10-K 1 v177355_10k.htm Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 (Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2009
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________________ to __________________
 
Commission file number: 001-33700
 
GLOBALOPTIONS GROUP, INC
(Exact Name of Registrant as Specified in Its Charter)

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

Registrant’s telephone number, including area code: (212) 445-6262

(Former name and former address, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share
 
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12 (g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨  No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of "large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large accelerated filer ¨
Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):  Yes ¨  No x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter ($2.00) was $15,997,186.  Solely for the purposes of this calculation, shares held by directors, executive officers and 10% owners of the registrant have been excluded.  Such exclusion should not be deemed a determination or an admission by the registrant that such individuals are, in fact, affiliates of the registrant.
 
As of March 16, 2010, there were 14,357,254 shares of the registrant’s common stock outstanding.

 
 

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Form 10-K
December 31, 2009
TABLE OF CONTENTS

PART I  
 
1
FORWARD-LOOKING STATEMENTS
1
ITEM 1.
Business.
1
ITEM 1A.
Risk Factors.
10
ITEM 1B.
Unresolved Staff Comments.
16
ITEM 2.
Properties.
17
ITEM 3.
Legal Proceedings.
17
ITEM 4.
(Removed and Reserved)
17
PART II
 
18
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
18
ITEM 6.
Selected Financial Data.
20
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
20
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.
28
ITEM 8.
Financial Statements and Supplementary Data.
28
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
29
ITEM 9A
Controls and Procedures.
29
ITEM 9B.
Other Information.
30
PART III
 
31
ITEM 10.
Directors, Executive Officers and Corporate Governance.
31
ITEM 11.
Executive Compensation.
36
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
45
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
47
ITEM 14.
Principal Accountant Fees and Services.
48
PART IV
 
49
ITEM 15.
Exhibits and Financial Statement Schedules.
49
EXHIBIT 21.1
   
EXHIBIT 23.1
   
EXHIBIT 31.1
   
EXHIBIT 31.2
   
EXHIBIT 32.1
   
EXHIBIT 32.2
   
 
 
 

 

PART I

FORWARD-LOOKING STATEMENTS

 This Annual Report on Form 10-K contains forward-looking statements (as defined in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  To the extent that any statements made in this Annual Report on Form 10-K contain information that is not historical, these statements are essentially forward-looking.  Forward-looking statements may be identified by the use of words such as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,” “should,” “intends,” “estimates” and other words or phrases of similar meaning.  Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements are subject to a number of risks and uncertainties discussed under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report on Form 10-K.  All forward-looking statements attributable to us are expressly qualified by these and other factors.  We cannot assure you that actual results will be consistent with these forward-looking statements.
 
Information regarding market and industry statistics contained in this Annual Report on Form 10-K is included based on information available to us that we believe is accurate.  Forecasts and other forward-looking information obtained from this available information is subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services.  The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made.  We do not undertake any obligation to publicly update any forward-looking statements.  As a result, you should not place undue reliance on these forward-looking statements.

Item 1. Business
 
GlobalOptions Overview
 
GlobalOptions is an integrated provider of risk mitigation and management services to government entities, Fortune 1,000 corporations and high net-worth and high-profile individuals. We enable clients to identify, assess and prevent natural and man-made threats to the well-being of individuals and the operations of governments and corporations. In addition, we assist our clients in recovering from the damages or losses resulting from the occurrence of acts of terror, natural disasters, fraud and other risks. Our strategy is to continue to develop a comprehensive risk mitigation solutions company through both organic growth and acquisitions. In pursuit of our strategy, we have acquired and integrated nine complementary risk mitigation businesses since August 2005 that contributed an aggregate of approximately $103 million, $103 million, and $84 million, respectively, in revenues to our business during the years ended December 31, 2009, 2008 and 2007. 
 
We believe our reputation, credentials and personal relationships provide us with a competitive advantage in securing new business opportunities. Our senior management team and advisory boards have extensive industry backgrounds and include former generals in the military, top government officials and corporate officers, intelligence and law enforcement officers, professional investigators and legal and crisis communications specialists.
 
