bci-10k_123112.htm

(7) Comprised of (a) 16,958,130 issued and outstanding shares of Common Stock owned by Fund Holdings LLC, of which Mr. Knetzger is the manager, (b) 5,129,150 issued and outstanding shares of Common Stock owned by Mr. Knetzger, (c) 500,000 shares of Common Stock that Mr. Knetzger has the right to acquire within 60 days upon the exercise of outstanding stock options, (d) 2,134 shares of Series E Preferred and 300 shares of Series E-2 Preferred owned by Bonds MX, LLC of which Mr. Knetzger is a member, (e) 17,331,739 shares beneficially owned by John J Barry IV, in which Fund Holdings LLC and Mr. Knetzger, as its manager, may be deemed to have beneficial ownership pursuant to the Voting Agreement, and (f) 20,639,294 shares beneficially owned by John J. Barry III, in which Fund Holdings LLC and Mr. Knetzger, as its manager, may be deemed to have beneficial ownership pursuant to the Voting Agreement. Mr. Knetzger disclaims beneficial ownership of the shares beneficially owned by either of John J. Barry IV and John J. Barry III and this Annual Report shall not be construed as an admission that Mr. Knetzger is the beneficial owner of any such shares. 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. Does not include 6,000,000 shares of Common Stock which John J. Barry, IV may acquire within 60 days upon the exercise of a stock option. The address for Mr. Knetzger is c/o DivcoWest, 575 Market Street, 35th Floor, San Francisco, California 94105.

(8) Comprised of shares that Mr. Lockhart has the right to acquire within 60 days upon the exercise of stock options.

(9) Comprised of shares that Mr. O’Krepkie has the right to acquire within 60 days upon the exercise of stock options.

(10) Comprised of (a) 266,660 issued and outstanding shares of Common Stock owned by Mr. Ryan and (b) shares that Mr. Ryan has the right to acquire within 60 days upon the exercise of stock options.

(11) Comprised of shares that Mr. Thees has the right to acquire within 60 days upon the exercise of stock options.

(12) Comprised of (a) 28,665,362 shares of Common Stock issuable upon conversion of shares of Series E-2 Preferred owned of record by Trimarc Capital Fund, LP (“Trimarc”), and (b) 28,571,429 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.

(13) Comprised of 135,707,044 shares of Common Stock issuable upon the conversion of Series C Preferred, Series E Preferred and Series E-2 Preferred held of record by Oak Investment Partners XII, Limited Partnership (“Oak”), and (b) 100,000,000 shares of Common Stock issuable upon conversion of warrants to purchases shares of Common Stock owned of record by Oak. The Series C Preferred listed include approximately 2,639 shares of Series C Preferred with respect to which Oak may be deemed to have beneficial ownership but are subject to an escrow arrangement and potential forfeiture based on the terms of the Company’s Asset Purchase Agreement, dated February 2, 2011, with Beacon Capital Strategies, Inc. 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 described elsewhere in this Annual Report, 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.

(14) Comprised of (a) 93,071,155 shares of Common Stock issuable upon conversion of shares of Series E-2 Preferred owned of record by DBIC, and (b) 85,714,286 shares of Common Stock issuable upon exercise of warrants to purchase 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 Annual Report, 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.

(15) Comprised of 88,526,996 shares of Common Stock issuable upon the conversion of Series E Preferred and Series E-2 Preferred held of record by GFINet, Inc. (“GFI”), and (b) 78,571,429 shares of Common Stock issuable upon conversion of warrants to purchases shares of Common Stock owned of record by GFI. 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 Annual Report, 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, NY 10041.

(16) Comprised of (a) 62,047,436 shares of Common Stock issuable upon conversion of shares of Series E-2 Preferred owned of record by Mida, and (b) 57,142,857 shares of Common Stock issuable upon exercise of warrants to purchase 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 Annual Report, 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.

(17) Comprised of (a) 16,958,130 issued and outstanding shares of Common Stock owned by Fund Holdings LLC, of which Mr. Knetzger is the manager, (b) 17,331,739 shares beneficially owned by John J Barry IV, in which Fund Holdings LLC may be deemed to have beneficial ownership pursuant to the Voting Agreement, and (c) 20,639,294 shares beneficially owned by John J. Barry III, in which Fund Holdings LLC may be deemed to have beneficial ownership pursuant to the Voting Agreement. Fund Holdings LLC disclaims beneficial ownership of the shares beneficially owned by either of John J. Barry IV and John J. Barry III and this Proxy Statement shall not be construed as an admission that Fund Holdings LLC is the beneficial owner of any such shares. Fund Holdings LLC and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Annual Report, which includes provisions with respect to the voting for members of the Company’s Board of Directors. 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.

(18) Comprised of (a) 38,233,328 shares of Common Stock issuable upon conversion of shares of Series E Preferred and Series E-2 Preferred owned of record by Bonds MX, LLC, and (b) 32,857,143 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, 90 Park Avenue, 31st Floor, New York, New York 10016, Att: Hugh Regan.

(19) Comprised of (a) 32,623,255 shares of Common Stock issuable upon conversion of shares of Series E Preferred owned of record by Jefferies & Company, Inc. (“Jefferies”), and (b) 28,571,429 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 Annual Report, 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.

(20) Comprised of (a) 28,665,362 shares of Common Stock issuable upon conversion of shares of Series E-2 Preferred owned of record by Trimarc Capital Fund, LP (“Trimarc”), and (b) 28,571,429 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.

(21) Includes (a) 289,487 issued and outstanding shares of Common Stock owned by Laidlaw & Company (UK) LTD, (b) 52,947 issued and outstanding shares of Common Stock owned by Laidlaw Holdings, PLC, (c) 8,327,484 issued and outstanding shares of Common Stock owned by Laidlaw Venture Partners III, LLC, and (d) 15,000,000 shares of Common Stock issuable to Laidlaw & Company (UK) LTD upon exercise of a warrant to purchase shares of Common Stock.

(22) Comprised of (a) 15,639,294 shares of common stock held jointly by Mr. Barry with his spouse, Holly A.W. Barry, as tenants by the entirety, and (b) 5,000,000 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) Comprised of 20,936,854 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by BR Trust.

(24) Comprised of (a) 266,660 issued and outstanding shares of Common Stock owned by Mr. Sanderson and (b) shares that Mr. Sanderson has the right to acquire within 60 days upon the exercise of stock options.

(25) Comprised of (a) 3,375,000 shares of Common Stock held by the John J. Barry, IV Revocable Trust, (b) 10,000,000 shares of Common Stock held by Otis Angel LLC, (c) 3,956,739 shares of Common Stock held by Siesta Capital LLC, and (d) 6,000,000 shares 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 (a) 5,526,607 shares of Common Stock, (b) 3,571,429 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock, and (c) 4,203,865 shares of Common Stock issuable upon conversion of shares of Series E Preferred. Mr. Jones and certain other security holders of the Company are parties to the Series E Stockholders’ Agreement described elsewhere in this Annual Report, 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.

(27) Comprised of (a) 7,755,930 shares of Common Stock issuable upon conversion of shares of Series E-2 Preferred owned of record by XOL Holding S.A.L. (“XOL”), and (b) 7,142,857 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 Annual Report, 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.

(28) Comprised of 4,896,726 shares of Common Stock issuable upon the conversion of Series E Preferred and Series E-2 Preferred held of record by Plough Penny Partners (“Plough Penny”), and (b) 4,285,714 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 Annual Report, 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, NY 10012.

(29) Comprised of 199,075 shares of Common Stock issuable upon the conversion of Series C Preferred held of record by Mr. Weisberger and (b) shares that Mr. Weisberger has the right to acquire within 60 days upon the exercise of stock options.

(30) Comprised of shares of Common Stock issuable upon exercise of a warrant to purchase Common Stock.

(31) Comprised of (a) 3,337,901 shares of Common Stock issuable upon conversion of shares of Series E Preferred owned of record by Mr. Coons, and (b) 2,857,143 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 Annual Report, 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.

(32) Comprised of (a) 93,071,155 shares of Common Stock issuable upon conversion of shares of Series E-2 Preferred owned of record by Daher Bonds Investment Company (“DBIC”), (b) 85,714,286 shares of Common Stock issuable upon exercise of warrants to purchase shares of Common Stock owned of record by DBIC, (c) 62,047,436 shares of Common Stock issuable upon conversion of shares of Series E-2 Preferred owned of record by Mida Holdings (“Mida”), and (d) 57,142,857 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.

