advance their own operations and contracts.
Our success depends on maintaining the integrity of our electronic trading platform, systems and infrastructure; our computer systems may suffer failures, capacity constraints and business interruptions that could increase our operating costs and cause us to lose clients.
We must provide reliable, real-time access to our electronic trading platform for our broker-dealer, liquidity provider and institutional and individual investor clients. If our electronic trading platform is hampered by slow delivery times, unreliable service or insufficient capacity, our broker-dealer, liquidity provider and institutional and individual investor clients may decide to stop using our platform, which would have a material adverse effect on our business, financial condition and results of operations.
We will need to improve and upgrade our electronic trading platform and infrastructure to accommodate any changes in order message volume and trading volume, the trading practices of new and existing clients, regulatory changes and the development of new and enhanced trading platform features, functionalities and ancillary products and services. The expansion of our electronic trading platform and infrastructure has required, and will continue to require, substantial financial, operational and technical resources. These resources will typically need to be committed well in advance of any change in trading volumes and order messages. We cannot assure you that our estimates of future trading volumes and order messages will be accurate or that our systems will always be able to accommodate actual trading volumes and order messages without failure or degradation, of performance. Furthermore, the use of new technologies to upgrade our established systems, and the development of these new technologies also entails technical, financial and business risks. We cannot assure you that we will successfully implement new technologies or adapt our existing electronic trading platform, technology and systems to the requirements of our broker-dealer, liquidity provider and institutional and individual investor clients or to emerging industry standards. The inability of our electronic trading platform to accommodate increasing trading volume and order messages would also constrain our ability to expand our business.
Our trading system could experience operational failures which would be extremely detrimental to our business.
We cannot assure you that we will not experience systems failures. Our electronic trading platform, computer and communication systems and other operations are vulnerable to damage, interruption or failure as a result of, among other things:
• an interruption in service from InterDealer;
• irregular or heavy use of our electronic trading platform during peak trading times or at times of unusual market volatility;
• disruptions of data flow to or from our system;
• power or telecommunications failures, hardware failures or software errors;
• human error;
• computer viruses, acts of vandalism or sabotage (and resulting potential lapses in security), both internal and external;
• natural disasters, fires, floods or other acts of God;
• acts of war or terrorism or other armed hostility; and
• loss of support services from third parties, including those to whom we outsource aspects of our computer infrastructure critical to our business.
In the event that any of our systems, or those of our third-party providers, fail or operate slowly, it may cause any one or more of the following to occur:
• unanticipated disruptions in service to our clients;
• slower response times or delays in our clients’ trade execution;
• incomplete or inaccurate accounting, recording or processing of trades;
• financial losses and liabilities to clients;
• litigation or other claims against us, including formal complaints to industry regulatory organizations; and
• regulatory inquiries, proceedings or sanctions.
Any system failure or other circumstance that causes an interruption in service or decreases the responsiveness of our service, including failures caused by client error or misuse of our systems, could damage our reputation, business and brand name and lead our broker-dealer, liquidity provider and institutional and individual investor clients to decrease or cease their use of our electronic trading platform.
In these circumstances, our back-up systems or disaster recovery plans may not be adequate. Similarly, although many of our contracts with our service providers require them to have disaster recovery plans, we cannot be certain that these will be adequate or implemented properly. In addition, our business interruption insurance may not adequately compensate us for losses that may occur.
We also cannot assure you that we or our third party providers have sufficient personnel to properly respond to system problems. We internally support and maintain many of our computer systems and networks, including those underlying our electronic trading platform and website. Our failure to monitor or maintain these systems and networks or, if necessary, to find a replacement for this technology in a timely and cost-effective manner would have a material adverse effect on our business, financial condition and results of operations.
If our security measures are breached and unauthorized access is obtained to our electronic trading platform, broker-dealers and institutional investors may become hesitant to use, or reduce or stop their use of, our trading platform.
Our electronic trading platform involves the storage and transmission of our clients’ proprietary information as well as the transfer of that information to our clearing agent. The secure transmission of confidential information over public networks is a critical element of our operations. Security breaches could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to trading or other confidential information, our reputation could be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage computer systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. If an actual, threatened or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and could cause broker-dealers, liquidity providers and clients to reduce or stop their use of our electronic trading platform. We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches. We cannot assure you that our security measures will be sufficient.
We may not be able to protect our intellectual property rights or technology effectively, which would allow competitors to duplicate or replicate our electronic trading platform. This could adversely affect our ability to compete.
Intellectual property is critical to our success and ability to compete, and if we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology. We will rely primarily on license agreements, third-party non-disclosure and other agreements and other contractual provisions and technical measures to protect our intellectual property rights. We attempt to negotiate beneficial intellectual property ownership provisions in our contracts and also require employees, consultants, advisors and collaborators to enter into confidentiality and assignment agreements in order to protect the confidentiality of our proprietary information. However, laws and our contractual terms may not be sufficient to protect our technology from unlawful use or theft by third parties. For instance, a third party might reverse engineer or otherwise obtain and use our technology without our permission and without our knowledge, thereby infringing our rights and allowing competitors to duplicate or replicate our products.
We may have legal or contractual rights that we could assert against illegal use of our intellectual property rights, but lawsuits claiming infringement or misappropriation are complex and expensive, and the outcome would not be certain. In addition, the laws of some countries in which we may in the future provide our services may not protect software and intellectual property rights to the same extent as the laws of the United States.
Defending against intellectual property infringement or other claims could be expensive and disruptive to our business. If we are found to infringe the proprietary rights of others, we could be required to redesign our products, pay royalties or enter into license agreements with third parties.
In our industry, there is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As the number of participants in our market increases and the number of patents and other intellectual property registrations increases, the possibility of an intellectual property claim against us grows. Although we have not been the subject of a material intellectual property dispute, we cannot assure you that a third party will not assert in the future that our technology or the manner in which we operate our business violates its intellectual property rights. From time to time, in the ordinary course of our business, we may become subject to legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties may assert intellectual property claims against us, particularly as we expand the complexity and scope of our business, the number of electronic trading platforms increases and the functionality of these platforms further overlaps. Any claims, whether with or without merit, could:
• be expensive and time-consuming to defend;
• prevent us from operating our business, or portions of our business;
• cause us to cease developing, licensing or using all or any part of our electronic trading platform that incorporates the challenged intellectual property;
• require us to redesign our products or services, which may not be feasible;
• result in significant monetary liability;
• divert management’s attention and resources; and
• require us to pay royalties or enter into licensing agreements in order to obtain the right to use necessary technologies, which may not be possible on commercially reasonable terms.
We license a substantial amount of intellectual property from third parties. Although we attempt to negotiate beneficial representations, warranties and indemnification provisions from such third party licensors, we cannot assure you that such provisions will adequately protect us from any potential infringement claims made against us as a result of the use of such licensed intellectual property.
We cannot assure you that third parties will not assert infringement claims against us and/or the third parties from which we have obtained licenses in the future with respect to our electronic trading platform or any of our other current or future products or services or that any such assertion will not require us to cease providing such services or products, try to redesign our products or services, enter into royalty arrangements, if available, or engage in litigation that could be costly to us. Any of these events could have a material adverse effect on our business, financial condition and results of operations.
Protection of our “Bonds.com” domain name.
We became the registered holder of the domain name “Bonds.com” in September 2007. Our current business plan is based, in part, on realizing the value of our domain name. We believe that the “Bonds.com” domain name allows us to market our business by directing potential customers directly to our website. Under current domain name registration practices, no one else can obtain an identical domain name, but someone might obtain a similar name, or the identical name with a different suffix (e.g., “.org”) or with a country designation. The regulation of domain names in the United States and in foreign countries is subject to change, and we may be unable to prevent third parties from acquiring domain names that infringe or otherwise decrease the value of our domain name or names; particularly since we anticipate that it could be difficult to protect any trademark rights we claim in the name “Bonds.com.” The Trademark Trial and Appeal Board of the United States Patent and Trademark Office (“USPTO”) in the matter In re CyberFinancial.Net, Inc. in August 2002 held that “Bonds.com” is generic and not registrable as a trademark. As a result, it is likely that we would not be able to obtain a trademark registration with the USPTO to protect our domain name under U.S. trademark laws. In the event that we are unable to protect our domain name under U.S. trademark laws it would be more difficult to prevent others from doing business under names similar to Bonds.com, which could dilute the value of our domain name and have a material adverse effect on our business.
If we are unable to enter into additional marketing and strategic alliances or if our current strategic alliances are not successful, we may not maintain the current level of trading or generate increased trading on our trading platform.
From time to time, we may enter into strategic alliances that will enable us to enter new markets, provide products or services that we do not currently offer or otherwise enhance the value of our platform to our clients. We cannot assure you we will be able to enter into such alliances.
Entering into joint ventures and alliances entails risks, including:
• difficulties in developing and expanding the business of newly-formed joint ventures;
• exercising influence over the activities of joint ventures in which we do not have a controlling interest; and
• potential conflicts with or among our joint venture or alliance partners.
We cannot assure you that we will be able to enter into new strategic alliances on terms that are favorable to us, or at all. These arrangements, if entered into, may not generate the expected number of new clients or increased trading volume we are seeking. Unsuccessful joint ventures or alliances could have a material adverse effect on our business, financial condition and results of operations.
If we acquire or invest in other businesses, products or technologies, we may be unable to integrate them with our business, our financial performance may be impaired or we may not realize the anticipated financial and strategic goals for any such transactions.
If appropriate opportunities present themselves, we may acquire or make investments in businesses, products or technologies that we believe are strategic. We may not be able to identify, negotiate or finance any future acquisition or investment successfully. Even if we do succeed in acquiring or investing in a business, product or technology, such acquisitions and investments involve a number of risks, including:
• we may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or the economic conditions underlying our acquisition decision may change;
• we may have difficulty integrating the acquired technologies or products with our existing electronic trading platform, products and services;
• we may have difficulty integrating the operations and personnel of the acquired business, or retaining the key personnel of the acquired business;
• there may be client confusion if our services overlap with those of the acquired company;
• our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;
• we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;
• an acquisition may result in litigation from terminated employees or third parties; and
• we may experience significant problems or liabilities associated with product quality, technology and legal contingencies.
These factors could have a material adverse effect on our business, financial condition, results of operations and cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.
The consideration paid in connection with an investment or acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of any available cash to consummate such acquisition. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs, such as acquired in-process research and development costs, and restructuring charges. They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.
We are limited in our ability to use our U.S. net operating loss carry-forwards.
As of December 31, 2013, we had U.S. net operating loss carry-forwards of approximately $43.5 million that will begin to expire in 2026. A net operating loss carry-forward enables a company to apply net operating losses incurred during a current period against future periods’ profits in order to reduce tax liability in those future periods.
Section 382 of the Internal Revenue Code provides that when a company undergoes an “ownership change,” that company’s use of its net operating losses is limited annually in each subsequent year. An “ownership change” occurs when, as of any testing date, the sum of the increases in ownership of each stockholder that owns five percent or more of the value of a company’s stock as compared to that stockholder’s lowest percentage ownership during the preceding three-year period exceeds 50 percentage points. For purposes of this rule, certain stockholders who own less than five percent of a company’s stock are aggregated and treated as a single five-percent stockholder. The Company’s management has not performed this analysis, but based on the various issuances of equity during the last three fiscal years, the Company believes that the utilization of its net operating loss carry-forwards will be limited. The proposed sale of the Company to MTS as discussed earlier will constitute an ownership change and will limit the utilization of the net operating loss carry-forwards.
The issuance or repurchase of a significant number of shares of stock or purchases or sales of stock by significant stockholders could result in an additional “ownership change.” For example, we may issue a substantial number of shares of our stock in connection with offerings, acquisitions and other transactions in the future and we could repurchase a significant number of shares in connection with a stock repurchase program, although no assurance can be given that any such offering, acquisition, other transaction or repurchase program will be undertaken. In addition, the exercise of outstanding options, rights or warrants to purchase shares of our common stock may require us to issue additional shares of our common stock. The extent of the actual future use of our U.S. net operating loss carry-forwards is subject to inherent uncertainty because it depends on the amount of otherwise taxable income we may earn. We cannot give any assurance that we will have sufficient taxable income in future years to use any of our federal net operating loss carry-forwards before they would otherwise expire.
We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner.
Our success depends largely upon the continued services of our executive officers and other key personnel. These individuals or the Company may terminate employment at any time. Any loss or interruption of their services could result in our inability to manage our operations effectively and/or pursue our business strategy. For our disclosures about the potential loss of key personnel in connection with the Merger, see also Item 1A, “Risk Factors” - “Our proposed merger with MTS may cause disruption in our business and, if the proposed merger does not occur, we will not have adequate capital to continue our operations absent another strategic transaction and may be unable to continue as a going concern.”
Because competition for our employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our business.
We strive to provide high-quality services that will allow us to establish and maintain long-term relationships with our broker-dealer, liquidity provider and institutional and individual investor clients. Our ability to provide these services and maintain these relationships, as well as our ability to execute our business plan generally, depends in large part upon our employees. We must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for software engineers with extensive experience in designing and developing software and Internet-related services, hardware engineers, technicians, product managers, marketing associates and senior sales executives.
We believe that the market for qualified personnel has grown more competitive in recent periods as electronic commerce has experienced growth. We also believe that domestic and international labor markets have tightened in concert with the continuing recovery in general economic conditions. Many of the companies with which we compete for experienced personnel have greater resources than we have and are longer established in the marketplace. In addition, in making employment decisions, particularly in the Internet, high-technology and financial services industries, job candidates often consider the total compensation package offered, including the value of the stock-based compensation they are to receive in connection with their employment. Significant volatility in the price of our common stock may adversely affect our ability to attract or retain key employees. The requirement to record as compensation expense the fair value of granted options may discourage us from granting the size or type of stock-based compensation that job candidates may require to join our company.
We cannot assure you that we will be successful in our efforts to recruit and retain the required personnel. The failure to attract new personnel or to retain and motivate our current personnel may have a material adverse effect on our business, financial condition and results of operations. For our disclosures about the failure to attract new personnel as a result of the potential Merger, see also Item 1A, “Risk Factors” - “Our proposed merger with MTS may cause disruption in our business and, if the proposed merger does not occur, we will not have adequate capital to continue our operations absent another strategic transaction and may be unable to continue as a going concern.”
Our business is subject to increasingly extensive government and other regulation and our relationships with our broker-dealer clients may subject us to increasing regulatory scrutiny.
The financial industry is extensively regulated by many governmental agencies and self-regulatory organizations, including the SEC, FINRA and various state agencies and regulatory authorities. As a matter of public policy, these regulatory bodies are responsible for safeguarding the integrity of the securities and other financial markets and protecting the interests of investors in those markets. These regulatory bodies have broad powers to promulgate and interpret, investigate and sanction non-compliance with their laws, rules and regulations.
Most aspects of our broker-dealer subsidiary are highly regulated, including:
• the way we deal with our clients;
• our capital requirements;
• our financial and regulatory reporting practices;
• required record-keeping and record retention procedures;
• the licensing of our employees; and
• the conduct of our directors, officers, employees and affiliates.
We cannot assure you that we and/or our directors, officers and employees will be able to fully comply with these laws, rules and regulations. If we fail to comply with any of these laws, rules or regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, suspensions of personnel or other sanctions, including revocation of our membership in FINRA and registration as a broker-dealer.
We have one major operating subsidiary, Bonds.com, Inc. Bonds.com, Inc. is subject to U.S. regulations, including federal and state securities laws and regulations, as a registered broker-dealer and as an alternative trading system, respectively, which prohibit repayment of borrowings from the Company or affiliates, paying cash dividends, making loans to the Company or affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources, without prior notification to or approval from such subsidiary’s principal regulator.
If FINRA Enforcement brings enforcement actions against us, we may be subject to significant fines or other sanctions, which could have a material adverse effect on our business and results of operations.
Changes in laws or regulations or in governmental policies, including the rules relating to the maintenance of specific levels of net capital applicable to our broker-dealer subsidiary, could have a material adverse effect on our business, financial condition and results of operations. Our industry has been and is subject to continuous regulatory changes and may become subject to new regulations or changes in the interpretation or enforcement of existing regulations, which could require us to incur significant compliance costs or cause the development of affected markets to become impractical. In addition, in the future it is likely that we will be subject to additional laws, rules and regulations. We cannot predict the extent to which any future regulatory changes may adversely affect our business and operations.
Our trading system, BondsPRO, is subject to regulation as an alternative trading system under Regulation ATS. Under Regulation ATS, the Company is required to follow additional reporting obligations and other limitations on the conduct of our business, many of which could be material. Being regulated as an alternative trading system subject to Regulation ATS includes following requirements related to, but not limited to, access, fees, operating standards and record keeping.
The activities and consequences described above may result in significant distractions to our management and could have a material adverse effect on our business, financial condition and results of operations.
We expect to expand our operations outside of the United States; however, we may face special economic and regulatory challenges that we may not be able to meet.
We plan to expand our operations throughout Europe and South and Central America and other regions. There are certain risks inherent in doing business in international markets, particularly in the financial services industry, which is heavily regulated in many jurisdictions outside the United States. These risks include:
• less developed technological infrastructures and generally higher costs, which could result in lower client acceptance of our services or clients having difficulty accessing our trading platform;
• difficulty in obtaining the necessary regulatory approvals for planned expansion, if at all, and the possibility that any approvals that are obtained may impose restrictions on the operation of our business;
• the inability to manage and coordinate the various regulatory requirements of multiple jurisdictions that are constantly evolving and subject to unexpected change;
• difficulties in staffing and managing foreign operations;
• fluctuations in exchange rates;
• reduced or no protection for intellectual property rights;
• seasonal reductions in business activity; and
• potentially adverse tax consequences.
Our inability to manage these risks effectively could adversely affect our business and limit our ability to expand our international operations, which could have a material adverse effect on our business, financial condition and results of operations.
We require additional capital to continue operations. We cannot predict our future sources of capital or our ability to obtain additional financing. If we cannot raise such capital, we will be forced to curtail or cease operations.
Our business is dependent upon the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs primarily through equity and debt financing. Our ability to continue operations depends on our continued ability to raise additional funds and generate our targeted revenues. We need to raise additional funds to satisfy our working capital needs.
For our disclosures about the risks if the proposed Merger does not close, see also Item 1A, “Risk Factors” - “Our proposed merger with MTS may cause disruption in our business and, if the proposed merger does not occur, we will not have adequate capital to continue our operations absent another strategic transaction and may be unable to continue as a going concern.”
As of March 21, 2014, the Company had cash and cash equivalents on hand of approximately $1.7 million. We intend to use the majority of these funds for working capital purposes.
We may not be able to obtain additional financing in amounts or on terms acceptable to us, if at all. If sufficient funds are not available or are not available on terms acceptable to us, our ability to meet our working capital requirements, fund any expansion, develop or enhance our services or products, or otherwise respond to competitive pressures may be significantly limited. These limitations could have a material adverse effect on our business, financial condition and results of operations.
Compliance with changing laws and regulations relating to corporate governance and public disclosure has resulted, and will continue to result, in the occurrence of additional expenses associated with being a public company.
New and changing laws and regulations, impose stricter corporate governance requirements and greater disclosure obligations. They have had the effect of increasing the complexity and cost of our corporate governance compliance, diverting the time and attention of our management from revenue-generating activities to compliance activities and increasing the risk of personal liability for our board members and executive officers involved in our corporate governance process. Our efforts to comply with evolving laws and regulations has resulted in increased general and administrative expenses and increased professional fees. In addition, it may become more difficult and expensive for us to obtain director and officer liability insurance. These laws and regulations may impose obligations that will increase the legal and financial costs required to consummate a business combination and increase the time required to complete a transaction. Further, in order to meet the new corporate governance and disclosure obligations, we have been taking, and will continue to take, steps to improve our controls and procedures and related corporate governance policies and procedures to address compliance issues and correct any deficiencies that we may discover.
As a public company, we are required to comply with Section 404(a) of the Sarbanes-Oxley Act. We cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity that remain un-resolved. As a public company, we will be required to report, among other things, control deficiencies that constitute a “material weakness.” A “material weakness” is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. If we fail to implement the requirements of Section 404(a) in a timely manner, we might be subject to sanctions or investigation by regulatory agencies such as the SEC.
In addition, failure to comply with Section 404(a) or the report by us of a material weakness and remediation thereof may cause investors to lose confidence in our financial statements and the trading price of our common stock may decline. If we fail to remedy any material weakness, our financial statements may be inaccurate, our access to the capital markets may be restricted and the trading price of our common stock may decline.
As of December 31, 2013, the Company’s management identified a material weakness in the Company’s internal control over financial reporting related to a lack of review controls over internal calculation, and the Company concluded that this deficiency could have resulted in a material misstatement of our annual or interim consolidated financial statements. For more information, see Item 9A (Controls and Procedures).
We are subject to important restrictive covenants under an agreement with a strategic partner.
Our Licensing and Services Agreement with UBS Securities LLC prohibits us from soliciting certain prospective customers during the term of such agreement and for a period of one year thereafter. Additionally, such agreement prohibits us, during the term of such agreement and for a period of six months after the termination of such agreement by the Company or by UBS Securities LLC for certain reasons, from licensing BondsPRO on a white label or private label basis or otherwise permitting any other party to use BondsPRO in the same manner as anticipated to be used by UBS Securities LLC. If we do not realize the anticipated benefits from this agreement with UBS Securities LLC or the agreement is terminated under certain circumstances, these restrictive covenants would prevent us from seeking alternative strategic partners to fulfill the same role anticipated to be fulfilled by UBS Securities LLC, would prevent us from pursuing certain customers and would prevent us from pursuing other possible business opportunities for a meaningful period of time. Given the speed at which our industry is developing and the competitive disadvantage of being required not to pursue certain clients or opportunities while our competitors do, such restrictions could have a material adverse impact on our business if the strategic relationship with UBS Securities LLC is not successful.
We are subject to the risks of litigation and securities laws liability.
Many aspects of our business, and the businesses of our clients, involve substantial risks of liability. Dissatisfied clients may make claims regarding quality of trade execution, improperly settled trades, mismanagement or even fraud against their service providers. We and our clients may become subject to these claims as the result of failures or malfunctions of our electronic trading platform and services provided by us. We could incur significant legal expenses defending claims, even those without merit. An adverse resolution of any lawsuits or claims against us could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Industry
If the use of electronic trading platforms does not become a reasonably accepted method for trading fixed income securities, we will not be able to achieve our business objectives.
The success of our business plan depends on our ability to create an electronic trading platform for a wide range of fixed-income products. Historically, fixed-income securities markets operated through telephone communications between institutional and individual investors and broker-dealers. The utilization of our products and services depends on the acceptance, adoption and growth of electronic means of trading securities. We cannot assure you that the use of electronic trading platforms for the trading of securities will be accepted at such level as would be required for us to achieve our business objectives.
Economic, political and market factors beyond our control could reduce demand for our services and harm our business, and our profitability could suffer.
The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control. Any one of these factors may cause a substantial decline in the U.S. and global financial services markets, resulting in reduced trading volume. These events could have a material adverse effect on our business, financial condition and results of operations. These factors include:
• economic and political conditions in the United States and elsewhere;
• adverse market conditions, including unforeseen market closures or other disruptions in trading;
• actual or threatened acts of war or terrorism or other armed hostilities;
• concerns over inflation and weakening consumer confidence levels;
• the availability of cash for investment by mutual funds and other wholesale and retail investors;
• the level and volatility of interest and foreign currency exchange rates; and
• legislative and regulatory changes.
Any one or more of these factors may contribute to reduced activity and prices in the securities markets generally. Our revenues and profitability are likely to decline significantly during periods of stagnant economic conditions or low trading volume in the U.S. and global financial markets.
Risk Relating to our Common Stock
If our proposed merger with MTS closes, the holders of our common stock will not receive any merger consideration for their shares.
Pursuant to the Merger Agreement, on completion of the merger, all shares of the Company’s common stock will automatically be cancelled, and the holders of outstanding shares of the Company’s common stock will not receive any consideration for such shares.
See also Item 1A, “Risk Factors” - “Our proposed merger with MTS may cause disruption in our business and, if the proposed merger does not occur, we will not have adequate capital to continue our operations absent another strategic transaction and may be unable to continue as a going concern.”
Since our common stock is thinly-traded, its stock price may be subject to wide fluctuations.