We deliver risk mitigation and management services through four business units: Preparedness Services; Fraud and Special Investigative Unit (“SIU”) Services; Security Consulting and Investigations; and International Strategies. The Preparedness Services unit develops and implements crisis management and emergency response plans for disaster mitigation, continuity of operations and other emergency management issues for governments, corporations and individuals. The Fraud and SIU Services unit provides investigative surveillance, anti-fraud solutions and business intelligence services to the insurance industry, law firms and multinational organizations. The Security Consulting and Investigations unit delivers specialized security and investigative services, such as security assessments, threat analyses and forensic DNA analysis and casework, to governments, corporations and individuals. The International Strategies unit provides a full range of security and risk management services, such as global business intelligence, investigations and litigation support, and personal protection, to foreign and domestic governments, corporations and individuals.

 
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Industry Overview
 
We compete in the global security industry, focused on providing comprehensive risk mitigation and management services to government entities, Fortune 1,000 corporations and high net-worth and high-profile individuals throughout the world. The risk mitigation industry encompasses a broad range of services enabling governments, corporations and individuals to enhance security, reduce exposure to overt and covert threats and optimize preparation for and response to critical events.
 
Until recently, risk mitigation was defined by the actions taken by organizations following the occurrence of a critical incident. Risk mitigation firms were traditionally engaged to assess damage once a serious event, loss or security breach had occurred. Engagements were typically non-recurring in nature and usually involved a service provider offering both assistance with primarily reactive measures and high-level analysis of incidents in order to reduce losses following an event.
 
In recent years, the risk mitigation industry has experienced significant growth, primarily driven by the occurrence of natural and man-made disasters, heightened regulatory and compliance standards and flaws and gaps in existing risk mitigation policies and procedures. The importance of risk mitigation has evolved as governments, corporations and individuals are faced with actively managing a broad variety of elements of risk, including terrorism, litigation, fraud, compliance, business continuity, brand protection, cyber attacks, industrial espionage and regulatory issues. In response, the focus of risk mitigation has shifted to proactively evaluating, identifying, quantifying and managing elements of risk, in addition to reacting to critical events.
 
The risk mitigation industry is highly fragmented, comprised primarily of smaller, specialized providers of a particular service. Historically, purchasers of risk mitigation services have relied upon multiple vendors to satisfy their requirements. However, due to the growing importance of risk mitigation, we believe governments, corporations and individuals are seeking to address proactively all of their risk mitigation needs through a single solutions provider. Despite this trend, there are currently few large, independent providers capable of delivering the full range of services sought by clients. As the risk mitigation market continues to grow, we anticipate the pace of industry consolidation will increase.
 
We categorize the risk mitigation industry into four primary service areas: investigations and background screening; preparedness and continuity planning; security consulting; and litigation and compliance support. There are other services, such as security guard services and alarm monitoring, that are lower-margin areas of the risk mitigation industry and outside the scope of our operational focus.
 
 
Investigations and Background Screening. Investigative services enable insurance companies, law firms and other organizations to combat fraud, substantiate suspicions of criminal acts and, ultimately, provide protection against financial loss and fraudulent activity. Background screening enables governments and corporations to implement effective hiring practices through in-depth analysis of a broad range of criteria of prospective employees, including work history, criminal offenses and drug testing results.
 
 
Preparedness and Continuity Planning. Preparedness and continuity planning services enable governments and corporations to effectively prepare for, respond to and recover from natural or man-made disasters. Specifically, these services include the creation of emergency response plans, business continuity planning and recovery services. We believe the funding of preparedness and continuity planning initiatives continues to be a priority for foreign, federal, state and local governments.
 
 
Security Consulting. Security consulting services provide governments, corporations and individuals with increased protection by analyzing and aiding in the implementation of security measures. These services include executive protection, facility security assessments and threat analysis.
 
 
Litigation and Compliance Support. In an increasingly stringent regulatory environment, governments and corporations have utilized litigation and compliance support services to ensure compliance with regulations and minimize the threat of litigation. Compliance support services assist organizations in effectively managing compliance with regard to financial reporting, government regulations and Securities and Exchange Commission (“SEC”) requirements. Litigation support services aid in the preparation for legal proceedings and include document review, case preparation, targeted investigations and witness interviewing.