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012 and 2011

TABLE OF CONTENTS

Reports of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets as of December 31, 2012 and 2011	F-3

Consolidated Statements of Operations for the years ended December 31, 2012 and 2011	F-4

Consolidated Statements of Changes in Stockholders’ Deficit for years ended December 31, 2012 and 2011	F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011	F-6

Notes to Consolidated Financial Statements	F-7

F-1

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, 2012 and 2011, and the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the years then ended. 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 audit.

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, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2012, 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.

/s/EisnerAmper LLP

New York, New York

March 26, 2013

F-2

BONDS.COM GROUP, INC.

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2012			2011
Assets
Current assets
Cash and cash equivlents	$	5,536,229		$	8,309,192
Prepaid expenses and other assets		153,287			185,757
Total current assets		5,689,516			8,494,949

Property and equipment, net		475,815			159,439
Intangible assets, net		1,722,959			908,850
Other assets		110,047			60,267
Total assets	$	7,998,337		$	9,623,505

Liabilities and Stockholders’ Deficit
Current liabilities
Accounts payable and accrued expenses	$	3,582,224		$	5,015,622
Notes payable, related parties		—			100,000
Convertible notes payable, other, net of debt discount		396,735			—
Convertible notes payable, related parties		—			1,740,636
Other liabilities		—			107,032
Liability under derivative financial instruments		5,793,857			7,479,000
Total current liabilities		9,772,816			14,442,290
Long-term liabilities
Convertible notes payable, other, net of debt discount					391,038
Deferred rent		53,164			25,899
Total liabilities		9,825,980			14,859,227
Commitments and contingencies
Stockholders’ Deficit
Preferred stock Series A $0.0001 par value; 508,000 authorized; 85,835 issued and outstanding (aggregate liquidation value of $858 and $858, respectively)		8			8
Convertible preferred stock Series B $0.0001 par value; 20,000 authorized, 0 issued and outstanding (aggregate liquidation value of $0 and $0, respectively)		—			—
Convertible preferred stock Series B-1 $0.0001 par value; 6,000 authorized, 0 issued and outstanding (aggregate liquidation value of $0 and $0, respectively)		—			—
Convertible preferred stock Series C $0.0001 par value;10,000 authorized, 10,000 issued and outstanding (aggregate liquidation value of $6,500,000 and $6,500,000, respectively)		1			1
Convertible preferred stock Series D $0.0001 par value; 14,500 authorized, 0 issued and outstanding (aggregate liquidation value of $0 and $0, respectively)		—			—
Convertible preferred stock Series D-1 $0.0001 par value; 1,500 authorized, 0 issued and outstanding (aggregate liquidation value of $0 and $0, respectively)		—			—
Convertible preferred stock Series E $0.0001 par value; 12,000 authorized, 11,831 issued and outstanding (aggregate liquidation value of $24,678,494 and $23,729,420, respectively)		1			1
Convertible preferred stock Series E-1 $0.0001 par value; 1,400 authorized, 1,334 issued and outstanding (aggregate liquidation value of $2,782,614 and $2,675,602, respectively)		—			—
Convertible preferred stock Series E-2 $0.0001 par value; 20,000 authorized, 17,000 and 10,000 issued and outstanding, respectively (aggregate liquidation value of $35,184,175 and $20,056,986, respectively)		2			1
Common stock $0.0001 par value; 1,500,000,000 authorized; 104,957,858 and 104,354,190 issued; and 97,375,008 and 104,354,190 outstanding, respectively		10,495			10,435
Additional paid-in capital		50,027,844			39,628,080
Accumulated deficit		(51,860,994	)		(44,874,248	)
Treasury stock, at cost 7,582,850 and 0 shares, respectively		(5,000	)		-
Total stockholders’ deficit		(1,827,643	)		(5,235,722	)
Total liabilities and stockholders’ deficit	$	7,998,337		$	9,623,505

See the accompanying notes to the consolidated financial statements.

F-3

BONDS.COM GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2012			2011

Revenue	$	7,561,417		$	4,322,775

Operating expenses
Payroll and related costs		7,400,957			6,995,422
Technology and communications		2,948,628			2,957,319
Rent and occupancy		280,628			917,267
Professional and consulting fees		2,309,630			2,709,765
Marketing and advertising		73,871			109,903
Other operating expenses		1,130,243			652,301
Impairment on intangible		—			924,061
Clearing and executing cost		850,514			544,495
Total operating expenses		14,994,471			15,810,533
Loss from operations		(7,433,054	)		(11,487,758	)

Other income (expense)

Interest expense, net		(63,475	)		(386,829	)
Loss on retirement of fixed assets		(18,427	)
Gain on settled derivatives					465,952
Gain (loss) on extinguishment of debt		237,857			(209,952	)
Change in value of derivative financial instruments		235,857			(3,132,107	)
Other income (expense), net		54,496			468,058
Total other income (expense)		446,308			(2,794,878	)
Loss before income tax expense		(6,986,746	)		(14,282,636	)
Income tax expense		—			(174,922	)
Net loss		(6,986,746	)		(14,457,558	)
Preferred stock dividend		(2,187,530	)		(1,821,439	)
Net loss applicable to common stockholders	$	(9,174,276	)	$	(16,278,997	)
Net loss per common share - basic and diluted	$	(0.09	)	$	(0.16	)
Weighted average number of shares of common stock outstanding		102,539,962			104,354,190

See the accompanying notes to the consolidated financial statements.

F-4

BONDS.COM GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

	Preferred Stock				Common Stock				Paid-In			Accumulated				Treasury Stock		Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			(Deficit)				Amount		Deficit)
Balances, January 1, 2011		89,335	$	8		103,694,139	$	10,369	$	21,464,512		$	(28,595,251	)	$	—		$	(7,120,362	)

Issuance of series C convertible preferred stock for the acquisition of Beacon’s assets		10,000		1		—		—		1,071,999			—			—			1,072,000

Issuance of convertible preferred series D shares of Unit sale, net of issuance cost of $331,625		8,900		1		—		—		8,561,374			—			—			8,561,375

Fair value of common stock warrants issued in conjunction with February, March, June and December 2011 Unit sales		—		—		—		—		(4,103,001	)		—			—			(4,103,001	)

February 2011 Exchange Offer – issuance of convertible preferred series D shares (2,250) for series B (2,250) and convertible preferred series D-1 (1,250) for series B-1 (1,250) resulting in preferred stock dividend		—		—		—		—		708,336			(930,501	)		—			(222,165	)

Common stock associated with the October 2010 exchange offer		—		—		660,051		66		46,138			—			—			46,204

Fair value of common stock warrants issued in conjunction with February 2011 Exchange Offer, classified as derivative financial instruments		—		—		—		—		(23,335)			—			—			(23,335)

Stock-based compensation expense		—		—		—		—		1,396,752			—			—			1,396,752

Issuance of common stock warrants for consulting services		—		—		—		—		221,514			—			—			221,514

Issuance of convertible preferred series E-2 shares of Unit sale, net of issuance cost of $480,000		10,000		1		—		—		9,519,999			—			—			9,520,000

December 2011 Exchange Offer – issuance of convertible preferred series E shares (11,831) for series D (11,150) and convertible preferred series E-1(1,334) for series D-1 (1,250) including an accrued preferred stock dividend		765		—		—		—		763,792			(763,792	)		—			—

Dividends to preferred shareholders		—		—		—		—		—			(127,146	)		—			(127,146	)

Net (loss)		—		—		—		—		—			(14,457,558	)		—			(14,457,558	)

Balances at December 31, 2011		119,000	$	11		104,354,190	$	10,435	$	39,628,080		$	(44,874,248	)	$	—		$	(5,235,722	)

Sale of convertible preferred series E-2 shares of Unit sale, net offering cost $33,293		7,000		1		—		—		6,966,706			—			—			6,966,707

Fair value of common stock warrants issued in conjunction with sale of convertible preferred Series E-2 shares		—		—		—		—		(2,517,000	)		—			—			(2,517,000	)

Stock-based compensation expense		—		—		—		—		1,687,722			—			—			1,687,722

Issuance of stock options in settlement of liability for directors fees		—		—		—		—		278,000			—			—			278,000

Derivative liability related to warrants whose down-round protection expired		—		—		—		—		3,966,286			—			—			3,966,286
Issuance of common stock in settlement of performance shares		—		—		603,668		60		18,050			—			—			18,110

Purchase of 7,582,850 shares of common stock		—		—		—		—		—			—			(5,000	)		(5,000	)

Net (loss)		—		—		—		—		—			(6,986,746	)		—			(6,986,746	)

Balances at December 31, 2012		126,000	$	12		104,957,858	$	10,495	$	50,027,844		$	(51,860,994	)	$	(5,000	)	$	(1,827,643	)

See the accompanying notes to the consolidated financial statements.