Our common stock is thinly traded and is not currently listed on any exchange; but it is authorized for quotation on the OTCQB Market (Operated by the OTC Market Group, Inc.). Accordingly, the market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following:
• technological innovations or new products and services by us or our competitors;
• intellectual property disputes;
• additions or departures of key personnel;
• sales of our common stock;
• our ability to execute our business plan;
• operating results that fall below expectations;
• loss of any strategic relationship;
• industry developments;
• economic and other external factors; and
• period-to-period fluctuations in our financial results.
In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock. If the Merger is completed, there will be no further market for our common stock, and our common stock will no longer be quoted on the OTCQB Market and will be deregistered under the Exchange Act.
Because we do not expect to pay dividends in the foreseeable future, any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as our board of directors may consider relevant. If we do not pay dividends, a return on an investment in our common stock will only occur if our stock price appreciates. Further, if our merger with MTS is completed, all shares of our common stock will automatically be cancelled and will cease to exist, and the holders of our common stock will not receive any consideration for such shares.
Because we have become public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
There may be risks associated with our becoming public through a “reverse merger.” Securities analysts of major brokerage firms may not provide coverage of us. No assurance can be given that brokerage firms will, in the future, assign analysts to cover the Company or want to conduct any secondary offerings on our behalf. If the Merger is completed, there will be no further market for our common stock, and our common stock will no longer be quoted on the OTCQB Market and will be deregistered under the Exchange Act.
Because our common stock may be deemed a “penny stock,” investors may find it more difficult to sell their shares.
Our common stock may be subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules apply to companies whose common stock trades at less than $5.00 per share or that have tangible net worth of less than $5.0 million ($2.0 million if the company has been operating for three or more years) and are not quoted on an exchange. These rules require, among other things, that brokers who trade a penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. Remaining subject to the penny stock rules for any significant period could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
Furthermore, for companies whose securities are traded in the OTCQB Market, it is more difficult to obtain accurate quotations, obtain coverage for significant news events (because major wire services generally do not publish press releases about such companies), and obtain needed capital. If the Merger is completed, there will be no further market for our common stock, and our common stock will no longer be quoted on the OTCQB Market and will be deregistered under the Exchange Act.
If there are large sales of a substantial number of shares of our common stock, our stock price may significantly decline.
If our stockholders sell substantial amounts of our common stock in the public market, including shares issued upon the exercise of outstanding options and warrants, the market price of our common stock could fall. These sales also may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. If the Merger is completed, there will be no further market for our common stock, and our common stock will no longer be quoted on the OTCQB Market and will be deregistered under the Exchange Act.
If we raise additional funds through the issuance of equity securities, or determine in the future to register additional common stock, existing stockholders’ percentage ownership will be reduced, they will experience dilution which could substantially diminish the value of their stock and such issuance may convey rights, preferences or privileges senior to existing stockholders’ rights which could substantially diminish their rights and the value of their stock.
We may issue shares of common stock for various reasons and may grant additional stock options to employees, officers, directors and third parties. If our board determines to register for sale to the public additional shares of common stock or other debt or equity securities in any future financing or business combination, a material amount of dilution can be expected to cause the market price of the common stock to decline. One of the factors which generally affect the market price of publicly traded equity securities is the number of shares outstanding in relationship to assets, net worth, earnings or anticipated earnings. Furthermore, the public perception of future dilution can have the same effect even if actual dilution does not occur.
In order for us to obtain additional capital or complete a business combination, we may find it necessary to issue securities, including but not limited to debentures, options, warrants or shares of preferred stock, conveying rights senior to those of the holders of common stock. Those rights may include voting rights, liquidation preferences and conversion rights. To the extent senior rights are conveyed, the value of the common stock may decline. If the Merger is completed, there will be no further market for our common stock, and our common stock will no longer be quoted on the OTCQB Market and will be deregistered under the Exchange Act.
There are a large number of shares of our common stock underlying options, warrants, convertible promissory notes, convertible preferred stock and other rights that may be issued in the future, and the issuance of these shares of common stock may depress the market price of our common stock and cause immediate, and substantial dilution to our existing stockholders.
As of March 21, 2014, we had approximately 262,395 shares of common stock issued, of which 243,438 shares were outstanding and, outstanding options, warrants and convertible securities and other rights which are exercisable or convertible for an aggregate of approximately 3,237,000 additional shares of common stock. Of these options, warrants and convertible securities approximately 2,567,000 shares may be issued at an exercise or conversion price of $28.00 per share, and the balance at exercise or conversion prices between $8.35 and $200.00.
A significant portion of the shares issuable upon exercise or conversion of such options, warrants and convertible securities and other rights may be sold without restriction pursuant to Rule 144 or are the subject of registration rights in favor of the holders. Both the issuance of these shares and the subsequent resale of these shares may adversely affect the market price of our common stock. Additionally, the existence of these options, warrants, convertible securities and other rights results in substantial dilution to the ownership interests of common stockholders. Holders of options and warrants will have the ability to exercise their options and warrants prior to the Merger. From and after the completion of the Merger, holders of options and warrants outstanding immediately prior to the Merger will not receive any consideration in respect thereof.
We have outstanding preferred stock with significant preferences and rights which have priority over our common stock and such preferences and rights may materially and adversely impact the value of our common stock.
We currently have outstanding shares of our Series E-2 Convertible Preferred Stock, Series E-1 Convertible Preferred Stock, Series E Convertible Preferred Stock, Series C Convertible Preferred Stock and Series A Participating Preferred Stock. In the event we are sold or liquidated, the holders of shares of such preferred stock would be entitled to receive a potentially significant amount of funds or property, if any, lawfully available for distribution to such holders prior to any distribution to holders of our common stock. Additionally, certain holders of our preferred stock would participate in any distribution to the holders of our common stock after the full payment, if any, of such preferred distributions. These preferences and rights may materially and adversely impact the value of our common stock.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Summary of the Company’s Equity Capitalization,” elsewhere in this Annual Report. See also Item IA, “Risk Factors” - “If our proposed merger with MTS closes, the holders of our common stock will not receive any merger consideration for their shares.”
ITEM 1B
ITEM 1B . UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
New York, New York
The Company is a party to a lease for office space in New York, New York which expires August 2014.
As part of its strategic plan, the Company moved its headquarters from Florida to New York in 2010. The Company has since closed the Florida office and has satisfied all obligations under the Florida office lease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
Our common stock is quoted on the OTCQB Market (Operated by the OTC Market Group, Inc.) under the symbol “BDCG”. The market for our common stock is limited and subject to volatility. There is no certainty that our common stock will continue to be quoted on the OTCQB Market or that any liquidity exists for our stockholders. If the Merger is completed, there will be no further market for our common stock. Our common stock will no longer be quoted on the OTCQB Market and will be deregistered under the Exchange Act.
The following table contains information about the range of high and low closing prices for our common stock for each quarterly period indicated during the last two fiscal years based upon reports of transactions on the OTCQB Market and the OTC Bulletin Board (on which our common stock was previously quoted).
The source of these high and low prices was the OTC Bulletin Board and the OTCQB Market. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not represent actual transactions.
If the Merger does not close, it is anticipated that the market price of our common stock will continue to be subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market for the products we distribute, the volume of shares sought to be purchased or sold, and other factors, many of which we have little or no control over. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance. On December 31, 2013, the closing price of our common stock as reported by the OTCQB Market was $0.76 per share.
Holders of Our Common Stock
As of March 21, 2014, we had 171 stockholders of record.
Dividends and Dividend Policy
Our Certificate of Incorporation contains significant restrictions on our ability to declare or pay dividends on our shares of common stock. We are prohibited from declaring or paying dividends on shares of our common stock without the consent of holders of our preferred stock and then only if we have first paid required preferential dividends to such holders. Additionally, the Delaware General Corporation Law prohibits us from declaring dividends where, after giving effect to the distribution of the dividend:
• we would not be able to pay our debts as they become due in the usual course of business; or
• our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution.
We have not paid any dividends on our common stock. We currently intend to retain any earnings for use in our business, and therefore do not anticipate paying cash dividends in the foreseeable future.
Additionally, under the Merger Agreement, we are restricted from paying any dividends without the prior consent of MTS.
Securities Authorized for Issuance under Equity Compensation Plans
At the end of our fiscal year ended December 31, 2013, and as of the date of this Annual Report, we have options outstanding under our 2006 and 2011 Equity Plans, which have not been approved by stockholders. The 2006 Equity Plan provides for the issuance of up to 32,835 shares of our common stock. As of December 31, 2013, options with respect to 20,884 shares of our common stock have been granted under the 2006 Equity Plan. On May 30, 2012 our Board of Directors adopted an amendment to our 2011 Equity Plan to increase the number of shares available for issuance. The 2011 Equity Plan now provides for the issuance of up to 500,000 shares of our common stock. As of December 31, 2013, options with respect to 402,863 shares of our common stock have been granted under the 2011 Equity Plan.
The following table provides information about the Company’s common stock that may be issued upon the exercise of stock options under all of our equity compensation plans in effect as of December 31, 2013.
Summaries of Equity Compensation Plans Not Approved by Stockholders
Summary of 2011 Equity Plan
Certain features of the Company’s 2011 Equity Plan are outlined below. The full text of the 2011 Equity Plan and the Amendment No. 1 to 2011 Equity Plan are referenced as exhibits to this Annual Report and the following summary is qualified in its entirety by reference to the full text of the 2011 Equity Plan and such amendment.
Purposes. The purposes of the 2011 Equity Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business.
Administration. The 2011 Equity Plan may be administered by our Board of Directors or a Committee, as determined by our Board of Directors. The Administrator of the 2011 Equity Plan, whether our Board of Directors or a designated Committee, will determine the terms of each stock option, including the exercise price, exercisability, and the number of shares for each option granted to participants. The Administrator will also determine the terms of each restricted stock grant, including the restriction period, the conditions for removal of restrictions and the number of shares granted to each participant. The Administrator shall also have the discretion to implement an option exchange program whereby outstanding options are exchanged for options with a lower exercise price or amended to decrease the exercise price as a result in a decline in the fair market value of the common stock.
Eligibility. Non-employee directors, consultants and full-time, salaried employees of the Company may be granted options and/or restricted stock. Options granted to employees may be incentive stock options or nonqualified stock options, but options granted to non-employee directors or consultants may only be nonqualified stock options.
Terms and Conditions of Options. In order for a participant to receive a stock option, he or she must enter into a written stock option agreement with the Company. The additional terms and conditions of each stock option are contained in the stock option agreement. The common terms and conditions of the stock options are:
(a) Exercise Price. The Administrator sets the exercise price of each stock option on the grant date based on the fair market value. The fair market value (x) as of any date if the common stock is not a listed security, will be determined by the Administrator in good faith and (y) as of any date if the common stock is a listed security, will be the closing price for the shares.
(b) Option Exercise. Each stock option agreement specifies the expiration date of the option and the dates on which the option becomes exercisable. A participant exercises an option by giving to the Company written notice and full payment for the number of shares he or she is purchasing.
(c) Termination of Employment or Service as a Director or Consultant. Unless the stock option agreement provides otherwise, if a participant’s employment or service as a director or consultant ends for any reason other than disability or death, that participant may exercise his or her option within the time specified in the written option agreement, but only to the extent that it could be exercised on the date employment or service ended. In the event a participant’s employment or service is terminated for cause, the option shall immediately terminate upon notice to the participant of the termination.
(d) Disability. If a participant’s employment or service as a director or consultant ends because of permanent and total disability, that participant may still exercise his or her option for up to six months after the date employment or service ended, but only to the extent that it could be exercised on the date employment or service ended.
(e) Death. If a participant dies, his or her estate or beneficiary may exercise the option during the year following death, but only to the extent that it could be exercised on the date of death.
(f) Termination of Options. Options expire as provided in the written option agreement, provided that no option may have a term of more than ten years from the grant date. No option may be exercised after it expires.
(g) Adjustments Because of Capitalization Changes. If there are any stock splits, reverse stock splits, stock dividends, mergers, recapitalizations or other changes in the Company’s capital structure, the Administrator will make appropriate adjustments in exercise prices and the number and class of shares subject to outstanding options.
(i) Other Provisions. The Administrator may include additional terms and conditions in a stock option agreement as long as they do not conflict with the 2011 Equity Plan. When an option terminates before it has been fully exercised, any option shares which were not purchased under that option will become available again for future grants under the 2011 Equity Plan.
Transferability of Options and Stock Purchase Rights. Options and stock purchase rights may not be transferred other than by will or the laws of descent, except that the Administrator may in its discretion grant non-statutory options that may be transferred to a trust for estate planning purposes.
Change in Control of the Company. Upon a Change of Control (as defined in the 2011 Equity Plan), stock options and shares of restricted stock will become vested and exercisable only to the extent provided in the applicable option agreement or restricted stock purchase agreement.
Amendment of the 2011 Equity Plan. The Board of Directors may amend, suspend or terminate the 2011 Equity Plan. To the extent necessary to comply with applicable law, the Company must obtain stockholder approval for any amendment in such a manner as required. Any amendment or termination of the 2011 Equity Plan may not materially and adversely affect the rights of any optionee or holder of stock purchase rights without his or her consent. Under the terms of the Merge Agreement, all outstanding stock options will be cancelled and holders of such options will not be entitled to any merger consideration.
Termination of the 2011 Equity Plan. If the Merger does not close, the 2011 Equity Plan will terminate in February 2021.
Summary of 2006 Equity Plan
Certain features of the Company’s 2006 Equity Plan are outlined below. The full text of the 2006 Equity Plan is referenced as an exhibit to this Annual Report and the following summary is qualified in its entirety by reference to the full text of the 2006 Equity Plan.
Purposes. The purposes of the 2006 Equity Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business.
Administration. The 2006 Equity Plan may be administered by the Board of Directors or a Committee, as determined by the Board of Directors. The Administrator of the 2006 Equity Plan, whether the Board of Directors or a designated Committee, will determine the terms of each stock option, including the exercise price, exercisability, and the number of shares for each option granted to participants. The Administrator will also determine the terms of each restricted stock grant, including the restriction period, the conditions for removal of restrictions and the number of shares granted to each participant.
Eligibility. Non-employee directors, consultants and full-time, salaried employees of the Company may be granted options and/or restricted stock. Options granted to employees may be incentive stock options or nonqualified stock options, but options granted to non-employee directors or consultants may only be nonqualified stock options.
Terms and Conditions of Options. In order for a participant to receive a stock option, he or she must enter into a written stock option agreement with the Company. The additional terms and conditions of each stock option are contained in the stock option agreement. The common terms and conditions of the stock options are:
(a) Exercise Price. The Administrator sets the exercise price of each stock option on the grant date based on the fair market value. The fair market value will be determined by the Administrator in good faith; provided that, when possible, the fair market value will be based on the closing price for the shares in the Wall Street Journal on the date of the grant.
(b) Option Exercise. Each stock option agreement specifies the expiration date of the option and the dates on which the option becomes exercisable. A participant exercises an option by giving to the Company written notice and full payment for the number of shares he or she is purchasing.
(c) Termination of Employment or Service as a Director or Consultant. Unless the stock option agreement provides otherwise, if a participant’s employment or service as a director ends for any reason other than disability or death, that participant may exercise his or her option within the time specified in the written option agreement, but only to the extent that it could be exercised on the date employment or service ended. In the event a participant’s employment or service is terminated for cause, the option shall immediately terminate upon notice to the participant of the termination.
(d) Disability. If a participant’s employment or service as a director or consultant ends because of permanent and total disability, that participant may still exercise his or her option for up to six months after the date employment or service ended, but only to the extent that it could be exercised on the date employment or service ended.
(e) Death. If a participant dies, his or her estate or beneficiary may exercise the option during the year following death, but only to the extent that it could be exercised on the date of death.
(f) Termination of Options. Options expire as provided in the written option agreement, provided that no option may have a term of more than ten years from the grant date. No option may be exercised after it expires.
(g) Adjustments Because of Capitalization Changes. If there are any stock splits, reverse stock splits, stock dividends, mergers, recapitalizations or other changes in the Company’s capital structure, the Administrator will make appropriate adjustments in exercise prices and the number and class of shares subject to outstanding options.
(i) Other Provisions. The Administrator may include additional terms and conditions in a stock option agreement as long as they do not conflict with the 2006 Equity Plan. When an option terminates before it has been fully exercised, any option shares which were not purchased under that option will become available again for future grants under the 2006 Equity Plan.
Transferability of Options and Stock Purchase Rights. Options and stock purchase rights may not be transferred other than by will or the laws of descent, except that the Administrator may in its discretion grant non-statutory stock options that may be transferred to a trust for estate planning purposes.
Change in Control of the Company. Upon a Change of Control (as defined in the 2006 Equity Plan), stock options and shares of restricted stock will become vested and exercisable only to the extent provided in the applicable option agreement or restricted stock purchase agreement. Under the terms of the Merge Agreement, all outstanding stock options will be cancelled and holders of such options will not be entitled to any merger consideration.
Amendment of the 2006 Equity Plan. The Board of Directors may amend, suspend or terminate the 2006 Equity Plan. To the extent necessary to comply with applicable law, the Company must obtain stockholder approval for any amendment in such a manner as required. Any amendment or termination of the 2006 Equity Plan may not materially and adversely affect the rights of any optionee or holder of stock purchase rights without his or her consent.
Termination of the 2006 Equity Plan. If the Merger does not close, the 2006 Equity Plan will terminate in August 2016.
Securities Authorized for Issuance Outside of Equity Compensation Plans
At the end of our fiscal year ended December 31, 2013, and as of the date of this Annual Report, we have options outstanding outside of our 2006 and 2011 Equity Plans, which have not been approved by stockholders. As of December 31, 2013, options with respect to 146,789 shares of our common stock have been issued outside of the 2006 and 2011 Equity Plans.
Summary of the Company’s Equity Capitalization
The Company currently has both common stock and preferred stock issued and outstanding. The Company’s issued and outstanding common stock is all of a single class. The Company’s issued and outstanding preferred stock is comprised of Series A Participating Preferred Stock (“Series A Preferred”), Series C Convertible Preferred Stock (“Series C Preferred”), Series E Convertible Preferred Stock (“Series E Preferred”), Series E-1 Convertible Preferred Stock (“Series E-1 Preferred”) and Series E-2 Convertible Preferred Stock (“Series E-2 Preferred”). The Company also has outstanding warrants, options and other rights to acquire shares of our common stock. A summary of certain terms of these issued and outstanding shares of common stock and preferred stock and of these outstanding warrants, options and other rights is set forth below.
Overview of Rights, Privileges and Preferences of our Common Stock and Preferred Stock
As of March 21, 2014, we had 262,395 shares of common stock issued of which 243,438 shares were outstanding. We also had issued and had outstanding 215 shares of Series A Preferred, 10,000 shares of Series C Preferred, 11,831 shares of Series E Preferred, 1,334 shares of Series E-1 Preferred and 19,000 shares of Series E-2 Preferred. Our shares of Series A Preferred are not convertible into common stock, but would participate with holders of common stock in the distribution of any legally available assets or funds of the Company upon any liquidation, dissolution or winding-up (including a sale of the Company), with each share of Series A Preferred being treated as equivalent to 100 shares of common stock for such purposes. Our outstanding shares of Series C Preferred are convertible into an aggregate of 62,500 shares of common stock. As of March 21, 2014, our outstanding shares of Series E Preferred are convertible into approximately 500,000 shares of common stock. Our outstanding shares of Series E-1 Preferred are convertible into either approximately 56,000 shares of common stock (subject to the same adjustments as the Series E Preferred) or approximately 560 shares of Series A Preferred (subject to equitable adjustment for stock splits, stock combinations and similar events). As of March 21, 2014, our outstanding shares of Series E-2 Preferred are convertible into approximately 786,000 shares of common stock (subject to the same adjustments as the Series E Preferred).
As of March 21, 2014, if the Company issued all shares of common stock and Series A Preferred which may be issued as described above (assuming the conversion of the Series E-1 Preferred into common stock and not Series A Preferred), the Company would have outstanding approximately 1,647,500 shares of common stock and approximately 215 shares of Series A Preferred. Based on the terms and conditions of our outstanding shares of preferred stock, warrants, options and other rights (including the exercise prices of certain rights), we anticipate that a portion of the entire amount of such shares of common stock issuable as described above will not be issued, but we are unable to provide an accurate estimate of the actual number of such shares of our common stock that ultimately will be issued.
Aside from the conversion rights of our preferred stock and the conversion and exercise rights of the other outstanding instruments described above and the resulting number of our shares of common stock that may be issued as described above, the other rights, privileges and preferences of our outstanding preferred stock are complex and have a material impact on the value of our outstanding shares of common stock. Among other things, in connection with a liquidation, dissolution or winding-up of the Company (including a sale of the Company) our shares of preferred stock would be entitled to receive a potentially significant amount of the funds or property, if any, lawfully available for distribution to stockholders prior and in preference to any distribution to the holders of our common stock. Additionally, certain shares of our preferred stock would participate in any distribution to the holders of our common stock after the payment in full, if any, of such preferential amounts. For example, if the Company was liquidated, dissolved, wound-up or sold as of March 21, 2014, the holders of our preferred stock would be entitled to receive the following preferential amounts out of any proceeds or property available for distribution to stockholders - with such amounts payable in the following order of priority and prior and in preference to any payment to holders of common stock:
First, holders of our Series E Preferred, Series E-1 Preferred and Series E-2 Preferred would be entitled to receive (out of funds lawfully available for distribution to stockholders, if any) approximately $69,757,000 or, if the proceeds to such holders (based on their preference and participation with holders of common stock discussed below) exceeds 5x their investment amount, $37,592,000, minimum liquidation preference of approximately $22,000,000 (as of March 21, 2014 and which amount is expected to increase over time based on the accrual of unpaid dividends).
Second, after payment, if any, of all preferential amounts required to be paid to holders of shares of our Series E Preferred, Series E-1 Preferred and Series E-2 Preferred, holders of our shares of Series C Preferred would be entitled to receive (out of funds lawfully available for distribution to stockholders, if any) an amount equal to the greater of (a) $6,500,000, or (b) such amount as they would have received had they converted their shares of Series C Preferred to common stock.
Third, after payment, if any, of all preferential amounts required to be paid to the holders of shares of our Series E Preferred, Series E-1 Preferred, Series E-2 Preferred and Series C Preferred, holders of our shares of Series A Preferred would be entitled to receive (out of funds lawfully available for distribution to stockholders, if any) an amount equal to $0.01 per share.
After payment of all of the foregoing preferential amounts, the holders of our common stock, Series A Preferred, Series E Preferred, Series E-1 Preferred and Series E-2 Preferred would share ratably in any funds or property remaining lawfully available for distribution to stockholders, with each share of Series A Preferred being treated as equivalent to 100 shares of common stock and each share of Series E Preferred, Series E-1 Preferred and Series E-2 Preferred being treated as if it had been converted to common stock.
Liquidation Preferences in the Proposed Merger with MTS
The merger consideration payable under the Merger Agreement is an amount equal to $15 million, minus transaction costs, minus closing liabilities, and plus or minus a working capital adjustment (to the extent the adjustment is outside the agreed upon collar), which we refer to as the “Merger Consideration.” The projected net proceeds of approximately $13 million will be substantially less than the aggregate liquidation preference of the Series E-2 Preferred (and substantially less than the aggregate invested capital by the holders of Series E-2 Preferred), which is entitled to the most senior liquidation preference under the Company’s Certificate of Incorporation in a transaction of this size. Consequently, all Merger Consideration will be paid to the holders of Series E-2 Preferred. Holders of Common Stock, Series A Preferred, Series C Preferred, Series E Preferred, or Series E-1 Preferred will not receive any consideration in the Merger with respect to such stock. The actual amount of net proceeds will vary based on a number of facts and circumstances, including the amounts of working capital, closing liabilities, and transaction expenses at the time of closing.
In accordance with the Company’s Certificate of Incorporation and as further described under “Overview of Rights, Privileges and Preferences of our Common Stock and Preferred Stock,” in a transaction with net proceeds less than or equal to the total stated value of the Series E Preferred, Series E-1 Preferred and Series E-2 Preferred (the “Total Stated Value”), the Series E-2 Preferred is treated as the most senior series of preferred stock; however, in a transaction with net proceeds greater than the Total Stated Value, the Series E Preferred, Series E-1 Preferred and Series E-2 Preferred would share in the net proceeds, pari passu, up to the aggregate liquidation preference of the Series E Preferred, Series E-1 Preferred and Series E-2 Preferred. As of March 19, 2014, the Total Stated Value was approximately $32.165 million and the liquidation preference of the Series E-2 Preferred was approximately $21.98 million. As a result, if the Merger had been completed as of March 19, 2014, all of the net proceeds of approximately $13 million would be applied to the liquidation preference of the Series E-2 Preferred.