 
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Collectively, these risk mitigation services enable organizations to protect constituents, employees and stockholders as well as optimize preparation for and response to critical events. We believe these services have become vital to the operational effectiveness of organizations worldwide and that they will continue to be a primary point of emphasis going forward.
 
Market Opportunity
 
As a result of geo-political events, corporate scandals, natural and man-made disasters and increasing litigation costs, we believe proactive risk mitigation has become critical for government entities, corporations and individuals. Our target clients are now actively addressing their security needs, thereby driving increased demand for outsourced risk mitigation and management services. The emerging trend towards outsourcing these services represents a fundamental shift in demand and we believe has created a compelling opportunity for market growth in the risk assessment and mitigation industry. We believe the following key market trends define our opportunity.
 
Natural Disasters and Emergency Preparedness. Governments, corporations and individuals have increased their focus on disaster preparedness and prevention after witnessing the loss of life and financial impact of natural disasters and acts of terror, including Hurricane Katrina and the terror attacks of September 11, 2001. According to The Federal Emergency Management Agency (“FEMA”), in 2009, there were 59 major disaster declarations in the U.S., and public assistance for major disasters in the U.S. has averaged approximately $275 billion annually since 1998. While major catastrophes capture the attention of a global audience, smaller regional and localized disasters can be equally damaging to governments, corporations and individuals. We believe most government entities, corporations and individuals are not equipped to address communications continuity, coordinate a rapid response and handle insurance related issues effectively enough to satisfy their constituents, employees and stockholders.
 
Market Inefficiencies Created by Fraud. According to the Insurance Information Institute, the total annual cost of insurance fraud, including life and health insurance, is more than $100 billion. The Coalition Against Insurance Fraud estimates insurance fraud’s overall impact on the consumer to be the equivalent of a hidden tax of approximately $1 per U.S. family on the cost of goods and services. We believe these market inefficiencies and the financial strain upon businesses as a result of insurance fraud have created a demand for expertise in investigative surveillance, business intelligence and other anti-fraud services.
 
Regulatory Complexity and Increased Litigation. We believe heightened focus on regulatory activity and corporate governance scrutiny will drive demand for risk mitigation and management services. Ineffective compliance management in today’s stringent regulatory environment can result in severe civil and criminal penalties for a company and its officers and directors. We believe the financial and business risk borne by a company, its corporate officers and directors from legislation such as the USA Patriot Act, the Federal Information Security Act, the Gramm-Leach-Bliley Act, the Health Insurance Portability and Accountability Act and the Sarbanes-Oxley Act of 2002, increases the need for industry experts to help organizations manage regulatory requirements.
 
Lack of Full Service Provider in a Fragmented Market. We believe the heightened focus on emergency preparedness and response, the escalating costs of fraud and the proliferation of regulatory scrutiny have created the need for an efficient provider of comprehensive risk mitigation and management services. Several of the traditional leaders in our industry have been acquired or evolved their business model, and we believe niche providers that offer limited services on a local scale are unable to meet the full range of their clients’ needs, leaving a service gap. We believe the drivers of increased risk assessment and mitigation spending are likely to continue into the foreseeable future and, as a provider of a comprehensive suite of customized services, we should benefit as the market opportunity grows.

 
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Competitive Strengths
 
We are committed to providing comprehensive risk mitigation and management services. We believe the following factors are strengths of our company and provide us with key competitive advantages.
 
Comprehensive Risk Mitigation Solutions. We have assembled what we believe to be core services utilized by clients seeking risk mitigation solutions. We are therefore able to offer a comprehensive suite of customized services designed to address each client’s specific needs. Our service offerings have been enhanced through our proprietary systems, such as GlobalTrak 3.0™, which provides both client and internal personnel access to real-time, web-based reporting, communications and fraud program management tools, and through advanced technologies, such as the forensic DNA capabilities of the Bode Technology Group (“Bode”), part of our Security Consulting Investigations Unit.
 