F-5

BONDS.COM GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Year Ended December 31,
	2012			2011
Cash Flows From Operating Activities
Net loss	$	(6,986,746	)	$	(14,457,558)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		—			174,920
Depreciation		179,348			56,786
Amortization		6,933			178,848
Share-based compensation		1,687,722			1,396,752
Interest expense write off		(27,350	)		—
Gain on settled derivatives		—			(465,952	)
Change in value of derivative financial instruments		(235,857	)		3,132,107
Amortization of debt discount		5,697			14,310
Exchange offer financing		—			46,207
Consulting services for warrants		73,809			147,705
Extinguishment of debt		(237,857	)		209,952
Gain on settlement of common stock due to note holders		(88,922	)		—
Impairment on intangible		—			924,061
Loss on retirement of fixed assets		18,427			—
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(41,339	)		(19,721	)
Other assets		33,529			—
Security deposit		(83,308	)		6,716
Accounts payable and accrued expenses		(890,193	)		(189,840	)
Other liabilities		—			107,032
Deferred rent		27,265			(15,608	)
Net cash used in operating activities		(6,558,842	)		(8,753,283	)
Cash Flows From Investing Activities
Purchase of property and equipment		(514,150	)		(133,058	)
Capitalization of software costs		(821,042	)		—
Net cash used in investing activities		(1,335,192	)		(133,058	)
Cash Flows From Financing Activities
Proceeds received from issuance of preferred stock, net		6,966,707			18,081,375
Repayments of notes payable, other		—			(82,000	)
Repayments of notes payable, related parties		(100,000	)		(200,000	)
Repayments of convertible notes payable, related parties		—			(850,000	)
Repayments of convertible notes payable, other		(1,740,636	)		(675,000	)
Purchase of treasury stock		(5,000	)		—
Net cash provided by financing activities		5,121,071			16,274,375
Net increase (decrease) in cash and cash equivalents		(2,772,963	)		7,388,034
Cash and cash equivlaents, beginning of year		8,309,192			921,158
Cash and cash equivlaents, end of year	$	5,536,229		$	8,309,192

Supplemental Disclosure of Cash Flow Information
Cash paid for interest	$	409,364		$	171,466
Settlement of derivative in connection with warrants whose down-round protection expired	$	3,966,286		$	—
Issuance of stock options in settlement of liability for directors fees	$	278,000		$	—
Warrants issued in connection with unit sales	$	2,517,000		$	4,103,001
Warrants issued at Exchange offer	$	—		$	23,335
Issuance of preferred stock for assets acquisition	$	—		$	1,072,000
Accrual of preferred stock dividends (undeclared)	$	2,187,530		$	1,821,439
Issuance of common stock for performance shares	$	18,110		$	—

See the accompanying notes to the consolidated financial statements.

F-6

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.

Description of Business

Bonds.com, Inc. a Financial Industry Regulatory Authority (“FINRA”) registered broker-dealer, offers corporate bonds, through its proprietary electronic trading platforms, via its www.Bondpro.com website, and other electronic interfaces.

Bonds.com, Inc., commenced trading on it BondsPRO electronic platform during 2010. 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.

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.

Software Development Costs

Costs for software developed for internal use are accounted for through the capitalization of certain costs incurred in connection with developing or obtaining internal-use software. Capitalized costs for internal-use software are included in intangible assets in the consolidated balance sheet. Capitalized software development costs are amortized over three years.

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. At December 31, 2012, the Company had $788,125 in capitalized software development of which the entire balance was fully capitalized during 2012. Software development capitalized in 2012 will be placed in service in stages beginning in 2013/2014 and the Company will begin amortizing over the software's estimated economic life. For the year ended December 31, 2012, amortization expense for software development capitalized in 2012 was zero.

F-7

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 is 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.


Category	Lives
Leased property under capital leases	3 years
Computer equipment	3 years
Furniture and fixtures	5 years
Office equipment	5 years
Leasehold improvements	Length of lease

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. 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 though undiscounted forecasted cash flows.

Category	Lives
Software	3 years
Software development costs	3 years
Website development costs	3 years
Domain name	Indefinite
Broker dealer license	Indefinite

Impairment of Long-Lived Assets

The Company reviews its long-lived assets, both property and equipment and definite-lived intangible assets, for impairment whenever events or changes indicate that the carrying amount of an asset or group of assets may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets.

Income Taxes

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

Marketing and Advertising Costs

Marketing and advertising costs are expensed as incurred. Marketing and advertising expenses for the year ended December 31, 2012 and 2011 were $73,871 and $109,903, 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.

F-8

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $51.9 million and a working capital deficiency of approximately $4.1 million at December 31, 2012, used approximately $6.6 million of cash in operations for the year ended December 31, 2012 and at December 31, 2012 had a stockholders deficiency of approximately $1.8 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.

Derivative Financial Instruments

The Company’s derivative financial instruments consist of conversion options embedded in convertible promissory notes and warrants issued in connection with the sale of common and preferred stock that contain “down-round” protection to the holders. These derivatives are valued with pricing models using inputs that are generally observable. The Company considers these models to involve significant judgment on the part of management. The fair values 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 instrument's expected term, expected strike price, expected risk-free interest rate over the expected instrument term, the expected dividend yield rate over the expected instrument term and the expected volatility of the Company’s stock price over the expected term. The expected term represents the period of time that the instruments granted are expected to be outstanding. The expected strike price is based upon a weighted average probability analysis of the strike price changes expected during the term as a result of the down round protection. The risk-free rates are based on U.S. Treasury securities with similar maturities as the expected terms of the options at the date of issuance. Expected dividend yield is based on historical trends. 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.

Commencing with the quarter ended March 31, 2011, the Company changed its methodology for measuring the market price of its common stock which was previously based on its over-the-counter market trading price. The Company determined that the historical prices and trading volume of its publicly-traded common stock were no longer sufficient to determine the readily determinable fair value of the Company’s stock. The over-the-counter market has not been active and private sales of the Company’s shares sold have been significantly lower than the historical trading price. The Company now obtains an independent valuation for determining the market price of its common stock.

On August 2, September 4, and December 21, 2012, the down-round provision of Common Stock Warrants to purchase an aggregate of 159,285,718 shares expired. As a result, the Company revalued the warrants on the respective expiration dates and 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. The warrants were reclassified to equity at a fair value of $3,562,715 (see note 13).

F-9

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Also, on August 2, 2012, the down-round provision of Series A Participating Preferred Warrants which convert to 17,857,143 of common stock equivalents expired. As a result, the Company revalued the warrants on the expiration date and recorded a gain of $5,357 on derivative liability which is included in changes in value of derivative financial instruments, in the accompanying consolidated statement of operations. The warrants were reclassified to equity at a fair value of $403,571 (see note 13).

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, 2012 and 2011 are as follows:

			Quoted Prices in Active Markets for Identical Assets / Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31 , 2012

Liabilities
Derivative financial instruments	$	5,793,857	$	—	$	—	$	5,793,857
Total liabilities measured at fair value on a recurring basis	$	5,793,857	$	—	$	—	$	5,793,857

December 31, 2011

Liabilities
Derivative financial instruments	$	7,479,000	$	—	$	—	$	7,479,000
Total liabilities measured at fair value on a recurring basis	$	7,479,000	$	—	$	—	$	7,479,000

Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains for liabilities within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs. The following table presents additional information about Level 3 liabilities measured at fair value on a recurring basis for the years ended December 31, 2012 and 2011:

	Fair Value of Derivative Liabilities

Balance – December 31, 2010	$	464,844
Changes in fair value included in operations		3,132,107
Issuances and settlements		3,882,049
Balance – December 31, 2011		7,479,000

Changes in fair value included in operations		(235,857	)
Expiration of down round provision		(3,966,286	)
Issuances		2,517,000
Balance - December 31, 2012	$	5,793,857

The change in value of derivative financial instruments included in the December 31, 2012 and 2011 statements of operation are related to Level 3 instruments held.