The following tables illustrate (a) the respective aggregate liquidation preference of each series of preferred stock and (b) the cumulative liquidation preferences of series of preferred stock senior to the applicable series of capital stock for transactions involving, in each case as calculated as of March 19, 2014 in accordance the Company’s Certificate of Incorporation for a transaction with net proceeds (1) less than or equal to the Total Stated Value and (2) greater than Total Stated Value:
Net proceeds less than or equal the Total Stated Value:
Net proceeds greater than Total Stated Value:
A holder of Series E-2 Preferred, on surrender of their Series E-2 Preferred, will receive a total amount equal to its allocation of the Merger Consideration, if any, on the basis of the Company’s Certificate of Incorporation, without interest and subject to required tax withholdings, and subject to any amounts placed in escrow. In this manner, each holder of Series E-2 Preferred will receive a percentage of the Merger Consideration equal to such holder’s percentage of the total liquidation preference payable to the holders of Series E-2 Preferred, all as determined at the closing of the Merger.
Because each share of Series E-2 Preferred has an accruing dividend, and because the holders of Series E-2 Preferred purchased shares of Series E-2 Preferred at different times, the Merger Consideration to be received per share of Series E-2 Preferred will vary as a result of the dividend accrued. For example, if the Merger had been completed as of March 19, 2014, based on the assumption of projected net proceeds of approximately $13 million, shares of Series E-2 Preferred issued on the following dates and held through the assumed closing date of the Merger would receive approximately the following amounts of Merger Consideration per share:
Series E-2 Preferred
The actual Merger Consideration to be received per share of Series E-2 Preferred will therefore depend on the amount of accrued dividend for such share through the closing date of the Merger. The actual amount of net proceeds will vary based on a number of facts and circumstances, including the amounts of working capital, closing liabilities, and transaction expenses at the time of closing.
The Merger Consideration to be paid at closing will be reduced by (a) $1.5 million, which will be placed in escrow to cover potential indemnification claims, if any, and (b) $100,000 (subject to increase to up to $200,000), which will be placed in escrow to cover expenses of the stockholder representative, if any. These portions of the Merger Consideration will be distributed to the stockholders, if at all, in accordance with the terms of the escrow agreement and the Merger Agreement.
Additional rights, privileges and preferences of our preferred stock are summarized in other filings we have made with the Securities and Exchange Commission, including our Current Reports on Form 8-K filed with the Securities and Exchange Commission on January 7, 2010, February 8, 2011 and December 9, 2011. The above descriptions of our Series A Preferred, Series C Preferred, Series E Preferred, Series E-1 Preferred and Series E-2 Preferred are summaries only and are qualified in their entirety by reference to the terms of such preferred stock set forth in the Company’s Amended and Restated Certificate of Incorporation, the Agreement with Respect to Conversion and the Amendment No. 1 to Agreement with Respect to Conversion dated December 5, 2011, all of which are referenced as exhibits to this Annual Report and incorporated by reference herein.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a “smaller reporting company” (as defined in Item 10 of Regulation S-K), the Company is not required to provide information required by this Item.
ITEM 7.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the financial condition and results of operations of the Company, as well as our liquidity and capital resources. The discussion, including known trends and uncertainties identified by management, should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in this Annual Report on Form 10-K.
On March 5, 2014, the Company entered into a Merger Agreement with MTS pursuant to which a wholly-owned subsidiary of MTS will merge with and into the Company, resulting in the Company becoming a subsidiary of MTS. See Note 16 to our consolidated financial statements contained within Item 8, “Financial Statements and Supplementary Data” and the other disclosures in this Annual Report about the Merger for more information.
Overview
The Company, through its indirect, wholly-owned subsidiary, Bonds.com, Inc. (a registered broker-dealer and alternative trading system) operates an electronic trading platform under the name BondsPRO. This platform offers large institutional investors an alternative trading system to trade odd-lot fixed-income securities. Our customers are able to customize screens and utilize dynamic filtering capabilities to quickly and easily select and view only those market areas that meet their criteria. The platform supports a broad range of trading opportunities, offering cutting edge technology solutions for list trading, Application Programming Interface (“API”) based order submission, and user-defined portfolio-specific market views. The platform supports investment grade and high yield corporate bonds and emerging market debt. The BondsPRO platform provides users the ability to obtain real-time executable bids or offers on thousands of bond offerings sourced directly from broker-dealers and other end users. As a registered broker-dealer, Bonds.com, Inc. acts as riskless principal on all trades which allows our customers to trade anonymously on the platform. Our customer base includes corporate bond dealers, market-makers, and liquidity providers, all of which can access our platform for free. Unlike electronic trading platforms that charge subscription fees, access charges, ticket fees, or commissions in order to generate revenue, our platform allows us to generate revenue through mark-ups or mark-downs on secondary market securities on those aggressing on the platform. BondsPRO provides a direct connection between our institutional customers and the trading desks at our participating broker-dealers.
Technology
We rely on a third-party vendor for the technology and hardware that operate our BondsPRO trading platform. Disruptions in the services provided by third parties to us, including their inability or unwillingness to continue to license products that are critical to the success of our business at favorable terms or at all, could have a material adverse effect on our business, financial condition and results of operations.
The electronic fixed income trading market is experiencing a period of both rapid growth and wide exposure. The advances made in the electronic equity markets have attracted the attention of fixed income market participants, technologists and opportunistic investors for many years. We are faced with the need to develop new businesses and enhance existing offerings. We will be required to stay ahead of the curve with hardware, software development, and networking capabilities, both internally and through vendor relationships. This will require expenditures on all fronts, including on internal development, and the potential to outsource needs or license technology.
Furthermore, as the electronic fixed income market evolves, we will be faced with increasingly complicated solution requirements, which will require more sophisticated technology solutions. Key to capturing, maintaining and growing market share will be the Company’s ability to deliver advanced technology solutions to our customer base in a cost efficient and timely manner.
Our biggest investment is in our people and relationships we build with our customers.
Financial Results of Operations
Earnings Overview
The Company has continued to incur operating losses. For the year ended December 31, 2013, we incurred a loss of $3.3 million, which was $3.7 million less than the loss of $7.0 million that we incurred for the year ended December 31, 2012. The change was due primarily to a $4.6 million increase in the value of derivative financial instruments resulting from a substantial decline in the calculated per-share price of our common stock as compared to December 31, 2012, offset by an increase in the Company’s operating expenses due to a (i) $0.9 million impairment on intangible assets, (ii) $1.0 million increase in payroll and related costs, and (iii) $1.3 million decrease in professional and consulting fees.
Revenue
The Company generates all of its revenue through its riskless principal trading activity. Customers who initiate trades (“aggressors”) on our platform pay a mark-up or mark-down on each trade based on the trade’s size and maturity. All trades, once matched on the platform, settle at our clearing firm and the net proceeds are credited to our account.
Total revenue declined by 1.4% to $7.5 million from $7.6 million for the twelve months ended December 31, 2013, compared to the same period in 2012. Our revenue is measured as a function of the aggregate value of the securities traded; therefore revenue varies based on the size of the applicable trade.
Operating Expenses
The primary operating expenses of the Company are compensation, technology and professional and consulting fees. Payroll expenses in 2013 and 2012 include salaries, bonuses, employee benefits and payroll taxes. In addition, there are share-based compensation expenses associated with the issuance of stock options under the Company’s employee equity plans. Our technology costs include license and other fees to our technology vendor, the cost of market data services, and other communication and technology costs. The professional and consulting fees are primarily corporate and regulatory counsel fees, audit and accounting services fees and sales, marketing and other consulting related costs.
Operating expenses increased 4.0%, or $0.6 million, to $15.6 million from $15.0 million for the twelve months ended December 31, 2013 compared to the twelve months ended December 31, 2012. The increase was due to a (i) $0.9 million increase related to the write-off of intangible assets in 2013, (ii) $1.0 million increase in payroll and payroll-related costs, and (iii) $1.3 million decrease in professional and consulting fees.
Other Income and Expense
Other income was approximately $4.8 million for the twelve month period ended December 31, 2013, compared to approximately $0.4 million for the twelve month period ended December 31, 2012. The change is primarily due to a $4.6 million increase in value of the Company’s derivative financial instruments.
Liquidity and Capital Resources
The Company continues to rely on investor capital to sustain its business. As of December 31, 2013, the Company had total current assets of approximately $1.6 million comprised of cash and cash equivalents ($1.4 million), and prepaid expenses and other assets ($0.2 million). This compares with current assets of approximately $5.7 million, comprised of cash and cash equivalents ($5.5 million), and prepaid expenses and other assets ($0.2 million), as of December 31, 2012. The decrease of $4.1 million is described more fully below.
The Company’s current liabilities as of December 31, 2013 totaled approximately $2.2 million, comprised primarily of accounts payable and accrued expenses. By comparison current liabilities at December 31, 2012 were approximately $9.8 million, comprised primarily of accounts payable and accrued expenses ($3.6 million), convertible and other notes payable ($0.4 million) and liabilities under derivative financial instruments ($5.8 million).
The working capital deficiency decreased approximately 84% or $3.4 million to $0.6 million at December 31, 2013 from $4.1 million at December 31, 2012.
During 2013, the Company raised additional equity capital, by the issuance of preferred stock and common stock warrants in the aggregate amount of $2.0 million.
Subsequent to year-end 2013, on February 26, 2014, Bonds.com Holdings, Inc., the wholly-owned subsidiary of Bonds.com Group, Inc., issued secured promissory notes in the aggregate principal amount of $1,500,000 to Mida Holdings (“Mida”; $361,700), Daher Bonds Investment Company (“DBIC” - $542,550), Oak Investment Partners XII, Limited Partnership (“Oak” - $271,275), GFINet Inc. (“GFI” - $271,275) and Trimarc Capital Fund, L.P. (“Trimarc” - $53,200) (each of the notes, a “Bridge Note,” and collectively, the “Bridge Notes”). Each of these entities is affiliated with one or more of our directors. The Bridge Notes will accrue simple interest at a rate of 10% per annum, payable upon maturity. Each Bridge Note has a maturity date of the earlier of (i) May 26, 2014 and (ii) the date of any change of control.
The Bridge Notes are subject to customary events of default, provide customary remedies upon an event of default and restrict the incurrence of additional indebtedness. The Bridge Notes are secured by a first priority security interest and lien in the capital stock of our major operating subsidiary, Bonds.com, Inc., pursuant to the terms of a Pledge Agreement, dated as of February 26, 2014, by and among Bonds.com Holdings, Inc., BCA LLC, as collateral agent, and the holders of the Bridge Notes (the “Pledge Agreement”). Under the Pledge Agreement, upon an event of default, the collateral agent, on behalf of the holders of Bridge Notes, may take possession of the capital stock of Bonds.com, Inc. and all funds generated therefrom and may liquidate the capital stock, among other options.
Our business is dependent upon the availability of adequate funding and regulatory capital under applicable regulatory requirements. Historically, we have satisfied these needs primarily through equity and debt financing. Our ability to continue operations and grow our business depends on our ability to raise additional funds and generate our targeted revenues. We would need to raise additional funds to satisfy our working capital needs.
The following is a summary of the Company’s cash flows provided by (used in) operating, investing, and financing activities for the twelve months ended December 31, 2013 and 2012 (in 000’s):
Operating Activities. Cash used in operations for the year ended December 31, 2013 amounted to $5.5 million, consisting primarily of a net loss of $3.3 million, adjusted for a non-cash related change in value of derivative financial instruments of $4.9 million and payments to reduce accounts payable and accrued expenses of $0.8 million, offset by share-based compensation of $2.2 million and impairment of intangible asset of $0.9 million.
Cash used in operations for the year ended December 31, 2012 amounted to $6.6 million, consisting primarily of a net loss of $7.0 million, adjusted for non-cash related items of $1.4 million and payments to reduce our accounts payable and accrued expenses of $0.9 million.
Investing Activities. Cash used in investing activities of $0.2 million for the year ended December 31, 2013, primarily consisted capitalized software cost.
Cash used in investing activities of $1.3 million for the year ended December 31, 2012, primarily consisted of capitalized software costs associated with the development of the new platform and leasehold improvements associated with the Company’s new headquarters.
Financing Activities. Net cash provided by financing activities of $1.6 million for the year ended December 31, 2013, primarily consisted of net proceeds from the issuance of preferred stock and common stock warrants of $2.0 million offset by the repayment of certain promissory notes payable for $0.4 million.
Net cash provided by financing activities of $5.1 million for the year ended December 31, 2012, primarily consisted of net proceeds from the issuance of preferred stock and related common stock purchase warrants of $6.9 million offset by repayments of certain promissory notes payable of $1.8 million.
Going Concern
Our independent auditors have added an emphasis paragraph to their audit opinions issued in connection with the consolidated financial statements of Bonds.com Group, Inc. for the years ended December 31, 2013 and 2012, with respect to the substantial doubt that exists regarding our ability to continue as a going concern due to our recurring losses from operations and our accumulated deficit. We have a history of operating losses since our inception in 2005, and have a working capital deficiency of approximately $0.6 million; an accumulated deficit of approximately $55.2 million and stockholders’ equity of approximately $0.6 million at December 31, 2013, which together raises substantial doubt about the Company’s ability to continue as a going concern. Our ability to continue as a going concern will be determined by our ability to sustain a successful level of operations and to continue to raise capital from debt, equity and other sources.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. We have identified in Note 2 - “Summary of Significant Accounting Policies” to the Financial Statements contained in this Annual Report our critical accounting policies that affect the more significant judgments and estimates used in the preparation of the financial statements.
Income Taxes
We recognize deferred income taxes for the temporary timing differences between U.S. GAAP and tax basis taxable income. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We evaluate and determine on a periodic basis the amount of the valuation allowance required and adjust the valuation allowance as needed. As of December 31, 2013 and 2012, a valuation allowance was established for the full amount of deferred tax assets due to the uncertainty of its realization.
Share-Based Compensation
We measure equity-based compensation awards at the grant date (based upon an estimate of the fair value of the compensation granted) and recorded to expense over the requisite service period, which generally is the vesting period. Accordingly, we estimate the value of employee stock options using a Black-Scholes option pricing model, where the assumptions necessary for the calculation of fair value include the value of the stock issuable upon exercise of the option, expected term and expected volatility, which are subjective and represent management’s best estimate based on the characteristics of the options granted.
Fair Value of Financial Instruments
Under U.S. GAAP, fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” U.S GAAP establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as Level 1 (unadjusted quoted prices for identical assets or liabilities in active markets), Level 2 (inputs that are observable in the marketplace other than those inputs classified in Level 1) and Level 3 (inputs that are unobservable in the marketplace). The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of its investment securities and derivative financial instruments.
“Down-Round” Provisions with Rights (Warrants and Conversion Options)
Purchase rights (warrants) associated with certain of our financings include provisions that protect the purchaser from certain declines in the Company’s stock price (or “down-round” provisions). Down-round provisions reduce the exercise price of the warrants (and conversion rate of the convertible notes) if the Company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new convertible instruments that have a lower exercise price. Due to the down-round provision, all warrants issued are recognized as liabilities at their respective fair values on each reporting date and are marked-to-market on a monthly basis. Changes in value are recorded on our consolidated statement of operations as a gain or loss on derivative financial instruments and investment securities in other income (expense). The fair values of these securities are estimated using a Binomial Lattice valuation model.
Revenue Recognition
Revenues generated from securities transactions and the related commissions are recorded on a trade date basis.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
As a “smaller reporting company” (as defined in Item 10 of Regulation S-K), the Company is not required to provide information required by this Item.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” (as defined in Item 10 of Regulation S-K), the Company is not required to provide information required by this Item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following report and financial statements are contained in this Annual Report:
-Report of Independent Registered Public Accounting Firm;
-Consolidated Balance Sheets - December 31, 2013 and 2012;
-Consolidated Statements of Operations - For the Years ended December 31, 2013 and 2012;
-Consolidated Statements of Changes in Stockholders’ Deficit - Period from January 1, 2012 to December 31, 2013;
-Consolidated Statements of Cash Flows - For the Years ended December 31, 2013 and 2012; and
-Notes to Consolidated Financial Statements.
ITEM 9.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Company under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the president and chief financial officer as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our President and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our President and Chief Financial Officer concluded that, as of December 31, 2013, our disclosure controls and procedures were not operating effectively to provide reasonable assurance that information required to be disclosed in our periodic reports filed with the Securities and Exchange Commission was recorded, processed and summarized effectively.
Our determination was based on our conclusion that we had a material weakness in our internal control over financial reporting, which we considered an integral part of our disclosure controls and procedures.
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.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 using criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework” issued in 1992 and concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2013 based on these criteria.
As of December 31, 2013, Management’s assessment identified a weakness in the Company’s internal control over financial reporting related to a lack of review controls over internal calculations.
The Company concluded that this deficiency constituted a material weakness in internal control over financial reporting which could have resulted in a material misstatement to our annual or interim consolidated financial statements.
Based on the Company’s processes and assessment, as described above, management has concluded that, as of December 31, 2013, the Company’s internal control over financial reporting was not effective and there is reasonable possibility that a material misstatement to the Company’s annual or interim consolidated financial statements could occur and not be prevented or detected by its internal controls in a timely manner.
Management is in the process of implementing changes to its processes to improve its internal control over financial reporting.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all controls issues and instances of fraud, if any, will be or have been detected. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in Internal Control of Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2013 that have materially affected or are reasonably likely to materially effect our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Our Directors and Executive Officers
Certain information with respect to our directors and our executive officers, as of March 21, 2014, appears below and was furnished in part by each such person.
Name
Age
First Elected
Position(s)
Michel Daher
December 2011
Director
Henri J. Chaoul, Ph. D.
December 2011
Director; Chair of the Audit Committee and Member of the Compensation Committee
Michael Gooch
December 2011
Director, Member of the Compensation Committee
Patricia Kemp
February 2011
Director; Chair of the Compensation Committee and Member of the Audit Committee
John Simmons
November 2013
Director, Member of the Special Committee
Philip Goodeve
November 2013
Director, Chair of the Special Committee
Marc Daher
October 2012
Director
Michael Trica
February 2013
Director
George O’Krepkie
February 2011
Director, Interim Chairman, President and Interim Co-Chief Executive Officer
John M. Ryan
February 2011
Chief Financial Officer, Chief Administrative Officer and Interim Co-Chief Executive Officer
Michel Daher joined our Board of Directors in December 2011. In 2003, Mr. Daher founded Master Global Assets, an investment vehicle charged with managing the Daher family’s investment activities. After accumulating a track record of consistent, outperforming returns, Mr. Daher went on to co-found the first hedge fund operations in the Middle East. In 2009, Mr. Daher co-founded and since then serves as Chairman of the Board of Master Capital Group SAL, one of the largest non-bank affiliated dealers broker that specifically caters to the Middle East and North Africa. In 2010, Mr. Daher founded a private equity fund targeting the FMCG sector in the Levant area. Mr. Daher also serves on the board of Victor IB Holdings, an Equities and Options broker for small institutional investors and high net worth individuals in the United States. Mr. Daher serves on the board of the Association of Lebanese Industrials as a result of being the founder and owner of two of the largest FMCG production and distribution companies in the region. Between 2007 and 2010, Mr. Daher served on the board of Forex Capital Markets LLC as one of the company’s largest stockholders. Michael Daher is Marc Daher’s father.
Henri J. Chaoul, Ph.D. joined our Board of Directors in December 2011. Dr. Chaoul is an independent consultant advising several clients in the Middle East regarding investment opportunities. Dr. Chaoul has served on the board of Master Capital Group SAL since 2009, a financial broker based in the Lebanon that introduces cutting-edge financial trading platforms to clients in the Middle East and North Africa. Concurrently, Dr. Chaoul serves also on the board of CreditBank, a commercial bank based in the Lebanon and one of its top 5 commercial lenders, where he is a member of the Board Audit Committee and President of the Board Risk Management Committee. From time to time, Dr. Chaoul lectures MBA students on investment banking and corporate finance at the Olayan School of Business of the American University of Beirut. From 2009 to 2012, Dr. Chaoul served as Chief Executive Officer of Master Capital Group SAL. In 2008 and 2009, Dr. Chaoul has co-founded the first hedge fund operations in the Middle East. Prior to that, between 2004 and 2008, Dr. Chaoul was a Managing Director at the Credit Suisse in London, running Europe’s Buy-Side Insights Group, the specialized practice that dealt with all corporate finance issues of the investment bank of Credit Suisse. Between 2002 and 2004, Dr. Chaoul was the Global Managing Partner of KPMG’s economic consulting practice and was based in Paris. Earlier, and between 2000 and 2002, Dr. Chaoul was a Partner of Monitor Group, a strategy consulting firm and co-started its Chicago office. Between 1994 and 2002, Dr. Chaoul was a Principal of A.T. Kearney, a management consulting practice, focusing on development of value-based management strategies. Dr. Chaoul received his B.A. in Economics from the American University of Beirut and his Masters and Doctorate degree in Economics from Columbia University in New York City.
Michael Gooch was elected to our Board of Directors on December 15, 2011. Mr. Gooch is the Executive Chairman of the Board of Directors GFI Group Inc. since he founded the company in 1987. Prior to founding GFI Group, Inc., Mr. Gooch worked for the Refco Group, Bierbaum Martin, Harlow Meyer Savage, Citibank and Tullet & Riley. Mr. Gooch has over three decades of experience in the wholesale brokerage industry.
Patricia Kemp joined our Board of Directors on February 2, 2011. Ms. Kemp is a Director of Financial Services Technology at Oak Investment Partners. Ms. Kemp joined the firm in February 2003 and focuses on the firm’s investments in the financial services information technology space. Ms. Kemp has over 11 years of senior management experience at Cendant Corporation. At various times, she was responsible for the marketing, operations or general management of a variety of direct marketing credit card affinity programs, the Entertainment Publications subsidiary, and the Welcome Wagon and Getting to Know You subsidiaries. Ms. Kemp serves on the boards of directors of private companies that Oak Investment Partners has invested in, including TxVia, Inc. and Kuaipay. She holds an M.B.A. from Stanford University’s Graduate School of Business and a B.A. from Stanford University.
John Simmons joined our Board of Directors on November 27, 2013. Mr. Simmons is the Chief Executive Officer of Growth Advisors, LLC. He is an accomplished business leader with significant operations, finance, and board experience in growth-oriented companies. Mr. Simmons served on the Board of Directors for Lifestyle Family Fitness, and also as its President and Chief Executive Officer. Mr. Simmons served as President of Quantum Capital Partners, a private equity firm that invested in growth companies in the consumer services, internet and software industries. Mr. Simmons is a CPA who was with KPMG LLP where he audited Publix Super Markets, Jabil Circuit, Danka Business Systems, and Checkers Drive-In Restaurants. He was also was partner in-charge of the Private Business Advisory Services and High Technology Practices for the West Coast of Florida.
Philip Goodeve joined our Board of Directors on November 27, 2013. Mr. Goodeve has over 25 years of experience in the global capital markets and has been a corporate finance consultant since 2009. He has led over 100 change of control transactions, 10 IPOs and 15 turnarounds. Most recently, Mr. Goodeve was Chief Financial Officer of FINCA International Inc., one of the largest microfinance banking groups in the world, with operations in 21 countries. Amongst other roles prior to that, Mr. Goodeve was the Global Co-Head of Financial Services Investment Banking for CIBC Capital Markets. Mr. Goodeve also currently serves on the Board of Integral Securities in Canada, and he has served on numerous other public and private company boards. Mr. Goodeve’s experience in the global capital markets provides a valuable perspective to the Board on strategy, competitive industry dynamics and capital markets transactions.
Marc Daher joined our Board of Directors in October 2012. Mr. Daher is a Managing Director at Daher Capital. Mr. Daher joined Daher Capital in 2007. Mr. Daher’s current work also involves leading Master Capital Group, one of the largest non-bank affiliated dealer brokers that specifically caters to the Middle East and North Africa and is regulated by the Central Bank of London. Mr. Daher also serves as a Board Member of Daher Foods and Master Capital Group. He holds a B.S. in Economics and Finance from the Lebanese American University.