Reputable and Resourceful Management and Advisory Boards. Due to the critical and sensitive nature of risk mitigation and investigative engagements, we believe the ability to provide services and retain clients is driven largely by reputation and personal relationships. Our senior management and advisory boards have exceptional credentials and well-established relationships. Their experience and former titles include: a Brigadier General in the U.S. Air Force; a Director of FEMA; a Director of the FBI; a U.S. Secretary of Transportation; a Director of the CIA; a U.S. Ambassador and high-ranking corporate executives. We believe this level of expertise provides credibility with clients and access to key decision-makers within government and industry.
 
Experienced Senior Management Team and Professionals. Our senior management team and professionals include individuals with vast industry experience. These individuals have the operational experience to execute sensitive and critical engagements, enabling us to effectively deliver solutions to our clients. Our management team has demonstrated the ability to lead the integration of acquisitions, retain top talent and drive organic growth from the combined business units.
 
Demonstrated Success with Strategic Acquisitions. Since August 2005, we have executed and integrated nine strategic acquisitions and retained selected key professionals, many as senior management. These acquisitions have contributed to our rapid growth in revenues, number of professionals, vertical industry coverage, areas of functional expertise, geographic presence and brand recognition.
 
Strategic Alternatives
 
We have retained the services of Needham & Company to explore strategic alternatives.  The exploration of strategic alternatives is consistent with our overall strategy to maximize stockholder value.  While we have not made any determination to pursue any transaction involving the sale of our entire business or any of our individual business units, pursuant to the retention of Needham we have had and continue to have discussions with various third parties with respect to potential transactions.  No assurance can be given that any such transaction will be effected and upon what terms such a transaction would be effected.
 
Growth Strategy
 
Our goal is to continue to develop a company within the risk mitigation industry that provides clients with a comprehensive offering solution through a balance of organic growth and acquisitions. We intend to grow our business in the following manner.
 
Leverage Our Relationships and Expertise. Our highly trained professionals have deep domain expertise and exceptional credentials. Further, our advisory boards are comprised of thought leaders in their respective fields. Since our industry relies heavily on reputation and trust, we believe our senior management team’s and advisory boards’ experience and relationships will help us gain access to an increasing number of opportunities.
 
Cross-sell and Integrate Businesses. We intend to continue our aggressive efforts to integrate the operations of companies we have acquired and will acquire, providing the framework necessary for our senior managers to focus on identifying, prospecting and winning new opportunities across all business units. We believe our operational expertise and comprehensive service offerings enable us to cross-sell over industry verticals as well as leverage our existing client base, thereby enhancing our ability to execute on our organic growth initiatives.

 
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Develop New Solutions. We will continue to develop and seek solutions to meet unique client and dynamic market segment needs by expanding and bundling our product and service offerings. As we continue to grow both organically and through acquisitions, we expect to meet additional needs of our clients. Evidence of this strategy is the continuing expansion of the capabilities of our enterprise-oriented solution, GlobalTrak 3.0™.  Through our GlobalTrak 3.0™ platform we are building more enhanced client interface and support capabilities and additional tools to help us more efficiently manage our investigations our Rapid Data and Rapid Video are example of solutions that have helped us leverage technologies to better serve our clients.  Our DNA technology service we offer through Bode continues to develop new tools and technologies.

Our Business Units
 
We deliver risk mitigation and management services through four business units: Preparedness Services; Fraud and SIU Services; Security Consulting and Investigations; and International Strategies.
 
Preparedness Services
 
The Preparedness Services unit develops and implements crisis management and emergency response plans for disaster mitigation, continuity of operations and other emergency management issues for governments, corporations and individuals. We offer a full range of services to help our clients better prepare for, respond to and recover from disasters. We believe our ability to mobilize management, security and communications resources in an expedited manner differentiate us from our competitors. Services we provide include:
 
 
Business continuity plans

 
Emergency exercises and training programs

 
Post-disaster crisis communications assistance

 
Preparedness, response and recovery services

 
Strategic advisory services

 
Threat and impact assessments
 
The Preparedness Services unit is comprised of James Lee Witt Associates, LLC (“JLWA”) and is led by former FEMA Director James Lee Witt.  Mr. Witt’s employment contract with us expired on March 10, 2010 and he is now working with us on at at-will basis.  Our staff includes seasoned crisis and emergency management leaders with significant experience in the public sector. Our Preparedness Services unit has 74 full-time employees and 1 part-time employee and is headquartered in Washington, D.C.
 