F-10

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Quantitative information about Level 3 Fair Value Measurements

	Fair Value at 12/31/12		Valuation Technique	Unobservable Inputs	Range		(Weighted Average)

Derivative liability	$	5,793,857	Binomial lattice pricing model	Market price	$	0.03	$0.03
				Probability strike price	$	0.03 - $0.07	$0.0635
				Expected term/life (years)		3.93 - 4.44	4.13
				Dividend yield		0.00%	0.00%
				Expected volatility		182.67% - 185.96%	183.98%
				Risk-free rate for expected life		0.54% - 0.72%	0.61%

The significant inputs used in the fair measurement of the Company’s derivative financial instruments are the probability, strike price and the expected volatility. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement.

The weighted-average fair value of warrants outstanding for the year ended December 31, 2012 was $0.024.

Note 5 - Property and equipment

Property and equipment consisted of the following at December 31, 2012 and 2011:

	December 31, 2012
	Gross		Accumulated Depreciation and Amortization			Net


Computer equipment	$	407,962		(138,894	)	$	269,068
Furniture and fixtures		19,776		(3,853	)		15,923
Office equipment		2,552		(496	)		2,056
Leasehold improvements		254,679		(65,911	)		188,768
Property and Equipment, net	$	684,969	$	(209,154	)	$	475,815

	December 31, 2011
	Gross		Accumulated Depreciation and Amortization			Net

Leased property under capital leases	$	209,757		(209,757	)	$	—
Computer equipment		349,534		(215,265	)		134,269
Furniture and fixtures		46,904		(40,633	)		6,271
Office equipment		111,177		(94,501	)		16,676
Leasehold improvements		10,372		(8,149	)		2,223
	$	727,744	$	(568,305	)	$	159,439

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, 2012 and 2011 was $179,348 and $56,786, respectively.

F-11

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 - Intangible Assets

Intangible assets consisted of the following at December 31, 2012 and 2011:

	December, 31 2012
	Gross		Accumulated Amortization			Net
Non-amortizing intangible assets:
Domain name (www.bonds.com)	$	850,000				$	850,000
Broker dealer license		50,000					50,000
		900,000					900,000
Amortizing intangible assets:
Software		49,891		(15,057	)		34,834
Software development costs		788,125		—			788,125
Website development costs		154,468		(154,468	)		—
Total intangible assets		992,484		(169,525	)		822,959
Intangible assets, net	$	1,892,484	$	(169,525	)	$	1,722,959

	December 31, 2011
	Gross		Accumulated Amortization			Impairment			Net
Non-amortizing intangible assets and goodwill:
Domain name (www.bonds.com)	$	850,000							$	850,000
Broker-dealer license		50,000								50,000
Goodwill		99,000				$	(99,000	)		—
		999,000					(99,000	)		900,000

Amortizing Intangible assets:
Software		431,996		(424,139	)					7,858
Website development costs		196,965		(195,973	)					992
Other		979,529		(154,468	)		(825,061	)		—
Total intangible assets		1,608,490		(774,580	)		(825,061	)		8,850
Intangible assets, net	$	2,607,490	$	(774,580	)	$	(924,061	)	$	908,850

Amortization expense for the year ended December 31, 2012 and 2011 was $6,933 and $178,848, respectively and is included in technology and communications in the consolidated statements of operations.

Intangible assets of $924,061 resulting from the acquisition of Beacon Capital Strategies, Inc. ("Beacon") in February 2011 (See Note 8), of which $99,000 is goodwill, net of amortization of $147,939, were abandoned and charged to operations in the fourth quarter of 2011.

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, based on the expected placed in service dates as of December 31, 2012:

Year Ending December 31,
2013	$	41,151
2014		272,718
2015		274,715
2016		234,375
	$	822,959

Note 7 - Accounts Payable and Accrued Expenses

The following is a summary of accounts payable and accrued expenses at December 31, 2012 and 2011:

	2012		2011
Accounts payable	$	149,059	$	708,503
Payroll and related payable		874,423		441,866
Severance payable		1,039,991		1,453,298
Directors fees payable		369,500		417,000
Convertible note interest payable		149,000		709,203
Preferred dividends payable		127,650		127,650
Liability for settlement to shareholders		225,000		—
Other accrued expense		647,601		1,158,102
Accounts Payable and Accrued Expenses	$	3,582,224	$	5,015,622

F-12

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8 - Business Acquisition

On February 2, 2011, the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Beacon whereby it purchased substantially all of the assets of Beacon. Beacon previously was engaged in the development and offering of an electronic trading platform for trades in mortgage-backed and asset-backed securities. As consideration for the purchase of the Beacon assets, the Company issued to the former shareholders of Beacon 10,000 shares of Series C Convertible Preferred Stock (“Series C” Preferred). The shares of Series C Preferred issued to Beacon are convertible into 25,000,000 shares of the Company’s Common Stock. As a result of an independent valuation, the fair value of the consideration given and the net assets and liabilities acquired, was determined to be $1,072,000.

The following table summarizes management’s fair values of the assets acquired and liabilities assumed at the date of acquisition.

Assets acquired:
Intangible Assets
Trade Name / Trademarks	$	10,000
Technology		641,000
Customer Relationships		322,000
Goodwill		99,000
Total assets acquired	$	1,072,000

Liabilities assumed		—
Total net assets acquired	$	1,072,000

In 2011, the Company ceased operations of the assets acquired from Beacon. The financial statements reflect a charge to operations of $924,061, net of amortization of $147,939, for the impairment of those assets.

Note 9 - Notes Payable, Related Parties

The following is a summary of related party notes payable at December 31, 2012 and 2011:

	2012		2011
Note payable held by Receiver	$	—	$	100,000
Total		—		100,000
Less: current portion		—		(100,000	)
Long-term portion	$	—	$	-

Note payable held by Receiver

Interest expense recognized on related party notes payable for the years ended December 31, 2012 and 2011 was $2,725 and $11,875, respectively. This note and accrued interest was repaid in April 2012.

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

The following is a summary of related party and non-related party convertible notes payable at December 31, 2012 and 2011:

Related Parties	2012			2011
Convertible promissory note held by the Receiver ("Convertible Promissory Notes")	$	—		$	1,740,636
Total Related Parties		—			1,740,636

Non-Related Parties
Convertible promissory notes payable ("Convertible Notes")		400,000			400,000
Less: unamortized debt discount		(3,265	)		(8,962	)
Total Non-Related Parties		396,735			391,038

Total		396,735			2,131,674
Less: current portion		—			(1,740,636	)
Long-term portion	$	396,735		$	391,038

F-13

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The convertible promissory notes are 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, 2012 and 2011, the Company recognized $5,697 and $14,309 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, 2012 and 2011, the Company also recognized $93,369 and $350,237 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 is due and payable on October 12, 2013 (the “Maturity Date”); bear 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 have the right to convert principal and interest due and payable into shares of common stock of the Company at a conversion price equal to the lesser of (1) $0.375 per share, as adjusted for stock splits, and reverse splits, or (2) the price paid for the Company’s common stock in any future sale of the Company’s securities while the Convertible Notes are outstanding, exclusive of certain excluded transactions.

The 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 February 2, 2011, the Company sold securities with an effective price per common share of $0.07. Accordingly, the conversion price of the Subject Notes was set at $0.07 per common share and there was no longer a “full-ratchet” adjustment. As a result, the Company recorded a gain on settled derivative of $465,952.

On December 28, 2011, the Company entered into and consummated a Repayment and Termination Agreement with certain Note holders of the Company. The Noteholders had secured convertible promissory notes aggregating $1,109,106 of principal and accrued interest (the “Notes”), warrants to purchase an aggregate of 566,673 shares of the Company’s common stock; and Contingent Performance Shares up to an aggregate of 3,541,667 shares of the common stock. Pursuant to the Repayment and Termination Agreement, the Company paid the Noteholders an aggregate of $873,037 and, in exchange, warrants and rights to Contingent Performance Shares were terminated. This agreement resulted in the Company recording a gain of $231,512 which was recorded in other expenses (net).