Michael Trica was elected to our Board of Directors on February 28, 2013. Mr. Trica is founder of, and served as portfolio manager for Trimarc Capital Fund, L.P. (“Trimarc”) since April 2006. He also is Director of Oakum Bay Capital, LLC, investment advisor to Trimarc. From July 2008 to December 2011, Mr. Trica served as a portfolio manager for KVO Capital Management, LLC. Prior to founding Trimarc, Mr. Trica managed private portfolios from 1997 to 2006. Mr. Trica received a BS in Finance from the Wharton School at the University of Pennsylvania.
George O’Krepkie was appointed as our President on February 2, 2011. In December 2013, Mr. O’Krepkie was appointed Interim Chairman, Interim Co-Chief Executive Officer. Prior to being appointed as President, Mr. O’Krepkie was employed as our Head of Sales since December 2009. Prior to joining the Company, Mr. O’Krepkie was Director of Fixed Income for BTIG LLC, an institutional brokerage and fund services company that provides order execution, ECN services, outsource trading and brokerage services, from January 2009 to December 2009. From July 1999 until September 2008, Mr. O’Krepkie was employed with MarketAxess Holdings, Inc., which operates an electronic trading platform, most recently as its Head of Dealer Relationship Management. Mr. O’Krepkie graduated from the University of Maryland.
John M. Ryan was appointed as our Chief Administrative Officer on February 2, 2011 and to the additional post of Chief Financial Officer in September 2011. In December 2013, Mr. Ryan was appointed Interim Co-Chief Executive Officer. Prior to that Mr. Ryan was employed by the Company in various capacities since approximately January 2010. Prior to joining the Company, Mr. Ryan was the Business Administration Director at Shortridge Academy Ltd., a co-educational therapeutic boarding school in New Hampshire, for approximately five years. Mr. Ryan continues to be a member of Shortridge Academy’s Board of Directors and its part-time CFO. From 2002 to 2003, Mr. Ryan was a Managing Director, CFO and CAO of Zurich Capital Markets, Inc. While at Zurich Capital Markets, Mr. Ryan served as a Director and Chair of the Audit Committee of Zurich Bank (Ireland). Mr. Ryan was previously with Greenwich Capital Markets from 1985 to 2001 in various management roles and was CFO when he left. He is a graduate of Trinity College Dublin and is a Chartered Accountant.
The size and composition of our Board is the subject of detailed voting arrangements among the Company and certain of our stockholders. Such voting arrangements are described below under “Voting Arrangements.” In addition to those voting arrangements, the Board considered the following experience and attributes of Messrs. Michel Daher, Chaoul, Gooch, O’Krepkie, Marc Daher and Ms. Kemp:
Michel Daher
• Leadership and operating experience in the financial services industry, including as co-founder of the first hedge fund operations in the Middle East, as well as current responsibilities as Chairman of the largest non-bank affiliated dealer-broker in Lebanon.
• Outside board of director experience as a director of Victor IB Holdings and a previous director of Forex Capital Markets.
Henri J. Chaoul, Ph.D.
• Leadership and operating experience in the financial services industry, including as co−founder of a hedge fund as well as current responsibilities as Chief Executive Officer of the largest independent non-bank affiliated dealer-broker in Lebanon.
• Outside board of director experience as a director of CreditBank.
• Significant investment banking and management consulting experience covering a number of industries and regions in the world.
Michael Gooch
• Leadership and senior management experience at a major financial services and brokerage firm as founder, chairman and CEO of the GFI Group, Inc.
• Over thirty years experience in the brokerage industry.
• Success in founding and building a financial services company into a dominant participant in its part of the market.
Patricia Kemp
• Leadership and management experience at Cendant corporation.
• Extensive experience of investing in the financial services and technology space, and on board of directors of those companies.
John Simmons
• Leadership and senior management experience in public and private growth companies.
• Financial expert with M&A experience.
• Outside board of directors experience previously with MedQuist, Technology Research Corporation, SRI Surgical and Lifestyle Family Fitness.
Philip Goodeve
• Leadership and operating experience in the financial services and broker-dealer industries internationally.
• Outside board of directors experience as a director with various public and private companies.
Marc Daher
• Leadership, management and operating experience in the financial services industry.
• Outside board of director experience as a Member of the Board at Daher Foods and Master Capital Group.
Michael Trica
• Leadership and senior management experience at major financial services firm as founder of Trimarc Capital.
• Outside board of director experience as a Member of the Board at Oakum Bay Capital, LLC.
George O’Krepkie
• President and Interim Co-Chief Executive Officer and former Head of Sales of the Company.
• Prior success and significant sales and operational experience with a competitor of the Company
Voting Arrangements
The Company, Daher Bonds Investment Company (“DBIC”), Mida Holdings, Oak Investment Partners XII, Limited Partnership (“Oak”), GFINet Inc. (“GFI”), Bonds MX, LLC Trimarc Capital Fund, L.P (“Trimarc”) and other security holders of the Company are parties to an Amended and Restated Series E Stockholders’ Agreement dated February 28, 2013 (the “Stockholders Agreement”).
Pursuant to the Stockholders Agreement, for so long as the holders of the Company’s Series E Preferred, Series E-1 Preferred and Series E-2 Preferred (the “Series E Stockholders”) collectively own at least 25% of the shares of Series E Preferred and/or Series E-2 Preferred issued to them (or 25% of the shares of Common Stock issued upon the conversion thereof), (a) the Company is required to nominate and use its reasonable best efforts to cause to be elected and cause to remain a director on the Board and (b) each Series E Stockholder is required to vote all shares of voting capital stock of the Company owned by it, so as to elect, and not to vote to remove, one person designated in writing collectively by the Series E Stockholders (the “Series E Designee”). Subject to the following sentence, the consent of each of the Series E Stockholders holding at least 8% of the outstanding shares of Series E Preferred or Series E-2 Preferred as of the date of the Stockholders Agreement is required in respect of the designation of the Series E Designee. Notwithstanding the foregoing, for so long as Oak continues to own at least 25% of the shares of Series E Preferred acquired by it (or 25% of the Common Stock issued upon the conversion thereof), the Series E Designee shall be designated by Oak in its sole discretion.
Additionally, pursuant to the Stockholders Agreement, (a) for so long as Oak continues to own at least 25% of the shares of Series E Preferred or Series E-2 Preferred acquired by it (or 25% of the Common Stock issued upon the conversion thereof), (i) the Company is required to nominate and use its reasonable best efforts to cause to be elected and cause to remain a director and (ii) each Series E Stockholder is required to vote all shares of voting capital stock of the Company owned by it, so as to elect, and not to vote to remove, two people designated by Oak, which Oak Designee shall, for the avoidance of doubt, be in addition to Oak’s rights in respect of the Series E Designee; (b) for so long as DBIC continues to own at least 25% of the shares of Series E-2 Preferred acquired by it (or 25% of the Common Stock issued upon the conversion thereof), (i) the Company is required to nominate and use its reasonable best efforts to cause to be elected and cause to remain a director and (ii) each Series E Stockholder is required to vote all shares of voting capital stock of the Company owned by it, so as to elect, and not to vote to remove, three people designated by DBIC; (c) for so long as GFI continues to own at least 25% of the shares of Series E Preferred or Series E-2 Preferred acquired by it (or 25% of the Common Stock issued upon the conversion thereof), (i) the Company is required to nominate and use its reasonable best efforts to cause to be elected and cause to remain a director and (ii) each Series E Stockholder is required to vote all shares of voting capital stock of the Company owned by it, so as to elect, and not to vote to remove, one person designated by GFI, and (d) for so long as Trimarc continues to own at least 25% of the Series E-2 Preferred acquired by it (or 25% of the common stock issued upon the conversion thereof), (i) the Company is required to nominate and use its reasonable best efforts to cause to be elected and cause to remain a director and (ii) each Series E Stockholder is required to vote all shares of voting capital stock of the Company owned by it, so as to elect, and not to vote to remove, one person designated by Trimarc.
Patricia Kemp (as a designee of Oak), Michel Daher (as a designee of DBIC and Mida), Marc Daher (as a designee of DBIC and Mida), Henri J. Chaoul, Ph.D.(as a designee of DBIC and Mida), Michael Trica (as a designee of Trimarc), and Michael Gooch (as a designee of GFI), each were elected to the Board of Directors pursuant to the foregoing obligations under the Stockholders Agreement.
Code of Ethics
The Company has adopted a “Code of Business Conduct and Ethics,” which applies to the Board of Directors and the Company’s officers and employees (the “Code of Ethics”). The Code of Ethics is intended to focus the Board of Directors, the individual directors and the Company’s executive officers and employees on areas of ethical risk, help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and foster a culture of honesty and accountability. The Code of Ethics covers areas of personal conduct relating to service on the Board of Directors and as an executive officer or employee of the Company, including conflicts of interest, unfair or unethical use of corporate opportunities, strict maintenance of confidential information, compliance with laws and regulations and oversight of ethics and compliance by employees of the Company.
The full text of the Code of Ethics is available on our website at www.bonds.com or in print upon written request addressed to the Secretary of the Company, without charge to any person. Requests should be addressed to Bonds.com Group, Inc., Attn: Secretary, 1500 Broadway, 31st floor, New York, New York 10036.
Audit Committee Financial Expert
The Audit Committee does not have an independent director who is acting as our “audit committee financial expert” within the meaning of the rules and regulations of the SEC. The Company is not subject to the requirements that it have an audit committee financial expert. The Board has determined, however, that the members of the Audit Committee are able to read and understand fundamental financial statements and have substantial business experience that results in their financial sophistication. Accordingly, the Board believes that the members of the audit committee have the sufficient knowledge and experience necessary to fulfill their duties and obligations required to serve on the Audit Committee. In light of the foregoing and practical considerations related to the Company’s size and stage of development, the Company does not believe it needs an audit committee financial expert at this time.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, generally requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities (“10% owners”) to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Directors and executive officers act 10% owners are required by SEC regulation to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely on review of copies of the reports furnished to us during the period from January 1, 2013 to December 31, 2013, Bonds MX, LLC, Edwin L. Knetzger III and Robert Jones, failed to timely file certain Form 4 filings with respect to the acquisition of beneficial ownership of our Common Stock in January 2013 and June 2013.
Item 11.
Item 11. Executive Compensation
The following table sets forth, in summary form, the compensation for the fiscal years ended December 31, 2013 and 2012 of certain of our current and former executive officers as of the end of our most recently completed fiscal year, who constitute all of the Company’s “Named Executive Officers” for such fiscal years pursuant to SEC rules.
Bonds.com Group, Inc.
2013 and 2012 Summary Compensation Table
(1) Thomas Thees was appointed Chief Executive officer of the Company on June 1, 2012. Mr. Thees’ employment terminated in December 2013. The Company and Mr. Thees are parties to a Consulting Agreement dated December 17, 2013, which is described below under “EMPLOYMENT AGREEMENTS AND POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL.”
(2) Michael O. Sanderson was appointed Chief Executive Officer of the Company on February 26, 2010. Mr. Sanderson’s employment terminated in December 2011. See “Separation Agreement with Michael O. Sanderson” noted below.
(3) George O’Krepkie was appointed President of the Company on February 2, 2011. Formerly, Mr. O’Krepkie was Head of Sales at the Company. In December 2013 Mr. O’Krepkie was appointed Interim Co-Chief Executive Officer. The Company and Mr. O’Krepkie are parties to an Employment Agreement dated February 2, 2011, which is described below under “EMPLOYMENT AGREEMENTS AND POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL.”
(4) John Ryan was appointed Chief Administrative Officer of the Company on February 2, 2011. In October 2011 Mr. Ryan was appointed to the additional role of Chief Financial Officer. In December 2013, Mr. Ryan was appointed Interim Co-Chief Executive Officer. The Company and Mr. Ryan are parties to an Employment Agreement dated February 2, 2011, which is described below under “EMPLOYMENT AGREEMENTS AND POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL.”
(5) David J. Weisberger was appointed Chief Operating Officer of the Company on February 24, 2012. Mr. Weisberger’s employment terminated July 31, 2012. See “Separation Agreement with David J. Weisberger” noted below.
(6) On June 1, 2012, Mr. Thees was granted the right to purchase a total of 78,000,000 shares of common stock at a strike price of $0.09. 25% vested at grant and the remaining rights vest quarterly over a three-year period. The amounts set forth in the “Option Awards” column for 2012 represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2012 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. The amounts set forth in the “Option Awards” column for 2013 represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2012 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. On December 11, 2013, the Company and Mr. Thees entered into a Consulting Agreement, which resulted in the acceleration of recognizing compensation expense pertaining to Mr. Thees’ award. At December 31, 2013, the Company recognized approximately $1,034,000 of additional compensation expense associated with the acceleration. Assumptions used in the calculation of these amounts are included in Note 16.
(7) In February 2, 2011 and July 14, 2011, Mr. O’Krepkie was granted the right to purchase a total of 36,750,000 and 3,901,780 shares of common stock, respectively, at various strike prices ranging from $0.7 to $0.105. Approximately 18 million of the option vested at grant date and the balance vest over various periods from 3 to 4 years. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2012 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16.
(8) On July 14, 2011 and May 30, 2012, Mr. Ryan was granted the right to purchase a total of 8,000,000 and 4,500,000 shares of common stock, respectively, at various strike prices ranging from $0.07 to $0.075. Approximately 3.1 million of these options vested at grant date and the balance vest over a four-year period. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2012 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16.
(9) In 2013 and 2012, Mr. Sanderson was paid $100,000 and $241,319, respectively, in accordance with his separation agreement. See “Separation Agreement with Michael O. Sanderson” noted below.
(10) In 2013 and 2012, Mr. Weisberger was paid $102,083 and 85,131, respectively in accordance with his separation agreement. See “Separation Agreement with David J. Weisberger” noted below. While employed as Chief Operating Officer, the Company paid 100% of Mr. Weisberger’s health and other benefit costs amounting to $8,695 in 2012.
(11) The Company paid 100% of Mr. Thees’ health and other benefit costs.
(12) The Company paid 100% of Mr. O’Krepkie’s health and other benefit costs.
(13) In 2013 and 2012 the Company paid 100% of Mr. Ryan’s health and other benefit costs, and a rental allowance.
Bonds.com Group, Inc.
Outstanding Executive Equity Awards at Fiscal Year-End
(1) On May 10, 2012, Thomas Thees was granted 195,000 equity options to purchase common stock. 47,500 vested on June 1, 2012, while the remaining 147,500 vest quarterly over three years from grant date with a final vesting date of June 1, 2015.
(2) On February 2, 2011, George O’Krepkie was granted 46,438 equity options to purchase common stock. These options vested immediately upon issuance on February 2, 2011.
(3) On February 2, 2011, George O’Krepkie was granted 46,438 equity options to purchase common stock. These options vest quarterly over three years from grant date with a final vesting date of February 2, 2014.
(4) On July 14, 2011, George O’Krepkie was granted 9.754 equity options to purchase common stock. 2,439 vested upon issuance on July 14, 2011, while the remaining 7,315 vest quarterly over four years from grant date with a final vesting date of July 14, 2015.
(5) On July 14, 2011, John Ryan was granted 20,000 equity options to purchase common stock. 5,000 vested upon issuance on July 14, 2011, while the remaining 15,000 vest quarterly over four years from grant date with a final vesting date of July 14, 2015.
(6) On May 30, 2012, John Ryan was granted 11,250 equity options to purchase common stock. 2,813 vested upon issuance on July 14, 2011, while the remaining 8,437 vest quarterly over four years from grant date with a final vesting date of May 30, 2016.
(7) On February 2, 2011, David Weisberger was granted 12,500 equity options to purchase common stock. Vesting of these options was modified in accordance with Mr. Weisberger’s Separation Agreement noted within the “Employment Agreements with Executive Officers” section of Item 11.
(8) On February 2, 2011, David Weisberger was granted 12,500 equity options to purchase common stock. Vesting of these options was modified in accordance with Mr. Weisberger’s Separation Agreement noted within the “Employment Agreements with Executive Officers” section of Item 11.
(9) On May 30, 2012, David Weisberger was granted 6,250 equity options to purchase common stock. Vesting of these options was modified in accordance with Mr. Weisberger’s Consulting Agreement noted within the “Employment Agreements with Executive Officers” section of Item 11.
2013 DIRECTOR COMPENSATION
(1) Elected to the Board in December 2011. In consideration of 2012 earned directors’ fees, on June 20, 2013 Mr. Chaoul was granted equity options to purchase 16,625 shares of common stock at a strike price of $8.35. These shares were fully vested on the grant date. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2013 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16.
(2) Elected to the Board in February 2011. In consideration of 2012 earned directors’ fees, on June 20, 2013 Ms. Kemp was granted equity options to purchase 15,794 shares of common stock at a strike price of $8.35. These shares were fully vested on the grant date. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2013 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16.
(3) Elected to the Board in October 2012. In consideration of 2012 earned directors’ fees, on June 20, 2013 Mr. Daher was granted equity options to purchase 2,586 shares of common stock at a strike price of $8.35. These shares were fully vested on the grant date. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2013 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16.
(4) Elected to the Board in November 2013. Other Compensation amounts were paid in Cash in January 2014.
(5) The total amount of earned fees by each director (with the exception of Simmons and Goodeve) in fiscal year 2013 is included in the All Other Compensation column above.
(6) Elected to the Board in December 2011. In consideration of 2012 earned directors’ fees, on June 20, 2013 Mr. Gooch was granted equity options to purchase 10,806 of common stock at a strike price of $8.35. These shares were fully vested on the grant date. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2013 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16.
(7) In consideration of 2012 earned directors’ fees, on June 20, 2013 Mr. Knetzger was granted equity options to purchase 134,193 shares of common stock at a strike price of $8.35. These shares were fully vested on the grant date. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2013 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16. Mr. Knetzger resigned in November 2013.
(8) Elected to the Board in February 2011. In consideration of 2012 earned directors’ fees, on June 20, 2013 Mr. Lockhart was granted equity options to purchase 11,176 shares of common stock at a strike price of $8.35. These shares were fully vested on the grant date. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2013 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16. Mr. Lockhart resigned in November 2013.
(9) Elected to the Board in December 2011. In consideration of 2012 earned directors’ fees, on June 20, 2013 Mr. Daher was granted equity options to purchase 11,176 shares of common stock at a strike price of $8.35. These shares were fully vested on the grant date. The amounts set forth in the “Option Awards” column represent the aggregate grant date fair value of awards made during the fiscal year ended December 31, 2013 in accordance with ASC Topic 718 of the Financial Accounting Standards Board Accounting Standards Codification. Assumptions used in the calculation of these amounts are included in Note 16.
Employment Agreements and Potential Payments Upon Termination or Change in Control
Employment Agreements with Executive Officers
We have Employment Agreements with each of George R. O’Krepkie, our President and Interim Co-Chief Executive Officer, and John M. Ryan, our Chief Financial Officer and Interim Co-Chief Executive Officer. These Employment Agreements, which are summarized below, provide for the current compensation and benefits of these executive officers and also provide for certain benefits upon a termination of employment or change-in-control.
Employment Agreement with George O’Krepkie
Mr. O’Krepkie’s Employment Agreement provides that he shall be President of the Company, serving under the direction and supervision of the Company’s Board of Directors. The term of the Employment Agreement is indefinite. Mr. O’Krepkie’s base salary under the Employment Agreement is $300,000 per year, and he is eligible for an annual performance bonus on performance at the discretion of our Board of Directors.
Mr. O’Krepkie’s Employment Agreement provides him with the following severance benefits:
• Upon a termination for death or disability, Mr. O’Krepkie shall be entitled to (a) payment of his base salary through the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), and (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies;
• Upon an involuntary termination without “cause,” or a voluntary termination with “good reason” (each as defined in the Employment Agreement), Mr. O’Krepkie shall be entitled to (a) payment of his base salary for a period of 18 months from and after the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies, and (d) reimbursement of his COBRA premiums for continued health insurance coverage for him and his dependents through the end of the 18-month severance period; and
• Upon an involuntary termination for “cause” or a voluntary termination without “good reason,” Mr. O’Krepkie shall be entitled to payment of his base salary through the termination date plus reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies.
Mr. O’Krepkie’s Employment Agreement contains confidentiality and invention assignment provisions, a 12-month post-employment non-compete provision (covering North America and any other country in which the Company does business) and a customer and employee non-solicit provision; provided, however, such non-competition and non-solicitation covenants do not limit or restrict Mr. O’Krepkie from (a) engaging in a business that is not primarily engaged in electronic fixed income trading, or (b) soliciting clients, former clients or prospective clients for services that do not directly compete with the services provided by the Company
Employment Agreement with John M. Ryan
Pursuant to his Employment Agreement, Mr. Ryan’s base salary shall not be less than $225,000 per year, and he is eligible for an annual performance bonus on performance at the discretion of our Board of Directors. The term of the Employment Agreement is indefinite.
Mr. Ryan’s Employment Agreement provides him with the following severance benefits:
• Upon a termination for death or disability, Mr. Ryan shall be entitled to (a) payment of his base salary through the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), and (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies;
• Upon an involuntary termination without “cause,” or a voluntary termination with “good reason” (each as defined in the Employment Agreement), Mr. Ryan shall be entitled to (a) payment of his base salary for a period of 12 months from and after the termination date, (b) payment of any performance bonus previously earned but unpaid (paid at the same time it would otherwise have been paid), (c) reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies, and (d) reimbursement of his COBRA premiums for continued health insurance coverage for the him and his dependents through the end of the 12-month severance period; and
• Upon an involuntary termination for “cause” or a voluntary termination without “good reason,” Mr. Ryan shall be entitled to payment of his base salary through the termination date plus reimbursement of any prior reimbursable business expenses in accordance with the Company’s standard policies.
Mr. Ryan’s Employment Agreement contains confidentiality and invention assignment provisions, a 12-month post-employment non-compete provision (covering North America and any other country in which the Company does business) and a customer and employee non-solicit provision.
In both Mr. O’Krepkie’s and Mr. Ryan’s employment agreements, “good reason” is defined as the resignation by the executive from employment with the Company and its subsidiaries as a result of one or more of the following actions (in each case taken without executive’s written consent): (a) a reduction in executive’s base salary (in the case of Mr. Ryan also an adverse change in the calculation of his bonus); (b) a material diminution of executive’s title, duties, authorities or reporting relationships; (c) the Company changes executive’s principal place of business to a location greater than 50 miles outside New York County, New York; (d) the assignment to executive of any duties inconsistent with his position with the Company in any material adverse respect; or (e) any other material breach by the Company (or its successors) of the employment agreement or any other written agreement to which the Company and the executive are parties; however, none of the events described in clauses (a) through (e) above constitute good reason unless the executive has notified the Company in writing and the Company fails to cure within 30 days after receipt of such notification. For Mr. Ryan, section (c) is not triggered if he is not required to spend a majority of his working time (normal travel for business purposes excluded) at such new location.
Management Incentive Plan
On November 12, 2013, the Board adopted the Bonds.com Group, Inc. Management Incentive Plan (the “Incentive Plan”) to retain its employees as it pursued a strategic process. The Incentive Plan establishes a bonus pool on the following dates and in the corresponding amounts: (a) on December 15, 2013, the amount of $225,000, (b) on February 15, 2014, the amount of $150,000, and (c) on July 15, 2014, the amount of “Adjusted EBITDA” (as defined in the Incentive Plan) generated during the performance period. All bonus pool awards will be paid in cash. The Compensation Committee (or the Company’s executive officers if the Compensation Committee delegates the authority to them) determines the percentage share of the bonus pool to be awarded to any eligible employees. If a change in control occurs during the performance period, the Company would pay all remaining unpaid bonus pool awards to the designated participants in a lump sum cash payment on the effective date of the change in control. The performance period would be deemed to end on the effective date of such change in control and the determination of Adjusted EBITDA would be based on the performance through such effective date (subject to a minimum amount after a specified date). This Merger constitutes a change in control under the Incentive Plan.
Separation and Consulting Agreement with Thomas Thees
On December 17, 2013, the Company entered into a consulting agreement (the “Agreement”) with Thomas Thees (“Consultant”), its former Chief Executive Officer . Pursuant to the Agreement, the Company and Consultant agreed to end their employment relationship and enter into a consulting relationship for a period commencing on December 17, 2013 through February 1, 2014. The Company will pay the Consultant a consulting fee of $12,500 per month (or pro-rated amount for any portion of a month) for his services. Further, the Company will reimburse Consultant for his health insurance premiums through July 31, 2014. Under the Agreement, the Consultant will be entitled to a bonus upon the occurrence of a Liquidity Event (as defined below) by the Company. The amount of such bonus, if any, will be determined based on the amount of proceeds certain holders of shares of the Company’s preferred stock and common stock would receive upon a Liquidity Event. Liquidity Event is defined as any distribution by the Company or transaction in which the Company is a party and is approved by the Board, and such distribution or transaction yields proceeds to the Company’s stockholders and qualifies as a “change of control,” for purposes of Section 409A of the Internal Revenue Code of 1986, as amended.