For the year ended December 31, 2009, we completed 103 crisis management and emergency response projects with average revenue of approximately $379.  Preparedness Services accounted for approximately 38% of our revenues for the year ended December 31, 2009.

 
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Fraud and SIU Services
 
The Fraud and SIU Services unit provides investigative surveillance, anti-fraud solutions and business intelligence services to the insurance industry, law firms and multinational organizations. We provide services to clients both nationally and regionally through licensed investigators in all 50 states, as well as internationally through affiliates. Our investigators provide reports and intelligence on subjects such as workman’s compensation surveillance, unfair trade practices, political trends, economic forecasts, mortgage insurance fraud, profiles on competitors and satellite reconnaissance. Services we provide include:
 
 
Anti-fraud training

 
Background investigations

 
Corporate investigations for liability

 
Fraud reporting

 
Insurance claims investigations

 
On-scene accident investigations

 
Regulatory compliance

 
Surveillance

Our proprietary GlobalTrak 3.0™ technology enables us to deliver real-time, web-based reporting, communications , rapid data intelligence, and fraud program management. By automating and streamlining investigative processes, GlobalTrak 3.0™provides our clients with more expedient and cost-effective service. Our recent rollout of rapid video upload, allowing for immediate delivery of field intelligence represents an example our advanced capabilities. Our comprehensive software enables adjusters, claims representatives, risk managers and SIU departments to securely access and download status updates, including case receipts, assignments, work schedules, results of investigative activity, investigative reports and streaming video and audio. We believe GlobalTrak 3.0™ is a significant competitive differentiator and offers our clients a valuable enterprise solution.
 
The Fraud and SIU Services unit is comprised of the following acquired companies: Confidential Business Resources (“CBR”); Hyperion Risk, Inc. (“Hyperion Risk”); Secure Source, Inc (“Secure Source”); Facticon, Inc. (“Facticon”); and First Advantage Investigative Services (“FAIS”).  This unit is led by Halsey Fischer, a 20-year industry veteran and former President and Chief Executive Officer of CBR. Our investigative team includes highly educated and trained investigators who utilize extensive public and proprietary databases to uncover factual circumstances surrounding sensitive investigations. Our experts are capable of handling any type of investigative need anywhere in the world. Our anti-fraud services are national in scope, but local in expertise. Headquartered in Nashville, TN, the Fraud and SIU Services unit has 298 full-time and 68 part-time employees and has offices in Sacramento, Chicago, Orlando and Philadelphia.

For the year ended December 31, 2009, we completed 31,930 investigations and anti-fraud projects with average revenue of just under $1. Fraud and SIU Services accounted for approximately 29% of our revenues for the year ended December 31, 2009.

 
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Security Consulting and Investigations
 
The Security Consulting and Investigations unit delivers specialized security and investigative services to governments, corporations and individuals. We provide security assessments, anti-terrorism training, threat analyses, fraud prevention techniques, special event security, private travel management and the design, implementation and management of security systems. Services we provide include:
 
 
Business intelligence
 
 
 
Facility and IT security
 
 
 
Forensic DNA analysis and casework
 
 
 
Independent monitoring and regulatory compliance
 
 
 
IT and accounting forensics
 
 
 
Litigation support
 
Through Bode we are able to provide forensic DNA analysis, highly advanced and proprietary DNA collection products and research services to law enforcement agencies, federal and state governments, crime laboratories and disaster management organizations.
 