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.

F-14

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11 - Commitments and Contingencies

Operating Leases

The Company leases office through October 2015 facilities (in New York, N.Y.) and equipment and obtains data feeds under long-term operating lease agreements with various expiration dates and renewal options. These data feeds and associated equipment provide information from financial markets that are essential to the Company’s business operations. The following is a schedule of future minimum rental payments required under operating leases as of December 31, 2012:

Year Ending December 31,
2013	$	872,763
2014		310,837
2015		21,676
Total minimum payments required	$	1,205,276

The Company had an office in Florida, which has been closed, but the Company was still obligated to pay rent through December 31, 2012. The full amount due through its expiration under this lease was charged to operations in 2011.

Rent expense for all operating leases for the years ended December 31, 2012 and 2011 was $280,628 and $917,267, respectively.

Customer Complaints and Arbitration

From time to time the Company’s subsidiary broker-dealer, Bonds.com, Inc., may be a defendant or co-defendant in arbitration matters incidental to its retail and institutional brokerage business. Bonds.com, Inc. may contest the allegations in the complaints in these cases and the Company carries errors and omissions insurance policy to cover such incidences. The policy terms require that the Company pay a deductible of $50,000 per incidence. The Company is not currently subject to any customer complaints or arbitration claims and therefore has not accrued any liability with regards to these matters.

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 2012 and 2011, the Company made employer-matching contributions of $26,981 and $17,780 respectively.

Employment Agreements

In May 2012 and February 2011, the Company entered into Employment agreements, as amended, with its certain executive officers. The term of these contracts was indefinite and committed the Company to the following:

●	Annual base salaries and a cash bonus at the discretion of the Compensation Committee of the Board;

●	Severance benefits as contained in the Agreements;

●	Option grants at various strike prices with vesting requirements. The options granted to the Company’s Chief Executive Officer amounted to 78 million at a strike price of $0.09. The options vest over a 3-year period from the grant date. The options granted to the Company’s President amounted to approximately 41 million options at various strike prices ranging from $0.7 to $0.105. The options vest over a 4-year period from the grant date. The options granted to the Company’s Chief Financial Officer amounted to 8 million options at a strike price of $0.75. The options vest over a 4-year period from the grant date; and

●	The amount charged to operations with respect to these options in 2012 and 2011 was $1,092,624 and $364,133, respectively.

In July of 2012, the Company entered into an Amended employment agreement with the Company’s Chief Financial Officer. This agreement provided for a change in his base salary and eliminated the annual performance bonus based on a percentage of earnings, as defined and replaced with eligibility for an annual bonus at the discretion of the Compensation Committee of the Board of Directors.

In December 2011, the Company entered into an Amended employment agreement with the Company’s President. This agreement provided for a change in his base salary and eliminated the annual performance bonus based on a percentage of revenues and replaced it with eligibility for an annual bonus at the discretion of the Compensation Committee of the Board of Directors.

F-15

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Marketing Agreement

On August 11, 2011, the Company entered into a Marketing Agreement with Red Kite Americas LLC (“Red Kite”). Pursuant to the Marketing Agreement, among other things, Red Kite has agreed to use its best efforts to market and promote the Company's trading platform to institutional investors whose principal places of business are located in Brazil, Mexico or Columbia, and the Company has agreed to compensate Red Kite for such efforts. Red Kite’s compensation comprised of (a) a flat fee in the amount of $175 for each transaction in fixed income instruments executed on our trading platform by clients referred to the Company by Red Kite (subject to certain limitations), (b) a warrant to purchase 2,857,143 shares of the Company’s common stock at an exercise price of $0.07 per share, which the Company issued to Red Kite immediately. The fair value of the warrants was $85,714 at the time of the issuance and it is being amortized to consulting expense over the contractual life. This agreement had an initial term of three years and was mutually terminated by both parties in 2012.

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.

Note 12 - Credit Risk

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

Note 13 - Stockholders' Equity

Description of Authorized Capital

Preferred Stock activity for the years ended December 31, 2012 and 2011 are as follows (there were no shares of Series B, B-1, D and D-1 outstanding) (share amounts in this chart are in thousands):

	Series A		Series B			Series B-1			Series C		Series D			Series D-1			Series E		Series E-1		Series E-2
Balance at January 1 ,2011		85,835		2,250			1,250			—		—			—			—		—		—

Issued		—		—			—			10,000		11,150			1,250			11,831		1,334		10,000

Cancelled		—		(2,250	)		(1,250	)		—		(11,150	)		(1,250	)		—		—		—

Balance at December 31, 2011		85,835		—			—			10,000		—			—			11,831		1,334		10,000

Issued		—		—			—			—		—			—			—		—		7,000

Balance at December 31, 2012		85,835		—			—			10,000		—			—			11,831		1,334		17,000

Issuances

Series A Participating Preferred Stock

On December 5, 2011, the Company amended its Certificate of Incorporation and increased the number of Series A Participating Preferred Stock to 508,000 shares.

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.

Series B Convertible Preferred Stock

On February 2, 2011, all of the shares of Series B Preferred were exchanged for shares of Series D Preferred and are no longer outstanding. Additionally, the right to receive the Performance Shares was terminated.

Series B-1 Convertible Preferred Stock

On February 2, 2011, all of the shares of Series B-1 Preferred were exchanged for shares of Series D-1 Preferred and are no longer outstanding. Additionally, the right to receive the Series A-1 Performance Shares was terminated.

Series C Convertible Preferred Stock

On February 2, 2011, the Company amended its Certificate of Incorporation and authorized the issuance of 10,000 shares of Series C Convertible Preferred Stock (the "Series C Preferred"), $0.0001 par value.

F-16

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 $0.10 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 D Preferred and Series D-1 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.

Preferred Stock Series D Issuance

On December 5, 2011, all of these shares of Series D Preferred were exchanged for shares of Series E Preferred and are no longer outstanding.

Preferred Stock Series D-1 Issuance

On December 5, 2011, all of these shares of Series D-1 Preferred were exchanged for shares of Series E-1 Preferred and are no longer outstanding.

Series E, E-1 and E-2 Convertible Preferred Stock

On December 5, 2011, the Company amended its Certificate of Incorporation and authorized the issuance of 12,000 shares of Series E Convertible Preferred Stock (the "Series E Preferred"), 1,400 shares of Series E-1 Convertible Preferred Stock (the "Series E-1 Preferred") and 20,000 shares of Series E-2 Convertible Preferred Stock (the "Series E-2 Preferred"), $0.0001 par value.

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 $0.07 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 $0.07, then the exercise price will be reduced by a “weighted-average” anti-dilution formula (subject to certain exempted issuances) the current conversion price is $0.07;

●	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 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.

F-17

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Preferred Stock Series C Issuance

On February 2, 2011, in conjunction with the Asset Purchase Agreement for the acquisition of the Beacon assets (see note 8), the Company issued 10,000 shares of Series C Preferred shares as consideration for the fair value of the purchase price of $1,072,000.

Preferred Stock Series E Issuance

On December 5, 2011, the Company entered into an Exchange Agreement with the other holders of Series D Preferred. Pursuant to the Exchange Agreement, the Company (a) issued 11,150 shares of Series E Preferred in exchange for all outstanding shares of Series D Preferred and (b) issued 681 shares of Series E Preferred in exchange for all rights with respect to accrued dividends on shares of Series D Preferred, which amounted to approximately $681,000.

As of December 31, 2012 there were cumulative undeclared dividends of approximately $1,016,000 with a weighted average price per share amount of $86.

Preferred Stock Series E-1 Issuance

On December 5, 2011, the Company entered into an Exchange Agreement with an investor. Pursuant to the Exchange Agreement, the Company (a) issued 1,250 shares of Series E-1 Preferred in exchange for all outstanding shares of Series D-1 Preferred and (b) issued 84 shares of Series E Preferred in exchange for all rights with respect to accrued dividends on shares of Series D-1 Preferred, which amounted to approximately $84,000.

As of December 31, 2012 there were cumulative undeclared dividends of approximately $115,000 with a weighted average price per share amount of $86.