Pursuant to the Agreement, the parties terminated the Consultant’s Employment Agreement dated May 16, 2012 (the “Prior Employment Agreement”). Other than the Consultant’s rights to indemnification, the terms of the Prior Employment agreement did not survive such termination. Consultant continued vesting in his stock options until February 1, 2014, at which time his continuous service status was deemed terminated without Cause (as defined in the Prior Employment agreement) by the Company solely with respect to the determination of the vesting period and the exercise period of his stock options.
Severance and Separation Arrangements with David J. Weisberger and Michael O. Sanderson
Separation Agreement with David J. Weisberger
On August 1, 2012, David J. Weisberger and the Company agreed that Mr. Weisberger would cease serving as Chief Operating Officer (an officer of the Company) effective July 31, 2012, and Mr. Weisberger’s employment with the Company terminated at that time. In connection with the termination of Mr. Weisberger’s employment, the Company and Mr. Weisberger entered into the Separation Agreement dated as of August 1, 2012 (the “Separation Agreement”). Except with respect to certain restrictive covenants in favor of the Company and given by Mr. Weisberger and certain other matters, the Separation Agreement terminated the Employment Agreement dated February 2, 2011, between the Company and Mr. Weisberger.
The Separation Agreement also provides Mr. Weisberger with the following severance benefits, which were otherwise payable under his Employment Agreement: (a) the Company will pay Mr. Weisberger severance at the rate of $175,000 per annum for 12 months after July 31, 2012, less ordinary payroll deductions; and (b) Mr. Weisberger shall be entitled to reimbursement of his COBRA premiums for continued health insurance coverage for him and his dependents through the end of the 12-month severance period.
Separation Agreement with Michael O. Sanderson
On December 5, 2011, Michael O. Sanderson and the Company agreed that Mr. Sanderson would cease serving as Chief Executive Officer and Co-Chairman (an officer of the Company) effective December 29, 2011, and Mr. Sanderson’s employment with the Company terminated at that time. In connection with the termination of Mr. Sanderson’s employment, the Company and Mr. Sanderson entered into the Separation Agreement dated as of December 5, 2011 (the “Separation Agreement”). Except with respect to certain restrictive covenants in favor of the Company and given by Mr. Sanderson and certain other matters, the Separation Agreement terminated the Employment Agreement dated February 2, 2011, between the Company and Mr. Sanderson.
The Separation Agreement also provides Mr. Sanderson with the following severance benefits, which were otherwise payable under his Employment Agreement: (a) the Company will pay Mr. Sanderson severance at the rate of $200,000 per annum for 18 months after December 29, 2011 for a total amount of $300,000, less ordinary payroll deductions; and (b) Mr. Sanderson shall be entitled to reimbursement of his COBRA premiums for continued health insurance coverage for him and his dependents through the end of the 18-month severance period.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of March 12, 2014, the number of shares of our voting equity securities owned by (i) each person who is known by us to own of record or beneficially five percent (5%) or more of any class of our voting equity securities, (ii) each of our directors, (iii) each of our executive officers and (iv) all of our directors and executive officers as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares of our voting equity securities beneficially owned.
(1) Unless otherwise noted, the address of each person is c/o Bonds.com Group, Inc., 1500 Broadway, 31st Floor, New York, New York 10036.
(2) As used in this table, “beneficial ownership” means the sole or shared power to vote, or to direct the voting of, a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose of, or to direct the disposition of, a security). In addition, for purposes of this table, a person is deemed, as of any date, to have “beneficial ownership” of any security that such person has the right to acquire within 60 days after such date but such security is not deemed to be outstanding for the purposes of computing the percentage ownership of any other person shown in the table.
(3) The Company has issued and outstanding shares of four classes of equity securities that are entitled to vote with respect to the election of directors: Common Stock, Series C Convertible Preferred Stock (“Series C Preferred”), and Series E Convertible Preferred Stock (“Series E Preferred”) and Series E-2 Convertible Preferred Stock (Series E-2 Preferred and, collectively with the Series E Preferred, “Series E/E-2 Preferred”). The Common Stock, Series C Preferred and Series E/E-2 Preferred all vote together as a single voting group with respect to the election of directors, with holders of Common Stock having one vote per share, holders of Series C Preferred currently having 6 votes per share, and holders of Series E/E-2 Preferred having such number of votes per share as if they had converted to Common Stock (which, as of March 12, 2014, equates to 42 votes per share for our Series E/E-2 Preferred issued on December 5, 2011, 42 votes per share for our shares of Series E/E-2 Preferred issued on January 24, 2012, 41 votes per share for our shares of Series E/E-2 Preferred issued on June 8, 2012, and 39 votes per share for our shares of Series E/E-2 Preferred issued on February 28, 2013). The information in this table is based upon 243,438 shares of Common Stock issued, 10,000 shares of Series C Preferred issued and outstanding (which have an aggregate of 62,500 votes in connection with the election of directors), 11,831 shares of Series E Preferred issued and outstanding (which, as of March 12, 2014, have an aggregate of approximately 499,217 votes in connection with the election of directors), and 19,000 shares of Series E-2 Preferred issued and outstanding (which, as of March 15, 2013, have an aggregate of approximately 784,785 votes in connection with the election of directors. The Common Stock, Series C Preferred and Series E/E-2 Preferred also vote as a single voting group on all other matters presented to the stockholders of the Company, except as otherwise required by law.
(4) The “Aggregate Voting Percentage” column represents for each person the number of votes which the shares beneficially owned by such person are entitled to in connection with the election of directors, expressed as percentage relative to the total number of votes which may be cast for the election of directors. As in the rest of the table, the percentages in this column are calculated assuming that such person has acquired and may vote any shares such person has the right to acquire within 60 days but such shares are not deemed to be issued and outstanding for the purposes of computing the voting percentage of any other person.
(5) Comprised of shares of Common Stock that Mr. Chaoul has the right to acquire within 60 days upon the exercise of stock options.
(6) Comprised of (a) 249,680 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Daher Bonds Investment Company (“DBIC”), (b) 214,585 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by DBIC, (c) 166,453 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Mida Holdings (“Mida”), and (d) 142,856 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Mida. Michel Daher is a Manager of DBIC and the Manager of Mida. His business address is P.O. Box 241, Ferzol Main Road, Bekaa Valley, Lebanon.
(7) Comprised of (a) 249,680 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Daher Bonds Investment Company (“DBIC”), (b) 214,585 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by DBIC, (c) 166,453 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Mida Holdings (“Mida”), and (d) 142,856 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Mida. The reporting person, Marc Daher, is an immediate family member of, and shares a household with, Michel Daher. For that reason, the reporting person is disclosing a beneficial ownership interest in the securities owned by Mida and DBIC and attributed to Michel Daher. His business address is P.O. Box 241, Ferzol Main Road, Bekaa Valley, Lebanon.
(8) Comprised of shares of Common Stock that Ms. Kemp has the right to acquire within 60 days upon the exercise of stock options.
(9) Comprised of shares of Common Stock that Mr. O’Krepkie has the right to acquire within 60 days upon the exercise of stock options.
(10) Comprised of (a) 666 issued and outstanding shares of Common Stock owned by Mr. Ryan and (b) shares of Common Stock that Mr. Ryan has the right to acquire within 60 days upon the exercise of stock options.
(11) Comprised of (a) 24,481 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Trimarc Capital Fund, LP (“Trimarc”), and (b) 21,428 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Trimarc. Michael H. Trica is a Manager of Trimarc. Trimac’s business address is 400 Madison Avenue, Suite 9D, New York, New York 10017.
(12) Comprised of 359,860 shares of Common Stock issuable upon the conversion of Series C Stock, Series E Stock and Series E-2 Stock held of record by Oak Investment Partners XII, Limited Partnership (“Oak”), and (b) 249,999 shares of Common Stock issuable upon conversion of warrants to purchases shares of Common Stock owned of record by Oak. Oak Associates XII, LLC (Oak’s general partner), Oak Management Corporation (the manager of Oak Associates XII, LLC), and Bandel L. Carano, Gerald R. Gallagher, Edward F. Glassmeyer, Fredric W. Harman, Ann H. Lamont, Iftikar A. Ahmed, Warren B. Riley and Grace A. Ames, (each partners of Oak and, collectively, the “Oak Partners”) may be deemed to beneficially own the securities owned of record by Oak. Oak and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. Oak, Oak Associates XII, LLC, Oak Management Corporation and the Oak Partners disclaim beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by it. Oak’s address is 901 Main Avenue, Suite 600, Norwalk, Connecticut 06851.
(13) Comprised of (a) 249,680 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Daher Bonds Investment Company (“DBIC”), (b) 214,585 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by DBIC. Michel Daher, a manager of DBIC, and Abdallah Daher, a manager of DBIC, may be deemed to beneficially own the securities owned by DBIC. DBIC and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Information Statement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. DBIC disclaims beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by it. DBIC’s business address is P.O. Box 241, Ferzol Main Road, Bekaa Valley, Lebanon.
(14) Comprised of 237,376 shares of Common Stock issuable upon the conversion of Series E Stock and Series E-2 Stock held of record by GFINet, Inc. (“GFI”), (b) 196,427 shares of Common Stock issuable upon conversion of warrants to purchases shares of Common Stock owned of record by GFI, and (c) 10,806 shares of Common Stock GFI has the right to acquire within 60 days upon the exercise of stock options. GFI Group Inc. may be deemed to beneficially own the securities owned of record by GFI. GFI and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Information Statement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. GFI disclaims beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by it. GFI’s address is c/o GFI Group Inc., 55 Water Street New York, New York 10041.
(15) Comprised of (a) 166,453 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Mida Holdings (“Mida”), and (b) 142,856 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Mida. Michel Daher, a manager of Mida, may be deemed to beneficially own the securities owned by Mida. Mida and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Information Statement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. Mida disclaims beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by it. Mida’s business address is P.O. Box 241, Ferzol Main Road, Bekaa Valley, Lebanon.
(16) Comprised of (a) 42,394 issued and outstanding shares of Common Stock owned by Fund Holdings LLC, of which Mr. Knetzger is the manager, (b) 12,822 issued and outstanding shares of Common Stock owned by Mr. Knetzger, (c) 44,112 shares of Common Stock that Mr. Knetzger has the right to acquire within 60 days upon the exercise of outstanding stock options and warrants and, (d) 2,134 shares of Series E Stock and 300 shares of Series E-2 Stock owned by Bonds MX, LLC of which Mr. Knetzger is a member. Mr. Knetzger holds a 17.4% interest in Fund Holdings LLC and a 50% interest in Bonds MX, LLC. Accordingly, Mr. Knetzger disclaims beneficial ownership of the shares described in clauses (a) and (d), except to the extent of his pecuniary interest in 16.3% of such shares owned by Funds Holdings, LLC and 50% of the shares owned by Bonds MX, LLC. The address for Mr. Knetzger is c/o DivcoWest, 575 Market Street, 35th Floor, San Francisco, California 94105.
(17) Comprised of (a) 102,480 shares of Common Stock issuable upon conversion of shares of Series E Stock and Series E-2 Stock owned of record by Bonds MX, LLC of which Mr. Tully is a member, and (b) 82,141 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Bonds MX, LLC and (c) 16,250 shares of Common Stock issuable upon exercise of a warrant to purchase Common Stock issued to Tully Capital Partners of which Mr. Tully is a member.
(18) Comprised of shares of Common Stock that Mr. Thees has the right to acquire within 60 days upon the exercise of stock options.
(19) Comprised of (a) 102,480 shares of Common Stock issuable upon conversion of shares of Series E Stock and Series E-2 Stock owned of record by Bonds MX, LLC, and (b) 82,141 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Bonds MX, LLC. Hugh Regan is the Manager of Bonds MX, LLC. Mr. Knetzger and Tully Capital Partners, LLC are the sole members of Bonds MX, LLC, each of which owns a 50% interest in Bonds MX, LLC. The address of Bonds MX, LLC is c/o Laidlaw & Company (UK) LTD, 546 Fifth Avenue, 5th Floor, New York, New York 10036, Att: Hugh Regan.
(20) Comprised of (a) 87,429 shares of Common Stock issuable upon conversion of shares of Series E Stock owned of record by Jefferies & Company, Inc. (“Jefferies”), and (b) 71,428 shares of Common Stock issuable upon the exercise of warrants to purchase Common Stock owned of record by Jefferies. Jefferies Group, Inc. may be deemed to beneficially own the securities owned of record by Jefferies. Jefferies and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Information Statement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. Jefferies and Jefferies Group, Inc. disclaim beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by them. Jefferies’ business address is 520 Madison Avenue, New York, New York 10022.
(21) Comprised of (a) 37,750 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Montpelier Investments Holdings Ltd. (“Montpelier”), and (b) 35,714 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Montpelier.
(22) Comprised of (a) 39,098 shares of common stock held jointly by Mr. Barry with his spouse, Holly A.W. Barry, as tenants by the entirety, and (b) 12,500 shares owned by Duncan Family, LLC, of which Mr. and Mrs. Barry are each 50% owners of the managing membership interest, and of which 20% of the non−managing membership interest is held by Shannon Duncan Family Trust, of which Mr. Barry’s daughter, Shannon Duncan, is the sole trustee and primary beneficiary. Mr. Barry disclaims beneficial ownership of the foregoing shares except to the extent of his pecuniary interest therein. The address for Mr. Barry is 8222 Regents Ct., University Park, Florida 34201.
(23) Includes (a) 723 issued and outstanding shares of Common Stock owned by Laidlaw & Company (UK) LTD, (b) 132 issued and outstanding shares of Common Stock owned by Laidlaw Holdings, PLC, (c) 20,818 issued and outstanding shares of Common Stock owned by Laidlaw Venture Partners III, LLC, and (d) 37,500 shares of Common Stock issuable to Laidlaw & Company (UK) LTD upon exercise of a warrant to purchase shares of Common Stock.
(24) Comprised of (a) 52,342 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by BR Trust of which Mr. Hollo is a member, (b) 7,367 shares of common stock issued to Black-II Trust of which Mr. Hollo is a member.
(25) Comprised of (a) 1,187 shares of Common Stock held by the John J. Barry, IV Revocable Trust, (b) 25,000 shares of Common Stock held by Otis Angel LLC, (c) 9,891 shares of Common Stock held by Siesta Capital LLC, and (d) 15,000 shares of Common Stock that Mr. Barry has the right to acquire within 60 days upon the exercise of stock options. Mr. Barry disclaims beneficial ownership of the foregoing shares except to the extent of his pecuniary interest therein. The address for Mr. Barry is 1216 Spanish River Road, Boca Raton, FL 33432.
(26) Comprised of shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by BR Trust.
(27) Comprised of 42,395 issued and outstanding shares of Common Stock owned by Fund Holdings LLC, of which Mr. Knetzger is the manager. Fund Holdings, LLC disclaims beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by it. The address for Fund Holdings LLC is c/o DivcoWest, 575 Market Street, 35th Floor, San Francisco, California 94105.
(28) Comprised of (a) 24,481 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Trimarc Capital Fund, LP (“Trimarc”), and (b) 21,428 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Trimarc. Trimac’s business address is 400 Madison Avenue, Suite 9D, New York, New York 10017.
(29) Comprised of (a) 20,807 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by XOL Holding S.A.L. (“XOL”), and (b) 17,856 shares of Common Stock issuable upon the exercise of warrants to purchase Common Stock owned of record by XOL. XOL and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Information Statement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. XOL disclaims beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by them. XOL’s business address is Dedeian Building 1st Floor, Naher Al Mout Street, Metn, Lebanon.
(30) Comprised of (a) 13,816 shares of Common Stock issued to Mr. Jones, (b) 8,928 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock, and (c) 11,266 shares of Common Stock issuable upon conversion of shares of Series E Stock. Mr. Jones and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Information Statement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. Mr. Jones disclaims beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by them.
(31) Comprised of 771 shares of Common Stock issuable upon the conversion of Series C Preferred held of record by Mr. Weisberger and (b) shares of Common Stock that Mr. Weisberger has the right to acquire within 60 days upon the exercise of stock options.
(32) Comprised of (a) 15,100 shares of Common Stock issuable upon conversion of shares of Series E-2 Stock owned of record by Kazazian Capital Master Fund, L.P. (“Kazazian”), and (b) 14,285 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by Kazazian.
(33) Comprised of 25,000 shares of Common Stock held by Otis Angel LLC.
(34) Comprised of (a) 13,126 shares of Common Stock issuable upon the conversion of Series E Stock and Series E-2 Stock held of record by Plough Penny Partners (“Plough Penny”), and (b) 10,713 shares of Common Stock issuable upon conversion of warrants to purchases shares of Common Stock owned of record by Plough Penny. Plough Penny and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Information Statement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. Plough Penny disclaims beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by it. Plough Penny’s address is c/o Plough Penny Management LLC, 270 Lafayette Street, Suite 1301, New York, New York 10012.
(35) Comprised of shares of Common Stock that Mr. Lockhart has the right to acquire within 60 days upon the exercise of stock options.
(36) Comprised of shares of Common Stock issuable upon exercise of a warrant to purchase Common Stock.
(37) Comprised of (a) 8,945 shares of Common Stock issuable upon conversion of shares of Series E Stock owned of record by Mr. Coons, and (b) 7,142 shares of Common Stock issuable upon the exercise of warrants to purchase Common Stock owned of record by Mr. Coons. Mr. Coons and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Information Statement, which includes provisions with respect to the voting for members of the Company’s Board of Directors. Mr. Coons disclaims beneficial ownership of any shares of Common Stock other than those reported as beneficially owned by it. Mr. Coons’ business address is 191 Cat Rock Road, Cos Cob, CT 06807.
(38) Comprised of 12,500 shares of Common Stock held by Duncan Family, LLC.
Item 13.
Item 13.Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
Proposed Merger Agreement with MTS
Members of our Board of Directors and our executive officers have various interests in the proposed Merger described in this section that may be different from, or in addition to, the interests of the Company and our stockholders generally. The Special Committee was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and the Merger. These interests include:
•ownership of shares of Series E-2 Stock, which will receive Merger Consideration, by the following affiliates of our directors:
oDaher Bonds Investment Company and Mida Holdings, which collectively own 10,000 shares of Series E-2 Stock and warrants to purchase 357,141 shares of Common Stock. Michel Daher, Marc Daher and Henri J. Chaoul, Ph.D. serve on our Board as designees of Daher Bonds Investment Company and Mida Holdings. Michel Daher is a manager of DBIC and manager of Mida Holdings. Marc Daher is the son of Michel Daher. Dr. Chaoul is a business associate of Mr. Michel Daher.
oOak Investment Partners XII, Limited Partnership, which owns 3,000 shares of Series E-2 Stock, 4,267 shares of Series E Stock, 8,795 shares of Series C Stock and warrants to purchase 249,999 shares of Common Stock. Patricia Kemp, who serves on our Board as the designee of Oak Investment Partners XII, Limited Partnership, is Director of Financial Services Technology at Oak Investment Partners, which is an affiliated fund manager of Oak Investment Partners XII, Limited Partnership.
oGFINet Inc., which owns 3,000 shares of Series E-2 Stock, 2,667 shares of Series E Stock and warrants to purchase 196,427 shares of Common Stock. Michael Gooch, who serves on our Board as a designee of GFINet Inc., is the executive chairman of the board of directors of GFI Group, Inc., which is the parent company of GFINet Inc.
oTrimarc Capital Fund, L.P., which owns 600 shares of Series E-2 Stock. Michael Trica, who serves on our Board as a designee of Trimarc Capital Fund, L.P., is its portfolio manager.
All shares of stock other than Series E-2 Stock, will be cancelled without consideration in accordance with the terms of the Merger Agreement. From and after the completion of the Merger, holders of options and warrants outstanding immediately prior to the Merger will not receive any consideration in respect thereof.
•ownership of secured promissory notes of Bonds.com Holdings, Inc., the wholly-owned subsidiary of the Company, which would be repaid upon closing of the Merger, in the following principal amounts (plus accrued and unpaid interest) by the following affiliates of certain directors:
oMida Holdings: $361,700
oDaher Bonds Investment Company: $542,550
oOak Investment Partners XII, Limited Partnership: $271,275
oGFINet Inc.: $271,275
oTrimarc Capital Fund, L.P.: $53,200;
•with respect to our executive officers, the right to receive certain severance payments and benefits in the event of a qualifying termination of employment by Parent after closing of the Merger;
•with respect to our executive officers, the right to receive certain cash payments under the Company’s Management Incentive Plan adopted on November 12, 2013 and, with respect to our former Chief Executive Officer, Mr. Thees, the right to receive certain payments in the event of the Merger pursuant to his consulting agreement with us; and
•the right to continued indemnification and funding of directors’ and officers’ liability insurance for our directors and officers, to be provided by the surviving corporation for events occurring prior to the time of the Merger.
UBS Stockholders Agreement
The Company, UBS Americas Inc. (“UBS”), John J. Barry, III, John J. Barry, IV, affiliates of John J. Barry, III and John J. Barry, IV and certain security holders of the Company are parties to a Stockholders Agreement dated January 11, 2010 (the “Series A Stockholders Agreement”), pursuant to which, among other things:
• The Company and each stockholder party to the Series A Stockholders’ Agreement (other than UBS) is prohibited from appointing or voting in favor of, as applicable, any nominee to the Company’s board of directors that is affiliated with another bank, bank holding company, broker or dealer unless UBS agrees in writing, except that the foregoing restriction shall not apply to Edwin L. Knetzger III.
Agreements with the Former Holder of Certain Convertible Secured Promissory Notes
Amendments to Certain Convertible Secured Promissory Notes
On October 19, 2010, the Company entered into an Amendment No. 2 to Convertible Secured Promissory Notes with Burton W. Wiand, as Receiver of Valhalla Investment Partners (the “Receiver”), who is the holder of a majority in principal amount of our Convertible Secured Promissory Notes issued on September 24, 2008, an Amendment No. 1 to Convertible Secured Promissory Note with the holder of our Convertible Secured Promissory Note issued on April 30, 2009 and an Amendment No. 1 to Convertible Secured Promissory Notes with the holders of our Convertible Secured Promissory Notes issued on June 8, 2009 (collectively, the “Note Amendments”). The Note Amendments restructured approximately $2,990,636 of our outstanding Convertible Secured Promissory Notes (the “Subject Notes”) as follows:
• The maturity date of each of the Subject Notes was extended until October 12, 2013; provided, however, that from and after April 12, 2012, the holders of the Subject Notes may make a written demand to the Company for the payment of the entire unpaid principal balance thereof together with all accrued but unpaid interest thereon and the Company shall be required to repay such outstanding principal and interest within ninety (90) days of its receipt of such demand.
• The conversion price of the Subject Notes was fixed at $0.24 per share (which was the then-current conversion price of the Subject Notes as a result of adjustments based on the price per share of Common Stock issued in the Company’s recently completed warrant exchange offer). As a result of the financing we consummated on February 2, 2011, this conversion price was subsequently reduced to $0.07 per share. However, the “full-ratchet” adjustment provision of the Subject Notes was eliminated.
• Holders of the Subject Notes have the right to receive up to 12,460,983 shares of our Common Stock based on the revenue generated by our operations during the twelve-month period ending February 2, 2012 (“Contingent Performance Shares”). If we generate at least $7,500,000 in revenue, no performance shares will be issued, if we generate no revenue, all of the performance shares will be issued and if we generate revenue between $0 and $7,500,000, a pro rata portion of the performance shares will be issued.