Preferred Stock Series E-2 Issuance

On December 5, 2011, the Company entered into a Unit Purchase Agreement with investors. Pursuant to the Unit Purchase Agreement, the Company sold to investors an aggregate of 100 Units for a total purchase price of $10,000,000, before the deduction of transaction fees and expenses which amounted to $480,000, with each unit comprised of (a) warrants to purchase 1,428,571 shares of our Common Stock and (b) 100 shares of newly-created class of preferred stock designated as Series E-2 Preferred. The Company allocated $3,485,714 and $6,514,286 of its proceeds to the warrants and Series E-2 Preferred, respectively, using the residual method. 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 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.

As of December 31, 2012 there were cumulative undeclared dividends of approximately $1,184,000 with a weighted average price per share amount of $70.

Common Stock Issuance

On December 14, 2012, the Company issued 603,668 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 (see note 10). This resulted in the Company offsetting a liability (with a corresponding increase in common stock and additional paid-in capital) of $18,110.

F-18

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common Stock Purchase Warrants

Warrant activity for the years ending December 31, 2012 and 2011 are as follows:

	Numbers of Warrants			Weighted-Average Exercise Price
Outstanding at January 1, 2011		35,378,665		$	0.32
Issued		332,999,993			0.06
Cancelled or expired		(9,941,681	)		0.25
Exercised		—
Outstanding at December 31, 2011		358,436,977		$	0.08
Issued		99,999,999			0.06
Cancelled or expired		(5,879,789	)		0.25
Exercised		—			—
Outstanding at December 31, 2012		452,557,187		$	0.08

Weighted average grant date fair value of warrants granted during the year ended December 31, 2012				$	0.03

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 $0.07. The Company revalued the warrants on the expiration dates using a Binomial Lattice Model. The value of each warrant was estimated to be $0.0226, $0.0226 and $0.0213, 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 $0.03. 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 and 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

On February 2, 2011, the Company issued an aggregate of 13,000,000 and 15,000,000 warrants to purchase its common stock to related parties in exchange for consulting services. The warrants had an exercise price of $0.07 and $0.10 and contain a provision allowing for cashless exercise. The fair value of the warrants issued, amounting to $72,800 and $63,000, was determined using the Black-Scholes option pricing model ranging from $0.0042 to $0.0056 for both warrants utilizing the following assumptions: expected volatility of 66.00%, risk free interest rate of 2.10%, contractual term of five years and a market price of $0.02. These warrants were fully vested and as such the fair value of the warrants was charged to operations during the year ended December 31, 2011.

On August 11, 2011, the Company issued 2,857,143 warrants in exchange for marketing services to be rendered over a three year period. The warrants had an exercise price of $0.07 and contain a provision allowing for cashless exercise. The fair value of the warrants issued, amounting to $85,714, was determined using the Black-Scholes option-pricing model of $0.03 per warrant utilizing the following assumptions, expected volatility of 166.11% , risk-free interest rate of 1.02%, contractual term of five years and a market price of $0.03. The fair value of the warrants were amortized over the three year service period and charged to operations during the year ended December 31, 2011.

The Company recognized $73,809 and $147,705 in consulting expense relating to warrants awarded during the years ended December 31, 2012 and 2011, respectively, relating to warrants awarded.

Warrants issued in connection with Preferred Stock Series D & E issuances

On February 2, 2011, the Company issued warrants pursuant to the Preferred Stock Series D Unit Purchase Agreements which included provisions containing a cashless net exercise election and providing that, for a period of 18 months following the date of the Unit Purchase Agreement, if the Company issues shares of Common Stock (or is deemed to issue shares of Common Stock) for a price per share less than $0.07, then the exercise price of the Common Stock Warrants will be reduced by a “weighted-average” anti-dilution formula (subject to certain exempted issuances).

Due to the down-round provision, all warrants issued are recognized as derivative liabilities at their respective fair values on each reporting date. The fair values of these warrants were estimated using a Binomial Lattice valuation model, which is being marked-to-market each reporting period with corresponding changes in the fair value being recorded as unrealized gains or losses on derivative financial instruments in the consolidated statement of operations.

The Company issued 92,857,143 warrants in connection with the Unit Purchase Agreements. The warrants had an initial exercise price of $0.07 and a term of five years. The fair value the warrants issued at grant date, which amounted to $455,000, was determined using the a Binomial Lattice valuation model at $0.0049 per warrant utilizing the following assumptions, expected volatility of 66.00%, risk-free interest rate of 2.10%, expected term of 5 years, weighted average probability strike price of $0.0610 and a market price of $0.02.

F-19

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Additionally, on March 7, and June 23, 2011 the Company issued 5,714,286 and 28,571,429 warrants respectively in connection with the Series D Unit Purchase Agreements. The fair value of the warrants issued at grant date, which amounted to $28,000 and $134,286, was determined using a Binomial Lattice valuation model ranging from $0.0047 to $0.0049 per warrants utilizing the following assumptions, expected volatility of 66.00%, risk-free interest rate ranging from 1.49% to 2.19%, expected term of 1.5 years, weighted average probability strike price of $0.0610 and a market price of $0.02.

On December 5, 2011, the Company issued 142,857,144 warrants in connection with the Preferred Stock Series E-2 Unit Purchase Agreements. The warrants had the same terms as the Preferred Stock Series D Unit Purchase Agreements. The fair value of the warrants issued at grant date, which amounted to $3,485,715, was determined using a Binomial Lattice valuation model at $0.0244 per warrant utilizing the following assumptions, expected volatility of 166.93%, risk-free interest rate of 0.93%, expected term of 5 years, weighted average probability strike price of $0.0635 and a market price of $0.03.

Warrants issued in connection with exchange agreements

On February 2, 2011, the Company issued warrants pursuant to an Exchange Agreement which included provisions containing a cashless net exercise election and providing that, for a period of 18 months following the date of the Unit Purchase Agreement, if the Company issues shares of Common Stock (or is deemed to issue shares of Common Stock) for a price per share less than $0.07, then the exercise price of the Common Stock Warrants will be reduced by a “weighted-average” anti-dilution formula (subject to certain exempted issuances).

Related to the exchange of the 22.5 Series B Preferred for Series D Preferred Units, the Company issued 32,142,848 warrants with a fair value at grant date, amounting to $157,500.

In connection with the Exchange Agreement, the Company cancelled 9,375,008 warrants originally issued in connection with the Series B Preferred Unit sale. In connection with this exchange offer, the Company recorded a charge of $142,499 to preferred dividend expense.

Cancellation of warrants

On December 28, 2011, the Company entered into and consummated a Repayment and Termination Agreement, pursuant to the agreement, 566,673 shares of warrants were cancelled (see note 10).

At December 31, 2012, the Company was in negotiations with a shareholder to settle a pending matter regarding existing warrants and options. On March 6, 2013, the Company entered into and consummated a Cancellation and Issuance Agreement, pursuant to which 20,936,854 warrants for the purchase of common stock were issued upon execution of a release for the cancellation of 15,402,971 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, 2012 and 2011are as follows:

	Numbers of Series A Warrants			Weighted-Average Exercise Price
Outstanding at January 1, 2011		52,084		$	24.00
Issued		178,575			6.10
Cancelled or expired		(52,084	)		24.00
Exercised		—			—
Outstanding at December 31, 2011		178,575		$	6.10
Issued		—			—
Cancelled or expired		—			—
Exercised		—			—
Outstanding at December 31, 2012		178,575		$	7.00

Weighted average fair value granted during the year ended December 31, 2012				$	—

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 $7.00 ($0.07 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 $0.0226 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 $0.07 and a market price of $0.03. As a result, the warrants were reclassified as equity within the Company's consolidated financial statements, at an aggregate fair value of $403,571. 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.

F-20

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 - 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, 2012 and 2011, include i) 471,664,330 and 376,294,477 respectively, of both common stock and preferred series A warrants; ii) 233,603,914 and 116,488,912, respectively, of common stock underlying stock options; iii) 7,809,524 and 40,321,253 respectively, issuable under convertible note payable and iv) 497,587,547 and 363,485,104 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 15 - 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, 2012 and 2011:

	2012		2011
Ratio of aggregate indebtedness to net capital	0.17 to 1		0.42 to 1
Net capital	$	4,498,393	$	4,151,046
Required net capital	$	100,000	$	117,029

Bonds.com Inc. was examined by FINRA for the period September 2008 through June 2010. In June 2011, FINRA issued its Examination Report that identified some exceptions. Two of these exceptions were referred to FINRA Enforcement for further review. They are: i) violations emanating from the expense-sharing agreement that the Company had with Bonds.com Inc. at the time, and related net capital issues; and, ii) objections to a revenue-sharing agreement with another broker-dealer that raises mark-up issues. As of the date of this report, Bonds.com Inc. is continuing to respond to requests from FINRA Enforcement. The outcome of this matter is currently unknown and, therefore, there has been no accrual for any related liability pertaining to this matter as of December 31, 2012.