On February 1, 2012, we entered into a letter agreement (the “Letter Agreement”) with the Receiver. Under the terms of the Letter Agreement, the Company paid the Receiver $2,250,000 and in exchange the Receiver (a) cancelled and terminated all indebtedness owed by the Company to the receivership, which constituted approximately $2,442,000 in outstanding principal and accrued interest, and (b) terminated any contingent rights the Receiver had to receive Contingent Performance Shares. Such termination included, among other things, a release of all liens in favor of the Receiver with respect to the assets of the Company. Additionally, under the terms of the Letter Agreement, the Company would pay the Receiver $5,000, and in consideration of such payment by the Company, the Receiver would transfer and surrender to the Company all outstanding shares of the Company’s equity securities held beneficially or of record by the Receiver, constituting 7,582,850 shares of Common Stock (the “Stock Repurchase”), which would occur, if ever, at such time at which the Company may legally repurchase the shares in accordance applicable law, except that if such repurchase does not occur prior to March 2013, the Receiver shall not be obligated to sell such shares to the Company.
Series E Stockholders’ Agreement
The Company, Daher Bonds Investment Company (“DBIC”), Mida Holdings (“Mida”), Oak Investment Partners XII, Limited Partnership (“OAK”) , GFINet Inc. (“GFI”), UBS, Bonds MX, LLC (an affiliate of Edwin L. Knetzger, III), Jefferies & Company, Inc. (“Jefferies”), Trimarc Capital Fund, L.P. (“Trimarc”) and certain other stockholders are parties to an Amended and Restated Stockholders’ Agreement dated February 28, 2013, which sets certain agreements among and between the Company and such stockholders (the “Series E Stockholders’ Agreement”).
Pursuant to the Series E Stockholders’ Agreement, in the event that DBIC, Mida, Oak, GFI, UBS, Bonds MX, Jefferies, Trimarc (the “Series E Stockholders”) seeks to sell his or its shares of Series E Preferred, Series E-1 Preferred or Series E-2 Preferred, as the case may be, each other Series E Stockholder shall have the right to sell a pro rata portion of its similar securities along with the selling Series E Stockholder. Alternatively, the Company, at its option, may redeem the applicable securities from the other Series E Stockholders and the selling Series E Stockholder would be permitted to sell his or its shares free of such obligation. The foregoing obligations do not apply to transfers pursuant to Rule 144, transfers to certain permitted transferees, bona fide pledges and pledges outstanding as of the date of the Series E Stockholders’ Stockholders’ Agreement. Such obligations also do not apply to sales of less than 10% of the securities held by the selling Series E Stockholder.
The Series E Stockholders’ Stockholders Agreement requires the Company to offer the Series E Stockholders the right to participate on a pro rata basis (based on its fully diluted shares of preferred stock relative to the total number of fully diluted shares of the Company) in future issuances of equity securities by the Company. The foregoing right does not apply to issuance of equity securities (a) in connection with any acquisition of assets of another person, whether by purchase of stock, merger, consolidation, purchase of all or substantially all of the assets of such person or otherwise approved by the Company’s Board of Directors and the requisite holders of the Series E Preferred and Series E-2 Preferred to the extent required under the Certificate of Designation of the Series E Convertible Preferred Stock, Series E-1 Convertible Preferred Stock and Series E-2 Convertible Preferred Stock, (b) Exempted Securities (as such term is defined in the Certificate of Designation of the Series E Convertible Preferred Stock, Series E-1 Convertible Preferred Stock and Series E-2 Convertible Preferred Stock), (c) in an underwritten public offering with gross proceeds of at least $50,000,000 and a market capitalization of at least $175,000,000, and (d) approved by holders of a majority of the shares of Series E Preferred and Series E-2 Preferred. The Company may elect to consummate the issuance of equity securities and subsequently provide the Series E Stockholders their right to participate. The foregoing right to participate under the Stockholders Agreement shall terminate on such date as of which less than 25% of the shares of Series E Preferred and Series E-2 Preferred collectively remain outstanding.
The Series E Stockholders Agreement also sets forth the voting provisions discussed in more detail above under “DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY - Voting Arrangements.”
Second Amended and Restated Registration Rights Agreement
On December 5, 2011, the Company entered into a Second Amended and Restated Registration Rights Agreement with DBIC, Mida, Oak, GFI, UBS, Bonds MX, Jefferies and certain other holders of our preferred stock (the “Second Amended and Restated Registration Rights Agreement”). Under the terms of the Second Amended and Restated Registration Rights Agreement, if at any time after the earlier of (a) one (1) year after the date of such agreement or (b) one hundred eighty (180) days after the date the Company’s shares of Common Stock are listed on a national securities exchange, the Company receives a written request from holders of 66.6% of the Series E Preferred, Series E-1 Preferred and the Series E-2 Preferred (such holders, the “Initiating Investors”) to file with the Securities and Exchange Commission a registration statement with respect to at least ten percent (10%) of such Common Stock then outstanding, then the Company is obligated within ten (10) days after the date of receipt by the Company of such written request, to give notice thereof to all of the other holders of Series E Preferred, Series E-1 Preferred or Series E-2 Preferred (such holders, the “Other Investors”). As soon as practicable thereafter (and in any event within sixty (60) days after the date of receipt by the Company of such written request), the Company shall file such registration statement with the Securities and Exchange Commission covering all Common Stock that are requested to be registered by the Initiating Investors and any additional Common Stock as specified by notice given to the Company by any Other Investors within twenty (20) days of the date the Other Investors received notice from the Company.
The Second Amended and Restated Registration Rights Agreement also provides DBIC, Mida, Oak, GFI, UBS, Bonds MX, Jefferies and certain other holders with “piggy back” registration rights with respect to certain registration statements filed by the Company for its own sale of shares of Common Stock or resales of shares of Common Stock by other stockholders, and also contains other customary undertakings and restrictions with respect to the Company.
The Second Amended and Restated Registration Rights Agreement was amended on February 28, 2013 to add Trimarc as a party with the same relative rights as the other stockholder parties thereto.
Additional Related Party Transactions
See “EMPLOYMENT AGREEMENTS AND POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL” above for summaries of our Employment Agreements with George O’Krepkie and John M. Ryan, Consulting Agreement with Thomas Thees and summaries of our Separation Agreement, Release and Covenant Not to Sue with David J. Weisberger and Michael O. Sanderson.
On October 15, 2012, the Company and David J. Weisberger, the Company’s former Chief Operating Officer, entered into a Consulting Agreement dated effective as of August 1, 2012 (the “Consulting Agreement”), which provides that Mr. Weisberger will provide certain consulting services for the Company through July 31, 2013. The terms of the Consulting Agreement include, among other things, that Mr. Weisberger will be subject to additional restrictive covenants which will continue after the expiration of the consulting term.
In consideration for Mr. Weisberger’s consulting services and other obligations, the Company and Mr. Weisberger agreed on October 15, 2012, to amend the terms of options granted to Mr. Weisberger by the Company on February 2, 2011. As amended, the vesting of such options is accelerated such that both options will be fully vested on July 31, 2013. Additionally, Mr. Weisberger’s right to exercise the options is extended through July 31, 2015. The amended terms for each option will be deemed null and void if Mr. Weisberger (i) breaches any of his obligations with respect to his release under his Separation Agreement or his restrictive covenants under his Separation Agreement or Consulting Agreement, or (ii) is terminated on the basis of certain “for cause” reasons under his Consulting Agreement.
Related Party Transactions Policies and Procedures
On April 8, 2010, our Board adopted written related party transaction policies and procedures (the “Policy”). For purposes of the Policy, “related party transactions” include transactions that involve more than $5,000 in any calendar year in which the Company is a participant and any related party has a direct or indirect interest, and “related party” includes our officers, directors or 5 percent stockholders and their immediate family members.
Except as described below, our Audit Committee (excluding any interested director) (the “Committee”) will review the material facts of all related party transactions. The Committee will either approve or disapprove of the entry into the related party transaction after taking into account, among other factors it deems appropriate, whether the related party transaction is on terms no less favorable than terms generally available to an unaffiliated third−party under the same or similar circumstances and the extent of the related party’s interest in the transaction. If advance Committee approval of a related party transaction is not feasible, the Committee will consider, and if it deems appropriate, ratifying the transaction at the Committee’s next regularly scheduled meeting. The Audit Committee has delegated authority to its Chair to approve related party transactions in which the amount involved is expected to be less than $25,000.
The following related party transactions are deemed to be pre−approved or ratified by the Committee (subject to the specific requirements and limitations set forth in the Policy):
(a) certain employment arrangements with our executive officers;
(b) certain compensation arrangements with our directors;
(c) transactions pursuant to which all of our stockholders receive proportional benefits;
(d) transactions involving competitive bids;
(e) regulated transactions; and
(f) banking transactions.
Director Independence
Currently, the Company is not subject to the requirements of a national securities exchange or an inter-dealer quotation system with respect to the need to have a majority of our directors be independent. Our Corporate Governance Guidelines provide that our Board of Directors shall include one or more directors who are neither officers or employees of the Company or its subsidiaries (and have not been officers or employees within the previous three years), do not have a relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, and who are otherwise “independent” under the listing requirements of either the New York Stock Exchange (“NYSE”) or The NASDAQ Stock Market (“NASDAQ”) or under such other requirements as may be established by our Board of Directors from time to time.
Item 14.
Item 14. Principal Accountant Fees and Services
Company’s Relationship with Independent Auditors
On May 9, 2012, the Audit Committee of the Company’s Board of Directors re-engaged EisnerAmper LLP (“EisnerAmper”) for the fiscal year ended December 31, 2012. On December 28, 2011, Daszkal Bolton LLP (“Daszkal”) notified the Company that it resigned as our independent registered public accounting firm. On January 20, 2012, the Audit Committee of the Company’s Board of Directors engaged EisnerAmper to replace Daszkal as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2011. In addition, the Company also engaged SEC Solutions Group, LLC to replace Daszkal as the Company’s tax preparation service provider. SEC Solutions was re-engaged by the Company on January 10, 2013 as the Company’s tax preparation service provider.
Set forth below are the fees and expenses for EisnerAmper for each of the last two years for the following services provided to us:
EisnerAmper LLP
Our audit committee approves each non-audit engagement or service with or by our independent auditor. Prior to approving any such non-audit engagement or service, it is the audit committee’s practice to first receive information regarding the engagement or service that (a) is detailed as to the specific engagement or service, and (b) enables the audit committee to make a well−reasoned assessment of the impact of the engagement or service on the auditor’s independence.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES
(a) The financial statements included as part of this Form 10-K are identified in the index to the financial statements appearing in Item 8 of this Form 10-K and which index is incorporated in this Item 15 by reference.
(b) Exhibits
Exhibit No.
Description
2.1
Agreement and Plan of Merger and Reorganization by and among IPORUSSIA, Inc., Bonds.com Holdings Acquisition, Inc. and Bonds.com Holdings, Inc., dated December 21, 2007 (1)
2.2
Stock Purchase Agreement dated on August 21, 2007 among Bonds.com Holdings, Inc. and Hanover Capital Partners 2, Ltd., and with respect to Article IV thereof, Hanover Capital Mortgage Holdings, Inc., relating to the purchase and sale of all of the capital stock of Pedestal Capital Markets, Inc. (1)
2.3
Agreement and Plan of Merger by and among Bonds.com Group, Inc., MTS Markets International, Inc. and MMI Newco Inc., dated March 5, 2014 (42)
3.1
Amended and Restated Certificate of Incorporation (39)
3.2
Amended and Restated Bylaws of the Company, as amended (43)
3.3
Specimen Common Stock Certificate (3)
3.4
Specimen of Series A Participating Preferred Stock (5)
3.5
Bonds.com Group, Inc. 2006 Equity Plan (1) **
3.6
Stock Option Agreement between Bonds.com Holdings, Inc. (f/k/a Bonds Financial, Inc.) and William M. Bass dated as of February 1, 2007 (1) **
3.7
Bonds.com Group, Inc. 2011 Equity Plan (20)**
3.8
First Amendment to Bonds.com Group, Inc. 2011 Equity Plan (27)**
3.9
Form of Ordinary Purchase Rights Certificate (15)
3.10
Form of Special Purchase Rights Certificate (5)
3.11
Form of Additional Purchase Rights Certificate (5)
3.12
Form of Preferred Stock Purchase Rights Certificate (16)
3.13
Form of Common Stock Warrant (26)
3.14
Form of Series A Preferred Stock Warrant (20)
3.15
Agreement with Respect to Conversion dated February 2, 2011 (20)
3.16
Amendment No. 1 to Agreement with Respect to Conversion dated December 5, 2011 (26)
3.17
Second Amendment to Bonds.com Group, Inc. 2011 Equity Plan (34)
3.18
Management Incentive Plan dated November 12, 2013 (41)**
10.1
Contribution Agreement (Domain Name Bonds.com) (1)
10.2
License Agreement dated as of February 19, 2007 between Valubond Securities, Inc. and Bonds.com Holdings, Inc. (f/k/a Bonds Financial, Inc.)* (1)
10.3
Agreement entered into as of September 11, 2006 between Radianz Americas, Inc. and Bonds.com Holdings, Inc. (f/k/a Bonds Financial, Inc.) (1)
10.4
Office Lease Agreement dated as of October 1, 2007 by and between 1515 Associates, Ltd. and Bonds.com Holdings, Inc. (Boca Raton, FL Lease) (1)
10.5
Grid Promissory Note with John Barry III dated January 29, 2008 (4)
10.6
Amendment dated March 26, 2009 to Promissory Note dated January 29, 2009 issued to John Barry III (9)
10.7
Amendment and Forbearance Agreement, dated January 11, 2010, by John Barry III with respect to January 29, 2008 Grid Promissory Note (5)
10.8
Form of Bonds.com Group, Inc. Secured Convertible Promissory Note (6)
10.9
Amendment dated December 1, 2008 to the Secured Convertible Note and Warrant Purchase Agreement (6)
10.10
Amendment dated as of February 3, 2009 to the Secured Convertible Note and Warrant Purchase Agreement and the Security Agreement (6)
10.11
Grid Promissory Note with Christopher D. Moody dated January 29, 2008 (4)
10.12
Grid Secured Promissory Note with Christopher D. Moody dated April 24, 2008. (9)
10.13
Amendment to Grid Secured Promissory Note with Christopher D. Moody dated July 8, 2008 (9)
10.14
Grid Secured Promissory Note with Valhalla Investment Partners dated April 24, 2008. (9)
10.15
Amendment to Grid Secured Promissory Note with Valhalla Investment Partners dated July 8, 2008 (9)
10.16
Secured Convertible Note and Warrant Purchase Agreement dated April 30, 2009 (10)
10.17
Secured Convertible Promissory Note dated April 30, 2009 (10)
10.18
Common Stock Warrant dated April 30, 2009 (10)
10.19
Amended and Restated Security Agreement, dated April 30, 2009, relating to the Security Agreement dated September 24, 2008 (10)
10.20
Secured Convertible Note and Warrant Purchase Agreement dated June 8, 2009 (11)
10.21
Secured Convertible Promissory Note dated June 8, 2009 (11)
10.22
Common Stock Warrant dated June 8, 2009 (11)
10.23
Secured Convertible Note and Warrant Purchase Agreement dated June 30, 2009 (12)
10.24
Secured Convertible Promissory Note dated June 30, 2009 (12)
10.25
Common Stock Warrant dated June 30, 2009 (12)
10.26
Unit Purchase Agreement, dated August 28, 2009, between Fund Holdings, LLC and Bonds.com Group, Inc. (13)
10.27
Amendment Letter, dated December 23, 2009, to August 28, 2009 Unit Purchase Agreement with Fund Holdings, LLC (14)
10.28
Unit Purchase Agreement, dated December 31, 2009, between Laidlaw Venture Partners III, LLC and Bonds.com Group, Inc. (15)
10.29
Unit Purchase Agreement, dated January 11, 2010, between UBS Americas Inc. and Bonds.com Group, Inc. (16)
10.30
Stockholders Agreement, dated January 11, 2010, between UBS America Inc. Bonds.com Group, Inc., Fund Holdings LLC, Laidlaw Venture Partners III, LLC, affiliates of John Barry III and affiliates of John J. Barry, IV (16)
10.31
Letter Agreement, dated January 11, 2010, between Bonds.com Group, Inc. Fund Holdings LLC, affiliates of John Barry III and affiliates of John J. Barry, IV, relating to Stockholders Agreement dated January 11, 2010 (5)
10.32
Letter Agreement, dated February 26, 2010, between Bonds.com Group, Inc., John Barry III, Holly A.W. Barry and John J. Barry, IV (17) **
10.33
Settlement Agreement and Release, dated March 19, 2010, between Bonds.com Group, Inc. and William Bass (18)
10.34
Stock Option Agreement, dated March 19, 2010, issued to William Bass (18)
10.35
Software License, Hosting, Joint Marketing, and Services Agreement, dated as of July 8, 2009, between InterDealer Securities, LLC, InterDealer Information Technology, LLC, InterDealer IP Holding, LLC and Bonds.com Group, Inc. (5)*
10.36
Letter Agreement, dated December 31, 2009, between Bonds.com Group, Inc., InterDealer Information Technologies, LLC, InterDealer Securities LLC and InterDealer IP Holdings LLC (5) *
10.37
Licensing and Services Agreement, dated January 11, 2010, between Bonds.com Group, Inc. and UBS Securities LLC (5)*
10.38
Secured Note and Warrant Purchase Agreement dated May 28, 2010 (22)
10.39
Form of Secured Convertible Promissory Note dated May 28, 2010 (22)
10.40
Second Amended and Restated Security Agreement dated May 28, 2010 (22)
10.41
Amendment No. 1 to Secured Convertible Note and Warrant Purchase Agreement and Exercise of Extension Right dated June 22, 2010 (32)
10.42
15% Promissory Note dated July 26, 2010 in favor of Bonds MX, LLC (23)
10.43
Amended 15% Promissory Note, dated August 20, 2010 in favor of Bonds MX, LLC (24)
10.44
Amendment No. 1 to Secured Convertible Promissory Notes dated September 21, 2010 (32)
10.45
Amendment No. 1 to Second Amended and Restated Grid Secured Promissory Note dated September 21, 2010 (32)
10.46
Separation Agreement, Release and Covenant Not to Sue, dated September 29, 2010, between the Company and Christopher Loughlin (25)
10.47
Separation Agreement, Release and Covenant Not to Sue, dated September 29, 2010, between the Company and Joseph Nikolson (25)
10.48
Unit Purchase Agreement, dated as of October 19, 2010, by and between the Company and Bonds MX, LLC (19)
10.49
Unit Purchase Agreement, dated as of October 19, 2010, by and between the Company and UBS Americas Inc. (19)
10.50
Series B Stockholders’ Agreement, dated as of October 19, 2010, by and among the Company, UBS Americas Inc. and Bonds MX, LLC (19)
10.51
Registration Rights Agreement, dated as of October 19, 2010, by and among the Company UBS Americas Inc. and Bonds MX, LLC (19)
10.52
Amendment No. 2 to Convertible Secured Promissory Notes, dated as of October 19, 2010 (19)
10.53
Amendment No. 1 to Convertible Secured Promissory Note, dated as of October 19, 2010 (19)
10.54
Amendment No. 1 to Convertible Secured Promissory Notes, dated as of October 19, 2010 (19)
10.55
Amendment and Release, dated as of October 19, 2010, by and among the Company and John J. Barry III (19)
10.56
Amendment and Release, dated as of October 19, 2010, by and among the Company and John J. Barry IV (19)
10.57
Common Stock Purchase Warrant, dated as of October 19, 2010, by and among the Company and Black-II Trust (19)
10.58
Common Stock Purchase Warrant, dated as of October 19, 2010, by and among the Company and Bonds MX, LLC (19)
10.59
Series A Preferred Stock Purchase Warrant, dated as of October 19, 2010, by and among the Company and Bonds MX, LLC (19)
10.60
Termination and Release Agreement, dated as of October 19, 2010, by and among the Company, Mark G. Hollo and The Fund, LLC (19)
10.61
Exchange Agreement, dated as of October 19, 2010, by and among the Company and UBS Americas Inc. (19)
10.62
Unit Purchase Agreement, dated as of February 2, 2011, by and among the Company, Oak Investment Partners XII, Limited Partnership and GFINet Inc. (20)
10.63
Exchange Agreement, dated as of February 2, 2011, by and among the Company, UBS Americas, Inc., Bonds MX, LLC and Robert Jones (20)
10.64
Series D Stockholders’ Agreement, dated as of February 2, 2011, by and among the Company, Oak Investment Partners XII, Limited Partnership, GFINet Inc., UBS Americas Inc., Bonds MX, LLC and Robert Jones (20)
10.65
Amended and Restated Registration Rights Agreement, dated as of February 2, 2011, by and among the Company, Oak Investment Partners XII, Limited Partnership, GFINet Inc., UBS Americas Inc., Bonds MX, LLC and Robert Jones (20)
10.66
Form of Common Stock Warrant (20)
10.67
Form of Series A Warrant (20)
10.68
Asset Purchase Agreement, dated as of February 2, 2011, by and among the Company, Bonds MBS, Inc. and Beacon Capital Strategies, Inc. (20)
10.69
Agreement With Respect to Conversion, dated as of February 2, 2011, by and among the Company, Bonds MBS, Inc. and Beacon Capital Strategies, Inc. (20)
10.70
Employment Agreement, dated as of February 2, 2011, between the Company and Michael O. Sanderson (20)**
10.71
Employment Agreement, dated as of February 2, 2011, between the Company and Jeffrey M. Chertoff (20) **
10.72
Employment Agreement, dated as of February 2, 2011, between the Company and John Ryan (20) **
10.73
Bonds.com Group, Inc. 2011 Equity Plan (20) **
10.74
Form of Non-Qualified Stock Option Agreement between the Company and George O’Krepkie (20) **
10.75
Bonds.com Group, Inc. Form of Stock Option Agreement (20) **
10.76
Form of Unit Purchase Agreement for individual investors, dated March 7, 2011 (32)
10.77
Amendment No. 1 to Series D Stockholders Agreement dated June 23, 2011 (28)
10.78
Marketing Agreement with Red Kite Americas LLC dated August 11, 2011 (29)
10.79
Form of Common Stock Warrant Issued to Red Kite Americas LLC (29)
10.80
Unit Purchase Agreement dated December 5, 2011 (26)
10.81
Form of Common Stock Purchase Warrant (26)
10.82
Exchange Agreement dated December 5, 2011 (26)
10.83
Series E Stockholders’ Agreement dated December 5, 2011 (26)
10.84
Second Amended and Restated Registration Rights Agreement dated December 5, 2011 (26)
10.85
Amendment No. 1 to Agreement with Respect to Conversion dated December 5, 2011 (26)
10.86
Separation Agreement with Michael O. Sanderson dated December 5, 2011 (26) **
10.87
Form of Indemnification Agreement (26)
10.88
Amended and Restated Employment Agreement of George O’Krepkie dated December 5, 2011 (26) **
10.89
Repayment and Termination Agreement dated as of December 28, 2011 (33)
10.90
Letter Agreement with Receiver dated February 1, 2012 (32)
10.91
Sub-Sublease Agreement dated February 24, 2012 (31)
10.92
Employment Agreement with Thomas Thees dated May 16, 2012 (27) **
10.93
Amendment No. 1 to Series E Stockholders’ Agreement dated May 16, 2012 (27)
10.94
First Amendment to 2011 Equity Plan (27) **
10.95
Second Amendment to Bonds.com Group, Inc.’s 2011 Equity Plan (34)**
10.96
Letter Agreement with Daher Bonds Investment Company, Mida Holdings, GFINet Inc., Oak Investment Partners XII, Limited Partnership, and certain other investors, dated as of June 8, 2012 (35)
10.97
Amendment No. 1 to Employment Agreement of John Ryan dated as of July 5, 2012 (36)**
10.98
Separation Agreement with David J. Weisberger dated as of August 1, 2012 (37)**
10.99
Consulting Agreement with David J. Weisberger dated as of August 1, 2012 (37)**
10.100
Amendment No. 1 to Notice of Stock Option Grant and Stock Option Agreement with David J. Weisberger dated as of May 30, 2012 (37) **
10.101
Amendment No. 1 to Notice of Stock Option Grant and Stock Option Agreement with David J. Weisberger dated as of May 30, 2012 (37) **
10.102
Amendment No. 1 to Notice of Stock Option Grant and Stock Option Agreement with David J. Weisberger dated as of May 30, 2012 (37) **
10.103
Unit Purchase Agreement with Trimarc Capital Fund, L.P., dated as of February 28, 2013 (38)
10.104
Common Stock Purchase Warrant issued to Trimarc Capital Fund, L.P., dated as of February 28, 2013 (38)
10.105
Amended and Restated Series E Stockholders’ Agreement dated as of February 28, 2013 (38)
10.106
Amendment No. 1 to Second Amended and Restated Registration Rights Agreement dated as of February 28, 2013 (38)
10.107
Common Stock Purchase Warrant issued to BR Trust dated March 6, 2013 (38)
10.108
Omnibus Amendment to Stock Options under 2011 Equity Plan dated as of June 20, 2013 (40) **
10.109
Amendment No. 1 to Non-Qualified Stock Option Agreements with George O'Krepkie dated as of June 20, 2013 (40) **
10.110
Consulting Agreement between the Company and Thomas Thees dated December 17, 2013 (43)
10.111
Form of Secured Promissory Note dated February 26, 2014 (43)
10.112
Pledge Agreement between Bonds.com Holdings, Inc. and the other parties identified therein dated February 26, 2014 (43)
10.113
Amendment to InterDealer Agreement dated February 28, 2014 (43)
Letter of Daszkal Bolton LLP (33)
Code of Business Conduct and Ethics (32)
Subsidiaries of the Company (32)
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (43)
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (43)
32.1
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (43)
32.2
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (43)
* Confidential treatment requested with respect to portions of this document.
** Indicates management contract or compensatory plan or arrangement.
(1) Incorporated by reference from the Company’s Registration Statement on Form S-1 (formerly Form SB-2) filed with the SEC on December 28, 2007 (File No. 333-148398) and any and all amendments thereto
(2) Incorporated by reference from the Company’s Registration Statement on Form SB-2 filed with the SEC on August 16, 2002 (File No. 333-98247)
(3) Incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2008 (File No. 000-51076)
(4) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on February 1, 2008 (File No. 000-51076)
(5) Incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on April 1, 2010 (File No. 000-51076)
(6) Incorporated by reference from the Company’s Current Report on Form 8K filed with the SEC on February 5, 2009 (File No. 000-51076)
(7) Incorporated by reference from the Company’s Current Report on Form 8K filed with the SEC on September 2, 2008 (File No. 000-51076)
(8) Incorporated by reference from the Company’s Current Report on Form 8K filed with the SEC on May 15, 2008 (File No. 000-51076)
(9) Incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on April 1, 2009 (File No. 000-51076)
(10) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on May 6, 2009 (File No. 000-51076)
(11) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 12, 2009 (File No. 000-51076)
(12) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 7, 2009 (File No. 000-51076)
(13) Incorporated by reference from the Company’s Current Report on Form 8-K/A filed with the SEC on September 3, 2009 (File No. 000-51076)
(14) Incorporated by reference from the Company’s Current Report on Form 8-K/A filed with the SEC on December 30, 2009 (File No. 000-51076)
(15) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on January 7, 2010 (File No. 000-51076)
(16) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on January 14, 2010 (File No. 000-51076)
(17) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on March 4, 2010 (File No. 000-51076)
(18) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on March 25, 2010 (File No. 000-51076)
(19) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on October 25, 2010 (File No. 000-51076)
(20) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on February 8, 2011 (File No. 000-51076)
(21) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on May 28, 2010 (File No. 000-51076)
(22) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 4, 2010 (File No. 000-51076)
(23) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 29, 2010 (File No. 000-51076)
(24) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on August 26, 2010 (File No. 000-51076)
(25) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on October 5, 2010 (File No. 000-51076)
(26) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on December 9, 2011 (File No. 000-51076)
(27) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on May 16, 2012 (File No. 000-51076)
(28) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2011 (File No. 000-51076)
(29) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on August 15, 2011 (File No. 000-51076)
(30) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on February 7, 2012 (File No. 000-51076)
(31) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on February 28, 2012 (File No. 000-51076)
(32) Incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on May 2, 2011 (File No. 000-51076)
(33) Incorporated by reference from the Company’s Current Report on Form 8-K filed with SEC on January 4, 2012 (File No. 000-51076)
(34) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 5, 2012 (File No. 000-51076)
(35) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 13, 2012 (File No. 000-51076)
(36) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 5, 2012 (File No. 000-51076)
(37) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on October 17, 2012 (File No. 000-51076)
(38) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on March 6, 2013 (File No. 000-51076)
(39) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on April 30, 2013 (File No. 000-51076)
(40) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2013 (File No. 000-51076)
(41) Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2013 (File No. 000-51076)
(42) Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on March 7, 2014 (File No. 000-51076)
(43) Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 31, 2014 By: /s/ George O’Krepkie
George O’Krepkie
President and Interim Co-Chief Executive Officer (Principal Executive Officer)
By: /s/ John M. Ryan
John M. Ryan
Chief Financial Officer, Chief Administrative Officer, and Interim Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ John Simmons
March 31, 2014
John Simmons, Director
/s/ Philip Goodeve
March 31, 2014
Philip Goodeve, Director
/s/ Patricia Kemp
March 31, 2014
Patricia Kemp, Director
/s/ Michel Daher
March 31, 2014
Michel Daher, Director
/s/ Henri J. Chaoul
March 31, 2014
Henri J. Chaoul, Ph.D., Director
/s/ Mark Daher
March 31, 2014
Mark Daher, Director
/s/ Michael Gooch
March 31, 2014
Michael Gooch, Director
/s/ Michael Trica
March 31, 2014
Michael Trica, Director
/s/ George O’Krepkie
March 31, 2014
George O’Krepkie, Director and Interim Chairman
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013 and 2012
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Bonds.com Group, Inc.
We have audited the accompanying consolidated balance sheets of Bonds.com Group, Inc. and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows for each of the years in the two-year period ended December 31, 2013. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bonds.com Group, Inc. and subsidiaries at December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has sustained recurring losses and negative cash flows from operations, and has a working capital deficiency and a stockholders’ deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described n Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
On March 5, 2014, the Company entered into a Merger Agreement (as further described in Note 16) with MTS Markets International Inc. (“MTS”), part of the London Stock Exchange Group, pursuant to which a wholly-owned subsidiary of MTS will merge with and into the Company, resulting in the Company becoming a subsidiary of MTS.
/s/EisnerAmper LLP
New York, New York
March 31, 2014
BONDS.COM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
See the accompanying notes to the consolidated financial statements.
BONDS.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See the accompanying notes to the consolidated financial statements.
BONDS.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
See the accompanying notes to the consolidated financial statements.
BONDS.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See the accompanying notes to the consolidated financial statements.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Description of Business Summary
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Bonds.com Group, Inc. (a Delaware Corporation) and its wholly-owned subsidiaries, Bonds.com Holdings, Inc. (a Delaware Corporation), Bonds.com, Inc. (a Delaware Corporation), Bonds MBS, Inc. (a Delaware Corporation), and Bonds.com, LLC (an inactive Delaware Limited Liability Company). These entities are collectively referred to as the “Company,” “we,” “us,” and “our”.
All material intercompany transactions have been eliminated in consolidation.
Basis of Presentation
On April 25, 2013, the Company implemented a 1-for-400 reverse split of the Company’s common stock, $0.0001 par value per share, and the Company’s Series A Preferred Stock (“Reverse Stock Split”). Trading of the common stock on a post-Reverse Stock Split adjusted basis on the OTCQB Market began on April 26, 2013. All historic share and per share information, including earnings per share, in this Form 10-K have been retroactively adjusted to reflect the Reverse Stock Split.
Corrected Preferred Stock Dividend and Net Loss Per Common Share
The Company has determined that the preferred stock dividends and net income (net loss) per common share previously reported in its Quarterly Report on Form 10-Q for the first quarter ended March 31, 2013 (the “Q1 2013 Form 10-Q”), its Quarterly Report on Form 10-Q for the second quarter ended June 30, 2013 (the “Q2 2013 Form 10-Q”) and its Quarterly Report on Form 10-Q for the third quarter ended September 30, 2013 (the “Q3 2013 Form 10-Q”) were understated (overstated with respect to the net income per common share) due to the inadvertent omission of certain accrued (but undeclared) dividends related to equity financings during 2012.
As a result of this omission, the preferred stock dividends reported were understated by $132,165 for the three months ended March 31, 2013, the preferred stock dividends reported were understated by $133,632 and $265,797, respectively for the three and six months ended June 30, 2013 and the preferred stock dividends reported were understated by $135,101 and $400,898, respectively for the three and nine months ended September 30, 2013.
Additionally, this omission resulted in an understatement of the net loss per common share in the Q1 2013 Form 10-Q, the Q2 2013 Form 10-Q and the Q3 2013 Form 10-Q. The net income per common share should have been reported as $6.96 rather than $7.51 for the three months ended March 31,2013, the net income/(loss) per common share should have been reported as ($5.43) and $1.54 rather than ($4.88) and $2.63, respectively, for the three and six months ended June 30, 2013, and the net loss per common share should have been reported as ($9.51) and ($7.98) rather than ($8.96) and ($6.33), respectively for the three and nine months ended September 30, 2013.
The Company did not amend the respective Form 10-Qs as management determined the errors to be immaterial.
Description of Business
Bonds.com, Inc. a Financial Industry Regulatory Authority (“FINRA”) registered broker-dealer, offers access to live liquidity and execution in fixed income securities, through its proprietary electronic trading platform, “BondsPRO,” via its www.bonds.com website, and other electronic interfaces.
Bonds.com, Inc. commenced trading on BondsPRO during 2010. This platform offers professional traders and large institutional investors an alternative trading system to trade odd-lot fixed income securities. Users are able to customize screens and utilize dynamic filtering capabilities to quickly and easily select and view only those market areas that meet their criteria. The platform supports a broad range of trading opportunities, offering cutting edge technology solutions for list trading, Application Programming Interface (“API”) based order submission(s), and user portfolio specific market views. The BondsPRO platform provides users the ability to obtain real-time executable bids or offers on thousands of corporate bond offerings sourced directly from broker-dealers and other end users. Unlike other electronic trading platforms that charge subscription fees, access charges, ticket fees, or commissions in order to generate revenue, our model allows us to generate revenue through mark-ups or mark-downs on secondary market securities.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less then acquired to be cash equivalents. Balance includes deposits with a clearing organization which consists of (a) cash proceeds from commissions and fees related to securities transactions net of all associated costs, and (b) a segregated cash deposit by the Company of $100,000 in each year to satisfy FINRA regulatory requirements.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company executes transactions between its clients and liquidity providers. It acts as an intermediary (riskless-principal) in these transactions by serving as a trading counterparty to both the buyer and the seller in matching back-to-back trades, which are then settled through a clearing organization. Securities transactions and the related revenues and expenses are recorded on a trade-date basis. Interest income is recorded on the accrual basis.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Financial Instruments
The carrying values of the Company’s cash, accounts payable and accrued expenses approximate their fair values based on the short-term nature of such items. The carrying values of notes payable approximate their fair values based on applicable market interest rates. The liability under derivative instruments was carried at fair value as described in Note 4.
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.
Intangible Assets
Intangible assets are initially recorded at cost, or fair value if acquired in a business combination. Amortization is provided for on a straight-line basis for definite-lived intangible assets over the estimated useful lives of the assets. The Company’s domain name (www.bonds.com) has an indefinite life and is not subject to amortization.
Costs for software developed for internal use are accounted for through the capitalization of costs incurred in connection with developing or obtaining internal-use software. Costs incurred during the preliminary project along with post-implementation stages of internal use computer software development and costs incurred to maintain existing product offerings are expensed as incurred. The capitalization and ongoing assessment of recoverability of development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility and estimated economic life.
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. When events or circumstances indicate impairment may exist, the Company assesses the recoverability of its definite lived intangible assets by determining whether the unamortized balance can be recovered over the assets remaining life through undiscounted forecasted cash flows. At December 31, 2013, the Company determined that $930,413 of Capitalized Software Development costs were impaired (See Note 6).
Income Taxes
Current income taxes are based on the year’s taxable income for federal and state income tax reporting purposes. Deferred income taxes are provided on a liability basis whereby deferred tax assets are recognized for deductible temporary differences and operating loss carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax law and rates on the date of enactment. The Company records a liability for uncertain tax positions when it is probable that a loss has been incurred and the amount can be reasonably estimated. The Company’s policy is to recognize interest and penalties related to income tax matters as a component of income tax expense. The Company’s 2010, 2011, and 2012 tax years remains subject to examination by taxing authorities. The Company has determined that it does not have any significant uncertain tax positions at December 31, 2013 and 2012.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and advertising expenses for the year ended December 31, 2013 and 2012 were $3,407 and $73,871, respectively.
Share-Based Compensation
Equity-based awards granted by the Company are recorded as compensation. These costs are measured at the grant date (based upon an estimate of the fair value of the equity instrument granted) and recorded to expense over the requisite service period, which generally is the vesting period. The fair value of share-based compensation arrangements are estimated using the Black-Scholes option pricing model.
Reclassification
Prior year numbers have been regrouped or reclassified to conform to the current year presentation.
Recent Issued Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a significant effect on the accompanying financial statements.
Note 3 - Going Concern
Since its inception, the Company has a history of operating losses, and has an accumulated deficit of approximately $55.2 million and a working capital deficiency of approximately $0.6 million at December 31, 2013, used approximately $5.5 million of cash in operations for the year ended December 31, 2013 and at December 31, 2013 had stockholders’ equity of approximately $0.6 million, which together raises substantial doubt about the Company’s ability to continue as a going concern.
The accompanying financial statements have been prepared on the basis that he Company will continue as a going concern which assumes the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the resolution of this contingency.
Note 4 - Fair Value of Financial Instruments
Authoritative accounting guidance defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements.
The fair value hierarchy measures the financial assets in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
• Level 1 - Valuations for assets and liabilities traded in active exchange markets, or interest in open-end mutual funds that allow a company to sell its ownership interest back at net asset value (“NAV”) on a daily basis. Valuations are obtained from readily available pricing sources for market transactions involving identical assets, liabilities or funds.
• Level 2 - Valuations for assets and liabilities traded in less active dealer, or broker markets, such as quoted prices for similar assets or liabilities or quoted prices in markets that are not active. Level 2 includes U.S. Treasury, U.S. government and agency debt securities, and mortgage-backed securities. Valuations are usually obtained from third party pricing services for identical or comparable assets or liabilities.
•
Level 3 - Valuations for assets and liabilities that are derived from other valuation methodologies, such as option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealers, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
The availability of observable inputs can vary from instrument to instrument and in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to measuring the fair value of an instrument requires judgment and consideration of factors specific to the instrument.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Financial Instruments
The Company’s derivative financial instruments consist of conversion options embedded in convertible promissory notes and warrants issued in connection with the sale of preferred stock that contain “down-round” protection to the holders. These derivatives are valued with pricing models using inputs that are generally observable. The Company considers these models to involve significant judgment on the part of management. The fair value of the Company’s derivative financial instruments are considered to be in Level 3 of the fair value hierarchy. The Company estimates the fair value of derivatives utilizing the Binomial Lattice pricing model. This model is dependent upon several variables such as the fair value of the Company’s common stock, expected term of the instrument, expected strike price, expected risk-free interest rate over the expected instrument term, the expected dividend yield rate over the expected instrument term and the expected volatility of the Company’s stock price over the expected term. The expected term represents the period of time that the instruments granted are expected to be outstanding. The expected strike price is based upon a weighted average probability analysis of the strike price changes expected during the term as a result of the down round protection. The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected terms of the options at the date of issuance. Expected dividend yield is based on historical trends. The Company measures volatility using a blended weighted average of the volatility rates for a number of similar publicly-traded companies along with the Company’s historical volatility.
Since the over-the-counter market has not been active and private sales of the Company’s shares sold may differ significantly from the then current trading price, the Company bases the fair market value of its common stock on a valuation. Based on the Company’s valuation, the fair market value of the Company’s common stock was reduced to $6.40 ($0.016 prior to the reverse stock split) in June 2013 from $10.80 ($0.03 prior to the reverse stock split) at December 31, 2012. This change in fair market value of the Company’s common stock is a significant factor in the change in the valuation. At December 7, 2013, all remaining down-round protection embedded in warrants issued in connection with the sale of preferred stock had expired. See Note 11.
Level 3 Assets and Liabilities
Level 3 liabilities include instruments whose value is determined using pricing models and for which the determination of fair value requires significant management judgment or estimation.
Fair values of assets measured on a recurring basis at December 31, 2013 and 2012 are as follows:
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains for liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs. The following table presents additional information about Level 3 liabilities measured at fair value on a recurring basis for the years ended December 31, 2013 and 2012:
The change in value of derivative financial instruments included in the December 31, 2013 and 2012 statements of operation are related to Level 3 instruments held.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Property and equipment
Property and equipment consisted of the following at December 31, 2013 and 2012:
During 2012 the Company retired $556,924 of property and equipment that was fully depreciated and no longer in use.
The Company recorded a loss on retirement of fixed assets of $18,427 associated with relocating office space in June 2012. Depreciation expense for the years ended December 31, 2013 and 2012 was $255,075 and $179,348, respectively.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Intangible Assets
Intangible assets consisted of the following at December 31, 2013 and 2012:
At December 31, 2013, the Company determined that $930,414 of Capitalized Software Development costs were impaired (See Note 2).
Amortization expense for the year ended December 31, 2013 and 2012 was $41,001 and $6,933, respectively.
During 2012 the Company retired $611,985 of software, capitalized website development costs and other intangibles that were fully amortized and no longer in use.
The following is a schedule of estimated future amortization expense of intangible assets as of December 31, 2013:
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Accounts Payable and Accrued Expenses
The following is a summary of accounts payable and accrued expenses at December 31, 2013 and 2012:
Note 8 - Convertible Notes Payable, Non-Related Parties
The following is a summary of related party and non-related party convertible notes payable at December 31, 2013 and 2012:
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The convertible promissory notes were secured by all of the assets of the Company, pursuant to the terms and conditions of a Security Agreement, dated September 24, 2008, between the Company and the holders of such notes, as amended on February 3, 2009, and as amended on May 28, 2010 (the “Security Agreement”).
On April 18, 2012, the Company paid the Receiver an aggregate of $2,250,000 in full settlement of the termination of any rights related to the contingent performance shares (approximately 3,257,578 shares of Common Stock) and carrying amount of the convertible note ($1,740,636) and notes payable ($100,000) plus accrued interest ($647,221) which resulted in the Company recording a gain of $237,857 on the extinguishment of the debt which is included in other income (expense), in the accompanying consolidated statements of operations. In addition, the Company had an obligation to pay the Receiver $5,000 in consideration for the repurchase of 7,582,850 shares of common stock. This repurchase was completed on October 4, 2012.
During the year ended December 31, 2013 and 2012, the Company recognized $3,265 and $5,697 in interest expense related to the amortization of the debt discount associated with the warrants issued with the Convertible Promissory Notes.
During the year ended December 31, 2013 and 2012, the Company also recognized $31,667 and $93,369 in interest expense on the Convertible Promissory Notes held by related parties and non-related parties.
Under the terms of the Convertible Notes, the entire principal amount of the Convertible Notes was due and payable on October 12, 2013 (the “Maturity Date”); bore interest at a rate of 10% per annum, with unpaid interest payable, in full, upon the earlier of the conversion of the Convertible Notes or on the Maturity Date. Holders of the Convertible Notes had the right to convert principal and interest due and payable into shares of common stock of the Company at a conversion price equal to the lesser of (1) $0.375 per share, as adjusted for stock splits, and reverse splits, or (2) the price paid for the Company’s common stock in any future sale of the Company’s securities while the Convertible Notes were outstanding, exclusive of certain excluded transactions.
The warrants (issued in conjunction with the convertible notes) were valued at the time of issuance using a Black-Scholes option pricing model with the following assumptions: (i) risk free interest rates ranging from 1.55 % to 2.91%, (ii) a contractual life of 5 years, (iii) expected volatility of 50% and (iv) a dividend yield of zero. The relative fair value of the warrants, based on an allocation of the value of the Convertible Notes and the value of the warrants issued in conjunction with the Convertible Notes, was recorded as a debt discount (with a corresponding increase to additional paid-in capital) in the amount of $355,472, and is being amortized to interest expense over the expected term of the Convertible Notes.
The Company has accounted for the conversion feature of the Convertible Notes as a debt discount. The conversion feature was valued at the time of issuance using a Black-Scholes option pricing model with the following assumptions: (i) risk free interest rates ranging from 0.78 % to 2.03%, (ii) a contractual life of 2 years, (iii) expected volatility of 50% and (iv) a dividend yield of zero. The fair value of the conversion feature was recorded as a debt discount in the amount of $719,338, and was being amortized to interest expense over the expected term of the Convertible Notes. The conversion feature was classified as a derivative liability as a result of the down-round provisions and resulted in the debt discount, which was being marked-to-market each reporting period with corresponding changes in the fair value being recorded as unrealized gains or losses on derivative financial instruments in the consolidated statement of operations.
On December 14, 2012, in accordance with the convertible promissory notes, the Company issued 603,668 of the Company’s common stock to Noteholders, in exchange for the termination of rights to any remaining Contingent Performance Shares under the promissory notes. This resulted in the Company offsetting a liability (with a corresponding increase in common stock and additional paid-in capital) of $18,110.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Commitments and Contingencies
Operating Leases
The Company leases office facilities and equipment 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 December 31, 2013:
The Company had an office in Florida, which has been closed, but the Company was still obligated to pay rent through December 31, 2012.
Rent expense for all operating leases for the years ended December 31, 2013 and 2012 was $238,772 and $280,628, respectively.
Management Incentive Plan
On November 12, 2013, the Company established a Management Incentive Plan (“Bonus Pool”) of $375,000 cash, $225,000 was paid on December 15, 2013 and $150,000 was paid on February 15, 2014. Additionally, the Bonus Pool contains possible further cash payments contingent on the future adjusted EBITDA of the Company, minus $375,000 generated from November 1, 2013 through to the close of business on June 30, 2014 (or “Performance Period”). The Company does not anticipate any further cash payments associated with future adjusted EBITDA. In the event of a Change of Control, the additional Bonus Pool will not be less than $100,000, as per the agreement, and will be funded out of working capital.
Customer Complaints and Arbitration
From time to time the Company’s subsidiary broker-dealer, Bonds.com, Inc., may be a defendant or co-defendant in arbitration matters incidental to its retail and institutional brokerage business. Bonds.com, Inc. may contest the allegations in the complaints in these cases and the Company carries errors and omissions insurance policy to cover such incidences. The policy terms require that the Company pay a deductible of $50,000 per incidence. The Company is not currently subject to any customer complaints or arbitration claims and therefore has not accrued any liability with regards to these matters.
Pension and Other Postretirement Benefit Plans
In 2007, the Company adopted the ADP TotalSource Retirement savings Plan covering voluntary contribution by employees of the Company into its 401(k) Plan and the Company’s safe harbor matching contributions. Eligibility is extended to all full-time employees who have been with the Company for more than three months.
During 2013 and 2012, the Company made employer-matching contributions of $67,264 and $26,981 respectively.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Agreements
In May 2012 the Company entered into an Employment agreement, as amended, with its Chief Executive Officer. The term of this contract was indefinite and committed the Company to the following:
• Annual base salary and a cash bonus at the discretion of the Compensation Committee of the Board;
• Severance benefits as contained in the Agreement;
• Option granted to the Company’s Chief Executive Officer amounted to 78 million at a strike price of $36.00. The options vest over a 3-year period from the grant date.
• The amount charged to operations with respect to these options in 2013 and 2012 was $1,713,756 and $1,092,624, respectively.
In December 2013, the Company entered into a Consulting Agreement (the “Agreement”), with its former Chief Executive Officer (the “Consultant”). Pursuant to the Agreement, the Company and the Consultant entered into a consulting relationship from the period from December 12, 2013 to February 1, 2014. The Company will pay the Consultant $12,500 per month (or pro-rated amount for any portion of a month) for his services. Further, the Company will reimburse the Consultant for his health insurance premiums through July 31, 2014. Under the Agreement, the Consultant will be entitled to a bonus upon the occurrence of a liquidity event. A liquidity event is defined as any distribution of proceeds to the Company’s stockholders or transaction that qualifies as a “change of control” for purposes of Section 409A of the Internal Revenue Code of 1986, as amended. The amount of a bonus to the Consultant, if any, will be based on the amount of proceeds certain shareholders (Preferred and Common) would receive upon a liquidity event.
The Company has employment agreements with two officers, these agreements provide for a base salary of $525,000 per annum and are eligible for an annual bonus at the discretion of the Compensation Committee of the Board of Directors. Neither of the agreements contain a termination date.