Bonds.com Inc. was examined by FINRA for the period July 2011 to January 2012. In December 2012, FINRA issued its Examination Report that identified some exceptions. Three of the exceptions were referred to FINRA Enforcement for further review. They are: i) violations emanating from the expense-sharing agreement that the Company had with Bonds.com Inc., ii) net capital issues; and, iii) non-compliance with transaction agreements between member and non-member organizations. As of the date of this report, Bonds.com Inc. is continuing to respond to requests from FINRA Enforcement. The outcome of these matters is currently unknown and, therefore, there has been no accrual for any related liability pertaining to these matters as of December 31, 2012.

Note 16 - Share-Based Compensation

The Company has two equity-based compensation plans which have not been approved by stockholders, the 2006 Equity Plan (the “2006 Plan”) and the 2011 Equity Plan (the “2011 Plan"), (Collectively referred to as 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 75,000,000 to a total of 200,000,000 shares. The 2006 Plan and 2011 Plan provides for a total of 13,133,825 and 200,000,000 shares, respectively, to be allocated and reserved for the purposes of offering non-statutory stock options to employees, consultants and non-employee directors and incentive stock options to employees. If any option expires, terminates or is terminated or canceled for any reason prior to exercise in full, the shares subject to the unexercised portion shall be available for future options granted under the Plan. Options become exercisable over various vesting periods depending on the nature of the grant. Certain option awards provide for accelerated vesting if there is a change in control (as defined by 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 10% Shareholder shall not be less than 110% of the fair market value of the Company's common stock. As of December 31, 2012, the Company had 33,715,158 options available to grant under the 2011 Plan and 2,280,287 options available to grant under the 2006 Plan.

F-21

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, 2012 and 2011 is provided below:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2010		10,958,538		$	0.36	—	$	—
Granted during 2011		71,953,560			0.07	—		—
Forfeited or expired during 2011		(25,388,720	)		0.08	—		—
Exercised during 2011		—			—	—		—
Outstanding at December 31, 2011		57,523,378		$	0.12	7.62	$	—
Granted during 2012		120,650,002			0.08	—		—
Forfeited or expired during 2012		(3,535,000	)		0.29	—		—
Exercised during 2012		—			—	—		—
Outstanding at December 31, 2012		174,638,380		$	0.09	6.00	$	—
Vested or expected to vest		174,638,380		$	0.09	6.00	$	—
Options exercisable, December 31, 2012		92,879,389		$	0.10	6.05	$	—

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, 2012 and 2011 is provided below:

	Weighted- Average Exercise Price				Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value

Outstanding at December 31, 2010		9,500,000	$	0.38		$
Granted during 2011		49,465,534		0.08
Forfeited or expired during 2011		—		—
Exercised during 2011		—		—
Outstanding at December 31, 2011		58,965,534	$	0.11	6.40	$	—
Granted during 2012		—		—
Forfeited or expired during 2012		—		—
Exercised during 2012		—		—
Outstanding at December 31, 2012		58,965,534	$	0.13	5.39	$	—
Vested or expected to vest		58,965,534	$	0.13	5.39	$	—
Options exercisable, December 31, 2012		52,773,867	$	0.13	5.43	$	—

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, 2012 and 2011 was $0.03 and $0.03, respectively. Options granted to non-employee directors during the year ended December 31, 2012 with a fair value of $278,000 were 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, 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:

	2012			2011
Dividend yield		—			—
Expected volatility		195.59% - 219.57	%		66.00% - 168.16	%
Risk-free interest rate		0.27% - 0.79	%		1.04% - 2.10	%
Expected life (in years)		2 - 5			4 - 5

The weighted-average expected life for the options granted reflects the alternative simplified method permitted by authoritative guidance, which defines the expected life as the average of the contractual term of the options and the weighted-average vesting period for all option tranches. Expected volatility for the 2011 option grants prior to July 1, 2011 was based on historical volatility over the same number of years as the expected life, prior to the option grant date. Beginning July 1, 2011, expected volatility was based on an average of the Company’s volatility plus comparable companies over the same number of years as the expected life.

F-22

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2012, there was approximately $2,182,365 of unrecognized compensation cost related to options issued of which approximately $1,797,066 shall be allocated to Bonds.com, Inc. This amount is expected to be recognized over the remaining estimated life of the options, which on a weighted-average basis is approximately 2.40 years.

There were no options exercised during the years ended December 31, 2012 and 2011. Tax benefits related to option exercises were not deemed to be realized as net operating loss carryforwards are available to offset taxable income computed without giving effect to the deductions related to option exercises.

Non-cash compensation expense relating to stock options was calculated by using the Black-Scholes option pricing model, amortizing the value calculated over the vesting period and applying a zero forfeiture percentage as estimated by the Company's management, using historical information. The Company has elected to recognize compensation cost for option awards that have graded vesting schedules on a straight-line basis over the requisite service period for the entire award. For the years ended December 31, 2012 and 2011, the non-cash compensation expense relating to option grants amounted to $1,965,722 and $1,396,751, respectively. The compensation expense is included in payroll and related costs in the consolidated statements of operations.

Note 17 - Income Taxes

The components of the provision for income taxes from continuing operations are as follows for the years ended December 31, 2012 and 2011:

	2012		2011
Current benefit (provision): federal	$	—	$	—
Current benefit (provision): state		—		—
Total current provision		—		—

Deferred provision: federal		—		151,916
Deferred provision: state		—		23,006
Total deferred provision		—		174,922

Total provision for income taxes from continuing operations	$	—	$	174,922

Significant items comprising the deferred tax assets and deferred tax liabilities are as follows at December 31, 2012 and 2011:

	2012			2011
Current deferred tax assets
Accrued expenses	$	318,000		$	130,000
Accrued litigation expense		—			59,000
Accrued technology expense		28,000			44,000
Accrued severance expense		460,000			527,000
		806,000			760,000

Non-current deferred tax assets (liabilities)
Equity bond compensation		3,426,000			2,363,000
Fixed assets		429,000			(162,000	)
Impairment of intangible asset		419,000			372,000
Charitable contributions carry forward		2,000			1,000
Net operating loss carry forward		17,505,000			13,095,000
Intangible assets		(125,000	)		(11,000	)
		21,656,000			15,658,000

Deferred tax assets, net		22,462,000			16,418,000
Less: valuation allowance		(22,462,000	)		(16,418,000	)
Net deferred tax assets	$	—		$	—

The change in valuation allowance in the year was $6,044,000.

F-23

—

BONDS.COM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

These amounts have been presented in the Company’s financial statements as follows:

	2012		2011
Current Deferred Tax Assets (Liability)	$	—	$	—
Non-Current Deferred Tax Asset		—		—

Net Deferred Tax Asset	$	—	$	—

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, 2012:

Year	Federal and State
2026	$	1,507,223
2027		4,163,262
2028		4,693,317
2029		3,054,920
2030		9,665,380
2031		9,924,228
2032		5,575,406
	$	38,583,736

F-24

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:

	December 31,
	2012			2011
Federal tax benefit (provision) rate		35.00	%		35.00	%
State tax benefit (provision) rate		10.37	%		5.30	%

Permanent differences		1.41	%		(9.25	%)

Change in valuation allowance		(86.50	%)		(33.70	%)
Change in effective state tax rate		31.33	%		0.00	%
Cumulative Change in Accounting/Prior Year Adjustments		8.39	%		2.65	%

Tax Benefit (Provision)		0.00	%		0.00	%

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

Note 18 - Related Parties Transactions

The Company is renting office space in San Francisco from an institution that is affiliated with our chairman, Edwin L. Knetzger, III at the aggregate rate of $12,000 per annum..

In the year ended December 31, 2012 and 2011, one customer, who is also an investor in the Company, represented approximately 7.5% and 13.2%, respectively, of total revenue. The loss of that client could have a material adverse effect on our business.