Litigation and Settlement
On January 12, 2009, the Company learned that Duncan-Williams, Inc. (“Duncan-Williams”) filed a complaint against the Company in United States District Court for the Western District of Tennessee, Western Division, under an alleged breach of contract. Duncan-Williams had been seeking monetary damages, a declaration of ownership relating to certain intellectual property and accounting of income earned by the company. The Company filed a motion to dismiss the complaint. The Court granted in part the Company’s motion and entered an order staying the action pending arbitration between the parties. Subsequently, on October 11, 2012, the Company and Duncan-Williams settled this dispute for $70,000, which is included in other operating expenses in the accompanying consolidated statement of operations and signed a Settlement Agreement and Release.
The Company is periodically involved in various claims and legal action arising in the ordinary course of business. Management is of the opinion that the ultimate outcome of these matters would not have a material adverse impact on the financial position or the results of its operations of the Company.
Note 10 - Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash. Management believes the financial risks associated with this financial instrument are not material. The Company places its cash with high credit quality financial institutions. The Company maintains its cash in bank deposit accounts that, at times, may exceed federally insured limits.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
Note 11 - Stockholders’ Equity
Description of Authorized Capital
Preferred Stock activity for the years ended December 31, 2013 and 2012 are as follows (share amounts in this chart are in thousands):
Issuances
Series A Participating Preferred Stock
The shares of Series A Participating Preferred Stock (the “Series A Preferred) have the following rights, privileges and preferences, among others, as more fully set forth in the amended Certificate of Incorporation. Subject to the liquidation preference described below, the Series A Preferred ranks pari passu with the Company’s common stock with respect to dividends and distributions upon liquidation, winding-up and dissolution of the Company and junior to any class or series of capital stock that ranks senior to the Series A Preferred. The Company may not declare, pay or set aside any dividends on shares of its common stock unless the holders of the Series A Preferred then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred in an amount at least equal to a rate per share of Series A Preferred determined by multiplying the amount of the dividend payable on each share of common stock by one hundred (100) (subject to standard adjustments) In the event of any liquidation, dissolution or winding up of the Company (including certain changes of control that are deemed a liquidation), subject to the rights of any series of preferred stock which may from time to time come into existence, the holders of Series A Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock or the holders of any series of preferred stock expressly made junior to the Series A Preferred, an amount per share equal to $0.01 Thereafter, subject to the rights of any series of preferred stock, the remaining assets of the Company available for distribution to its stockholders are required to be distributed among the holders of shares of Series A Preferred and common stock, pro rata based on the number of shares held by each such holder, treating for this purpose each such share of Series A Preferred as if it had been converted into one hundred (100) shares of common stock immediately prior to such liquidation (including a deemed liquidation), dissolution or winding up of the Company. The Series A Preferred is non-voting capital stock of the Company, except as may otherwise be required by applicable law and except that the holders thereof have certain limited approval rights, including.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Series C Convertible Preferred Stock
The Shares of Series C Preferred have the following rights, privileges and preferences, among others, as more fully set forth in the amended Certificate of Incorporation:
• are convertible at the option of the holders of a majority of the issued and outstanding shares of Series C Preferred, at the current conversion price of $40.00 per share and the conversion value of $2,500,000, for a conversion ratio of 2,500 shares of the Company’s Common Stock for each share of Series C Preferred or 25,000,000 shares of common stock in the aggregate.
• are mandatory convertible into shares of the Company’s Common Stock upon certain milestones related to the trading of the Company’s Common Stock.
• in the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, and upon certain changes, subject to the rights of holders shares of Series E Preferred, Series E-1 Preferred and Series E-2 Preferred, the holders will be entitled to a liquidation preference; and
• holders have the right to vote with holders of the Company’s Common Stock on an as-converted basis.
Series E, E-1 and E-2 Convertible Preferred Stock
The shares of Series E Preferred, Series E-1 Preferred and Series E-2 Preferred have the following rights, privileges and preferences, among others, as more fully set forth in the amended Certificate of Incorporation:
• are initially convertible at the option of the holder into shares Common Stock at a conversion price of $28.00 per share, for an initial conversion ratio of 14,286 shares of Common Stock for each share; provided that, for a period of 18 months following the date of their issuance, if the Company issues shares of Common Stock (or is deemed to issue shares of Common Stock) for a price per share less than $28.00 then the exercise price will be reduced by a “weighted-average” anti-dilution formula (subject to certain exempted issuances) the current conversion price is $28.00;
• is mandatorily convertible into shares of our Common Stock under certain milestones related to the trading of the Company’s common stock;
•
is mandatorily convertible into shares of our Series A Preferred upon the same mandatory conversion event applicable to the Series E-1 Preferred;
• dividends of 8% per annum shall accrue but are payable only as, if and when declared by the Board, in connection with the conversion thereof (in which case payment shall be in-kind) or as part of the liquidation or change of control preference summarized below;
• holders of Series E-2 Preferred shall be entitled to a preferential payment (prior to any payment to holders of Series E Preferred, Series E-1 Preferred, Series C Preferred, Series A Preferred or Common Stock) upon a liquidation or change of control, as applicable, in certain circumstances; and
• holders have the right to vote with holders of Common Stock on an as-converted basis.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2013 there were cumulative undeclared dividends of $1,962,974 with a weighted average price per share amount of $166.
Preferred Stock Series E-1 Issuance
As of December 31, 2013 there were cumulative undeclared dividends of $221,334 with a weighted average price per share amount of $166.
Preferred Stock Series E-2 Issuance
On January 24, 2012, the Company sold an aggregate of 3 units for a total purchase price of $300,000, with each unit comprised of (a) warrants to purchase 1,428,572 shares of Common Stock and (b) 100 shares of Series E-2 Preferred. The Company allocated $105,000 and $195,000 of its proceeds to the warrants and Series E-2 Preferred, respectively, using the residual method. Such warrants contain down-round protection provisions for the holders and are therefore considered a derivative liability. Such warrants have been valued using a Binomial Lattice Model. The value of each warrant was estimated to be $0.0245 per warrant utilizing the following assumptions, expected volatility of 167.79%, risk-free interest rate of 0.92%, expected term of 5 years, weighted average probability strike price of $0.0635 and a market price of $0.03. The Company analyzed the effective conversion feature of the Series E-2 Preferred and determined that there was no beneficial conversion features upon the issuance.
On June 8, 2012, the Company sold an aggregate of 67 units for a total purchase price of $6,700,000, with each unit comprised of (a) warrants to purchase 1,428,572 shares of Common Stock and (b) 100 shares of Series E-2 Preferred. The Company allocated $2,412,000 and $4,288,000 of its proceeds to the warrants and Series E-2 Preferred, respectively, using the residual method. Such warrants contain down-round protection provisions for the holders and are therefore considered a derivative liability. Such warrants have been valued using a Binomial Lattice Model. The value of each warrant was estimated to be $0.0252 per warrant utilizing the following assumptions, expected volatility of 180.74%, risk-free interest rate of 0.71%, expected term of 5 years, weighted average probability strike price of $0.0635 and a market price of $0.03. The Company analyzed the effective conversion feature of the Series E-2 Preferred and determined that there was no beneficial conversion features upon the issuance.
On February 28, 2013, the Company sold an aggregate of 20 units for a total purchase price of $2,000,000, with each unit comprised of (a) warrants exercisable for 3,571 shares of common stock of the Company, par value $0.0001 per share, and (b) 100 shares of Series E-2 Convertible Preferred Stock of the Company, par value $0.0001 per share. The Company allocated $282,857 and $1,686,523 of its proceeds to the warrants and Series E-2 Preferred, respectively, using the residual method. Such warrants contain down-round protection provisions for the holders and are therefore considered a derivative liability. Such warrants have been valued using a Binomial Lattice Model. The value of each warrant was estimated to be $3.96 per warrant utilizing the following assumptions, expected volatility of 108.35%, risk-free interest rate of 0.77%, expected term of 5 years, weighted average probability strike price of $28.00 and a market price of $6.40 ($0.016 prior to the reverse stock split). The Company analyzed the effective conversion feature of the Series E-2 Preferred and determined that there was no beneficial conversion features upon the issuance.	
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2013 there were cumulative undeclared dividends of $2,678,312 with a weighted average price per share amount of $128.
Common Stock Issuance
On December 14, 2012, the Company issued 1,509 of the Company’s common stock to Convertible Secured Promissory Noteholders, in exchange for the termination of rights to any remaining Contingent Performance Shares under the promissory notes. This resulted in the Company offsetting a liability (with a corresponding increase in common stock and additional paid-in capital) of $18,110.
Common Stock Purchase Warrants
Warrant activity for the years ending December 31, 2013 and 2012 are as follows:
On June 4, 2013, July 24, 2013 and December 7, 2013, the 18 month down round protection of the warrants expired, which resulted in the reset of the exercise price of the warrants to the base floor price of $28.00. The Company revalued the warrants on the expiration dates using a Binomial Lattice Model. The value of each warrant was estimated to be $1.72, $1.60 and $1.80, respectively per warrant utilizing the following assumptions, expected volatility of ranging from 89.73% to 94.19%, risk-free interest rate ranging from 0.64% to 1.08%, expected term of 3.5 years, strike price of $25.40 - $28.00 and a market price of $6.40 As a result, the warrants were reclassified as equity within the Company’s consolidated financial statements, at an aggregate fair value of $1,201,487. In addition, the Company recorded a gain of $364,135 on the derivative liability which is included in changes in value of derivative financial instruments, in the accompanying consolidated statement of operations.
On August 2, 2012, September 4, 2012 and December 21, 2012, the 18 month down round protection of the warrants expired, which resulted in the reset of the exercise price of the warrants to the base floor price of $28.00. The Company revalued the warrants on the expiration dates using a Binomial Lattice Model. The value of each warrant was estimated to be $9.04, $9.04 and $8.52, respectively per warrant utilizing the following assumptions, expected volatility of ranging from 174.30% to 189.02%, risk-free interest rate ranging from 0.46% to 0.57%, expected term of 3.5 years, strike price of $0.07 and a market price of $12.00. As a result, the warrants were reclassified as equity within the Company’s consolidated financial statements, at an aggregate fair value of $3,562,714. In addition, the Company recorded a gain of $91,786 on the derivative liability which is included in changes in value of derivative financial instruments, in the accompanying consolidated statement of operations.
Warrants issued to Non-Employees
The Company recognized $0 and $73,809 in consulting expense relating to warrants awarded during the years ended December 31, 2013 and 2012, respectively, relating to warrants awarded.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cancellation of warrants
On March 6, 2013, the Company entered into and consummated a Cancellation and Issuance Agreement, pursuant to which 52,342 warrants for the purchase of common stock were issued upon execution of a release for the cancellation of 38,507 warrants for the purchase of common stock. The Company recorded a charge of $225,000 at December 31, 2012 for this matter which is included in accounts payable and accrued expenses and other income (expense), net in the accompanying consolidated balance sheet and statements of operations.
Preferred Series A Purchase Warrants
Series A warrant activity for the years ending December 31, 2013 and 2012 are as follows:
On August 2, 2012, the 18 month down round protection of the Series A Preferred warrants expired, which resulted in the reset of the exercise price of the Series A Preferred warrants to the base floor price of $2,800.00 ($28.00 in common stock equivalent). The Company revalued the warrants on the expiration dates using a Binomial Lattice Model. The value of each warrant was estimated to be $9.04 per warrant utilizing the following assumptions, expected volatility of 188.58%, risk-free interest of 0.46%, expected term of 3.5 years, strike price of $28.00 and a market price of $12.00. As a result, the warrants were reclassified as equity within the Company’s consolidated financial statements, at an aggregate fair value of $403,572. In addition, the Company and recorded a gain of $5,357 on the derivative liability which is included in changes in value of derivative financial instruments, in the accompanying consolidated statement of operations.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 - Earnings (Loss) Per Share
Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share considers the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the earnings of the entity. No diluted loss per share has computed since the effect of any potentially dilutive securities would be antidilutive. Potentially dilutive securities excluded from the calculation of weighted average common shares outstanding at December 31, 2013 and 2012, include i) 1,254,825 and 1,179,160 respectively, of both common stock and preferred series A warrants; ii) 679,621 and 584,009, respectively, of common stock underlying stock options; iii) 0 and 19,523 respectively, issuable under convertible note payable and iv) 1,406,355 and 1,243,969 respectively, of shares issuable under preferred stock. All of these potentially dilutive securities have the ability to be converted to common stock. Dividends related to convertible preferred stock have been excluded from the calculation of diluted loss per share.
Note 13 - Net Capital and Reserve Requirements
Bonds.com Inc., is subject to SEC Uniform Net Capital Rule 15c3-1. Bonds.com Inc. computes its net capital under the basic method permitted by the rule, which requires that the minimum net capital be equal to the greater of $100,000 or 6-2/3% of aggregate indebtedness.
Bonds.com Inc. is exempt from the SEC Rule 15c3-3 pursuant to the exemption provision under subparagraph (k)(2)(ii) and, therefore, is not required to maintain a “Special Reserve Bank Account for Exclusive Benefit of Customers”.
Net capital positions of Bonds.com Inc. were as follows at December 31, 2013 and 2012:
Bonds.com, Inc. was examined by FINRA for the periods September 2008 through June 2010 and July 2011 through January 2012. During the examinations FINRA identified some exceptions and referred to FINRA Enforcement the following exceptions: i) violations emanating from the expense-sharing agreement the Company had with Bonds.com, Inc., and related net capital issues; ii) objections to a revenue-sharing agreements with another broker-dealer that raised markup issues; and, iii) non-compliance with transaction agreements between member and non-member organizations. On October 4, 2013, Bonds.com Inc. executed a Letter of Acceptance, Waiver and Consent with FINRA, accepting and consenting, without admitting or denying the findings of FINRA. Bonds.com Inc. consented to the imposition of a censure and a $25,000 fine, which is included in Other Operating Expenses within the Consolidated Statement of Operations.
Note 14 - Share-Based Compensation
The Company has two equity-based compensation plans, the 2006 Equity Plan (the “2006 Plan”) and the 2011 Equity Plan (the “2011 Equity Plan”, and together with the 2006 Plan, each a “Plan” and together the “Plans”), which are effective for 10 years. In May 2012, the Board of Directors adopted a measure to increase the number of shares in the 2011 plan by 187,500 to a total of 500,000 shares. The 2006 Plan and 2011 Equity Plan provides for a total of 32,835 and 500,000 shares, respectively, to be allocated and reserved for the purposes of offering non-statutory stock options to employees, consultants and non-employee directors and incentive stock options to employees. If any option expires, terminates or is terminated or canceled for any reason prior to exercise in full, the shares subject to the unexercised portion shall be available for future options granted under the respective Plan. Options become exercisable over various vesting periods depending on the nature of the grant. Certain option awards provide for accelerated vesting if there is a change in control (as defined in the Plans).
The exercise price of both incentive and non-statutory options may not be less than 100% of the fair market value of the common stock on date of grant; provided, however, that the exercise price of an incentive stock option granted to a holder of at least ten percent (10%) of total issued and outstanding common stock shall not be less than 110% of the fair market value of the shares of common stock. As of September 30, 2013, the Company had 77,137 shares of Common Stock available for the future grant of options under the 2011 Equity Plan, and 11,951 shares of Common Stock available for the future grant of options under the 2006 Plan.
On April 25, 2013, the Parent implemented a 1-for-400 reverse split of the Parent’s common stock, $0.0001 par value per share (“Reverse Stock Split”). Trading of the common stock on a post-Reverse Stock Split adjusted basis on the OTCQB Market began on April 26, 2013. All historic share and per share information, in these financial statements have been retroactively adjusted to reflect the Reverse Stock Split.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 20, 2013, the Company’s Board of Directors determined that the previously issued employee stock options no longer served their original purpose of providing incentives to employees because the exercise prices for such options were well in excess of the current fair market value of the Common Stock. To address this concern, the Company adopted an omnibus amendment on June 20, 2013 to amend the terms of all outstanding non-qualified employee stock options issued to existing employees under the Company’s 2011 Equity Plan (the “Omnibus Amendment”), including non-qualified stock options issued to Thomas Thees (a Consultant, and the Company’s former Chief Executive Officer), George O’Krepkie (the Company’s President and Interim Co-Chief Executive Officer), and John Ryan (the Company’s Chief Financial Officer and Chief Administrative Officer and Interim Co-Chief Executive Officer). Additionally, the Company and Mr. O’Krepkie entered into the Amendment No.1 to Non-Qualified Stock Option Agreements (the “O’Krepkie Amendment”), dated as of June 20, 2013, pursuant to which the parties amended the terms of the non-qualified stock options issued to Mr. O’Krepkie on February 2, 2011.
On December 12, 2013, the Company and Mr. Thees entered into a Consulting Agreement, which resulted in the acceleration of recognizing compensation expense pertaining to Mr. Thees’ award. At December 31, 2013, the Company recognized approximately $1,034,000 of additional compensation expense associated with the acceleration.
Under the Omnibus Amendment and the O’Krepkie Amendment, the exercise price of the options subject to such amendments has been reduced to $8.35 per share, which was the most recent closing price as of the date of grant as reported on the OTCQB Marketplace. The number of shares, the terms of vesting, and the expiration date for each of the non-qualified stock options remain unchanged by such amendments.
As a result of the re-pricing of the stock options, additional compensation expense of approximately $627,000 will be charged to operations over the vesting period of the stock options. During the year ending December 31, 2013, approximately $502,000 of additional compensation expense, was charged as a result of the re-pricing.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity related to options granted to employees under the Plans and related information for the years ended December 31, 2013 and 2012 is provided below:
Stock option activity related to options granted outside the Plans to both employees and non-employees and related information for the years ended December 31, 2013 and 2012 is provided below:
The Company granted an aggregate of 58,965,534 options outside the Plans, of which 9,500,000 was granted to non-employees.
The weighted-average grant date fair value of options granted to employees and non-employee directors during the years ended December 31, 2013 and 2012 was $0.03 and $0.03, respectively. Options granted to non-employee directors during the year ended December 31, 2013 with a fair value of $455,994 was for payment of previously accrued director’s compensation for the year ended December 1, 2012. Options granted to non-employee directors during the year ended December 1, 2012 with a fair value of $278,000, was for partial payment of previously accrued director’s compensation of $271,000 and $146,000 for the years ended December 31, 2011 and 2010, respectively. Options granted to non-employee directors have a three-year life, and were fully vested at the grant date. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions:
The weighted-average expected life for the options granted in 2013 reflects the alternative simplified method permitted by authoritative guidance, which defines the expected life as the average of contractual term of the options and the weighted-average vesting period for all option tranches. Expected volatility for the 2013 option grants is based on an average of the Company’s volatility plus comparable companies over the same number of years as the expected life.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2013, there was approximately $307,000 of unrecognized compensation cost related to options issued. This amount is expected to be recognized over the remaining estimated life of the options, which on a weighted-average basis is approximately 2.5 years.
There were no options exercised during the years ended December 31, 2013 and 2012. Tax benefits related to option exercises were not deemed to be realized as net operating loss carry-forwards are available to offset taxable income computed without giving effect to the deductions related to option exercises.
Non-cash compensation expense relating to stock options was calculated by using the Black-Scholes option pricing model, amortizing the value calculated over the vesting period and applying a zero forfeiture percentage as estimated by the Company’s management, using historical information. The Company has elected to recognize compensation cost for option awards that have graded vesting schedules on a straight-line basis over the requisite service period for the entire award. For the years ended December 31, 2013 and 2012, the non-cash compensation expense relating to option grants amounted to $2,684,582 and $1,965,722, respectively. The compensation expense is included in payroll and related costs in the consolidated statements of operations.
Note 15 - 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.
The components of the provision for income taxes from continuing operations are as follows for the years ended December 31, 2013 and 2012:
Significant items comprising the deferred tax assets and deferred tax liabilities are as follows at December 31, 2013 and 2012:
The change in valuation allowance in the year was $3,462,000.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These amounts have been presented in the Company’s financial statements as follows:
The amounts and corresponding expiration dates of the Company’s federal unused net operating loss carry forwards as shown in the following table at December 31, 2013:
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s effective income tax (benefit) rate for continuing operations differs from the statutory federal income tax benefit rate as follows:
In accordance with certain provisions of the Tax Reform Act of 1986 a change in ownership of greater than fifty percent (50%) of a corporation within a three (3) year period will place an annual limitation on the corporation’s ability to utilize its existing tax carryforward losses. The Company’s management has not performed this analysis, but based on the various issuances of equity during the last two fiscal years, the Company believes that the utilization of its net operating loss carryforwards will be limited under Section 382 of the Internal Revenue Code. The proposed sale of the Company to MTS as discussed earlier will constitute an ownership change and will limit the utilization of the net operating loss carry-forwards.
Note 16 - Subsequent Events
Merger Agreement with MTS
On March 5, 2014, the Company entered into the merger agreement (the “Merger Agreement”) with MTS Markets International, Inc. (“MTS”), an affiliate of the London Stock Exchange Group, pursuant to which a wholly-owned subsidiary of MTS will merge with and into the Company, resulting in the Company becoming a subsidiary of MTS. Pursuant to the Merger Agreement, the Company will receive proceeds of approximately $15 million in cash, subject to adjustments based on the amount of transaction expenses, certain closing liabilities, and a working capital adjustment. We refer to this amount, as adjusted, as the “Merger Consideration.”
Pursuant to the Merger Agreement, the outstanding shares of the Company’s preferred and common stock, other than shares owned by the Company and MTS (which will be cancelled) and shares for which appraisal rights are properly exercised and not withdrawn under Delaware law (which will also be cancelled), will automatically be converted into the right to receive allocations of the Merger Consideration. The Company has five series of preferred stock with specified liquidation preferences outstanding, of which the Series E-2 Preferred is the most senior for a transaction of this size. Because the amount of Merger Consideration is (a) less than the total stated value of the Series E Preferred, Series E-1 Preferred and Series E-2 Preferred, collectively, and (b) substantially less than the aggregate minimum liquidation preference of the Series E-2 Preferred, all Merger Consideration will be paid to the holders of the Series E-2 Preferred. Holders of the Company’s common stock, Series A Preferred, Series C Preferred, Series E Preferred, and Series E-1 Preferred will not receive any consideration. Holders of options and warrants will have the opportunity to exercise their options and warrants prior to the Merger. From and after the completion of the Merger, holders of options and warrants outstanding immediately prior to the Merger will not receive any consideration in respect thereof.
The Merger Agreement may be terminated by either the Company or MTS, among other reasons, if the Merger has not been consummated by June 30, 2014. In addition, the Merger Agreement also includes customary fiduciary out and termination provisions for the Company and MTS and provides that, in connection with the termination of the Merger Agreement under specified circumstances (including, without limitation, the Company’s Board of Directors changing its approval or recommendation of the Merger or the Merger Agreement), the Company will be required to pay MTS a termination fee of 5% of the Company’s enterprise value based on the transaction.
The proposed merger has been approved by the Company’s Board of Directors and its stockholders and remains subject to certain additional conditions and approval of regulatory authorities. There are no assurances that the Merger will be consummated on the expected timetable (during the second quarter of 2014), or at all.
BONDS.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bridge Loan Financing
On February 26, 2014, the Company issued secured promissory notes in the aggregate principal amount of $1,500,000 to Mida Holdings, Daher Bonds Investment Company, Oak Investment Partners XII, Limited Partnership, GFINet Inc. and Trimarc Capital Fund, L.P., (each of the notes, a “Bridge Note,” and collectively, the “Bridge Notes”), all of whom are current holders of various issues of the Company’s preferred stock. The proceeds from the Bridge Notes were used to pay down the Company’s liability to its operating subsidiary, Bonds.com, Inc.
The Bridge Notes will accrue simple interest at a rate of 10% per annum, payable upon maturity. Each Bridge Note has a maturity date of the earlier of (i) May 26, 2014 and (ii) the date of any change of control of the Company.
The Bridge Notes are subject to customary events of default, and provide customary remedies upon an event of default and restrict the incurrence of additional indebtedness.
The Bridge Notes are secured by a first priority security interest and lien in the capital stock of the Company and the Company’s operating subsidiary, Bonds.com, Inc. pursuant to the terms of a Pledge Agreement (the “Pledge Agreement”). Under the Pledge Agreement, upon an event of default, the collateral agent, on behalf of the holders of Bridge Notes, may take possession of the capital stock of the Company and all funds generated therefrom and may liquidate the capital stock, among other options.
The proceeds from the Bridge Notes shall be used for working capital purposes. Until closing of any Change of Control transaction, as defined in the Bridge Notes, there are restrictions as to how the proceeds may be utilized..