Note 19 - Subsequent Events

On March 1, 2013 the Company consummated a sale of $2,000,000 for the purchase of 20 “Units” of the Company. Each “Unit” purchased consists of (i) 100 shares of Series E-2 Convertible Preferred Stock of the Company, par value $0.0001 per share and (ii) warrants exercisable for 1,428,571 shares of common stock of the Company, par value $0.0001 per share, at an exercise price of $0.07 per share.

F-25

Delaware		38-3649127
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1500 Broadway – 31st Floor

New York, New York		10036
(Address of principal executive offices)		(Zip Code)

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

	Municipal	Treasury 1	Mortgage Related 2	Corporate Debt	Federal Agency Securities	Money Markets 3	Asset-Backed 4	Total

2011
Q1	3,697.20	9,122.50	8,479.60	8,124.30	2,490.00	2,943.10	1,989.60	36,846.20
Q2	3,670.30	9,326.20	8,498.60	8,198.80	2,380.60	2,897.00	1,930.10	36,901.60
Q3	3,652.20	9,616.10	8,482.00	8,166.70	2,359.40	2,662.70	1,872.70	36,811.80
Q4	3,719.40	9,928.40	8,339.10	8,324.90	2,326.90	2,572.30	1,831.00	37,042.10

2012
Q1	3,667.40	10,068.40	8,310.50	8,566.40	2,202.50	2,498.70	1,789.10	37,103.10
Q2	3,679.60	10,483.40	8,256.30	8,622.10	2,166.50	2,473.00	1,744.20	37,425.10
Q3	3,673.50	10,716.10	8,205.20	8,905.60	2,132.00	2,442.40	1,706.60	37,781.40
Q4	3,714.60	10,920.90	8,168.10	9,088.20	2,084.20	2,461.20	1,688.70	38,125.90

	Municipal	Treasury 1	Agency MBS 4	Non Agency MBS 5	ABS 6	Corporate Debt 2,3	Federal Agency Securities 3	Total 7
2012
Jan.	11.2	478.7	307.4	5.4	1.3	18.1	12.2	834.3
Feb	11.3	594.7	306.9	7.3	1.3	20.4	10.8	952.7
Mar	10.5	547.0	302.0	5.6	2.0	18.1	9.4	894.7
Apr	11.7	495.7	260.4	3.7	1.3	16.0	9.0	797.8
May	11.2	545.0	277.0	4.0	1.7	17.0	10.0	865.9
Jun	12.5	522.6	314.3	3.1	2.4	18.1	10.5	883.5
Jul	11.4	469.2	280.3	4.2	1.6	14.3	9.2	790.2
Aug	11.1	479.2	258.0	3.7	1.2	13.9	9.4	776.7
Sep	10.7	589.6	306.5	4.6	1.7	18.6	10.7	942.4
Oct	10.6	515.5	269.4	5.7	1.4	16.7	8.8	828.1
Nov	11.6	498.2	268.9	3.6	1.4	16.1	7.4	807.1
Dec	11.4	491.8	215.2	3.4	1.1	13.5	9.2	745.5

AVE. '12	11.3	567.8	250.0	—	—	15.6	9.6	858.3

Fiscal Quarter End	Low		High
December 31, 2010 - OTC Bulletin Board	$	0.04	$	0.21
March 31, 2011 - OTC Bulletin Board	$	0.11	$	0.20
June 30, 2011 - OTC Bulletin Board	$	0.08	$	0.18
September 30, 2011 - OTC Bulletin Board	$	0.0475	$	0.11
December 31, 2011 - OTC Bulletin Board	$	0.03	$	0.10
March 31, 2012 - OTC Bulletin Board	$	0.05	$	0.10
June 30, 2012 - OTCQB Market	$	0.015	$	0.20
September 30, 2012 - OTCQB Market	$	0.04	$	0.07
December 31, 2012 - OTCQB Market	$	0.01	$	0.20

	BONDS.COM GROUP, INC.
(Exact name of Registrant as Specified in its Charter)

	(212) 257-4062
(Registrant’s Telephone Number, Including Area Code)

Item Number in Form 10-K		Page

	PART I
1	Business	5
1A.	Risk Factors	14
1B.	Unresolved Staff Comments	30
2.	Properties	30
3.	Legal Proceedings	31
4	Mine Safety Disclosures	31

	PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
6.	Selected Financial Data	37
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
7A.	Quantitative and Qualitative Disclosure About Market Risk	42
8.	Financial Statements and Supplementary Data	43
9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	43
9A.	Controls and Procedures	43
9B.	Other Information	45

	PART III
10.	Directors, Executive Officers and Corporate Governance	45
11.	Executive Compensation	50
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	55
13.	Certain Relationships and Related Transactions, and Director Independence	58
14.	Principal Accounting Fees and Services	66

	PART IV
15.	Exhibits, Financial Statement Schedules	66


●	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.

●	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; and

●	regulatory compliance costs.

●	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.

●	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.

●	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.

●	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.

	●	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.


●	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 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.

●	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.

●	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.

●	support more rapid growth of our business;

●	develop new or enhanced services and products;

●	respond to competitive pressures;

●	acquire complementary companies or technologies;

●	enter into strategic alliances;

●	increase the regulatory net capital necessary to support our operations;

●	respond to unanticipated capital requirements; and

●	fund ongoing litigation.

●	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.

●	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.

●	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.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a) ,
	(a)		(b)		(c)
Equity Compensation plans approved by stockholders		—		—		—

Equity Compensation plans not approved by stockholders		174,638,380	$	0.09		38,495,445

·	Lack of formal written policies and procedures over the financial reporting process;
·	Operated with inadequate and insufficient accounting and finance resources;
·	Inadequate controls over stock-based compensation and severance calculations;
·	Inadequate controls to ensure proper financial valuation modeling methodology relating to stock-based compensation and accounting for unit sales of stock; and
·	Inadequate controls to ensure we are properly accounting for unit sales of stock.

· ·	Management has taken an active role in evaluating the Company’s internal control environment and the need for enhancements; Hiring of a Financial Controller to develop and implement policies and procedure, maintain and monitor controls and directly supervise internal and external resources used in financial reporting and other key accounting and finance functions:
·	Management has engaged consultants to assist with the recording complex transactions, including accounting for stock-based compensation and other equity-related transactions; and

·	Management has developed and implemented a finance and accounting policy manual that communicates all relevant information related to significant accounting policies and required procedures.

Name	Age	First Elected	Position(s) Held with the Company
Edwin L. Knetzger, III	60	August 2009	Chairman of the Board of Directors; Chair of the Corporate Governance and Nominating Committee
Michel Daher	51	December 2011	Director
Henri J. Chaoul, Ph. D.	45	December 2011	Director; Chair of the Audit Committee and Member of the Compensation Committee
Michael Gooch	53	December 2011	Director, Member of the Compensation Committee
Patricia Kemp	50	February 2011	Director; Chair of the Compensation Committee and Member of the Audit Committee
H. Eugene Lockhart	62	February 2011	Director and a Member of the Corporate Governance and Nominating Committee
Marc Daher	22	October 2012	Director
Michael Trica	37	February 2013	Director
Thomas Thees	51	May 2012	Director and Chief Executive Officer
George O’Krepkie	47	February 2011	Director and President
John M. Ryan	60	February 2011	Chief Financial Officer and Chief Administrative Officer

	●	Leadership and operating experience in the fixed income securities industry, including as co−founder, President, Chief Executive Officer and Chairman of Greenwich Capital Markets, Inc.
	●	Outside board of director experience as a director of Morgan’s Hotel Group (NASDAQ: MHGC).
	●	Affiliation with a significant investor in the Company.

	●	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.

	●	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.

	●	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.

	●	Leadership and senior management experience in financial services and technology organizations, including as President and CEO of MasterCard International, President of the Global Retail Bank and Senior Vice Chairman of BankAmerica Corporation, President of Consumer Services at AT&T, and President and Chief Executive Officer of New Power Holdings.
	●	Outside board of director experience, including as a director and audit committee chairman of RadioShack Corporation (NYSE: RSH), a director and audit committee chairman and compensation committee member of Huron Consulting (NASDAQ: HURN) and a director and compensation committee member of Asset Acceptance Capital Corp. (NASDAQ: AACC).