Our Security Consulting and Investigations unit is comprised of the following acquired companies: Safir Rosetti, LLC (“Safir”); Bode and SPZ Oakland Corporation, dba On Line Consulting Services, Inc. (“On Line Consulting”). Until March 31, 2010, this unit will be led by Howard Safir, former New York City Police Commissioner. Effective April 1, 2010, pursuant to the terms of a consulting agreement, Mr. Safir will become a consultant to this business unit and this unit will then be led by Harvey Schiller, our Chief Executive Officer and Jeffrey Nyweide, our Chief Financial Officer. Our national network of security and investigative personnel has extensive backgrounds in the fields of security, investigations, intelligence, law enforcement and public safety. Headquartered in New York, NY, we have 302 full-time and 14 part-time employees in the Security Consulting and Investigations unit and have offices in Dallas, Oakland, and Lorton, VA.
 
For the year ended December 31, 2009, we completed 811 security and investigation projects (excluding Bode) with average revenue of $15. During the year ended December 31, 2009, Bode completed 75,621 DNA related projects with average revenue of less than $1. Security Consulting and Investigations (including Bode) accounted for approximately 33% of our revenues for the year ended December 31, 2009.

International Strategies
 
The International Strategies unit provides multidisciplinary, international risk management and business solutions. We offer a range of security and risk management services to foreign and domestic governments, corporations and individuals. The International Strategies unit was our original core business and is led by Thomas Ondeck, a founder of GlobalOptions. Headquartered and operated in Washington, D.C., we employ two full-time employees.
 
International Strategies is not a separate reporting segment and as such we attribute its revenues to the Fraud and SIU Services unit.
 
Corporate History
 
GlobalOptions, Inc., our wholly-owned operating subsidiary, was initially formed as a limited liability company in the state of Delaware in November 1998 and converted into a Delaware corporation on January 24, 2002. On June 24, 2005, we became a public company by completing a reverse merger transaction, in which GlobalOptions Acquisition Corp., a Delaware corporation and our newly created, wholly owned subsidiary, merged with and into GlobalOptions, Inc. As a result of the reverse merger, GlobalOptions, Inc. became our wholly owned operating subsidiary, with GlobalOptions, Inc.’s former security holders acquiring a majority of the outstanding shares of our common stock. At the time of the reverse merger, our corporate name was Creative Solutions with Art, Inc., a Nevada corporation. Following the reverse merger, we changed our name to GlobalOptions Group, Inc.  On December 8, 2006, we completed a reincorporation merger whereby we changed our state of incorporation from Nevada to Delaware.

 
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History of Acquisitions
 
Since becoming a public company in June 2005, we have actively pursued our acquisition strategy.
 
On August 14, 2005, we purchased substantially all of the assets and liabilities of CBR, a nationwide investigations firm based in Nashville, Tennessee. CBR was the foundation acquisition for our Fraud and SIU Services unit. The CBR acquisition provides us with significant capabilities in the intelligence gathering, surveillance, investigation, risk reduction and litigation exposure reduction fields.
 
On January 9, 2007, we acquired substantially all of the business and assets of On Line Consulting, a full-service security and fire alarm consulting and design firm headquartered in Oakland, California. The On Line Consulting acquisition added security and communications systems expertise to our Security Consulting and Investigations unit.
 
On February 28, 2007, we acquired all of the outstanding common stock of Bode, which provides forensic DNA analysis, proprietary DNA collection products and related research services to law enforcement agencies, federal and state governments, crime laboratories and disaster management organizations. The Bode acquisition significantly expanded the size of our Security Consulting and Investigations unit.
 
On February 28, 2007, we acquired substantially all of the business and assets of Facticon, a surveillance, investigative and business intelligence firm based in Chadds Ford, Pennsylvania. The Facticon acquisition expanded our Fraud and SIU Services unit’s risk mitigation expertise in the insurance, legal, business and financial industries.
 
On April 21, 2008, we acquired substantially all of the business and assets of FAIS related to our Fraud and SIU Services unit.  The FAIS acquisition expanded our Fraud and SIU Services unit’s risk mitigation expertise in the legal, business and insurance industries.
 
Underwritten Public Offering
 
On October 29, 2007, we completed an underwritten public offering of 4,500,000 shares of our common stock, receiving approximately $20.25 million in gross proceeds ($18.2 million in net proceeds).
 
We used a portion of the net proceeds from the proposed underwritten public offering to repay $4.3 million of notes and $38 of related accrued interest and have been using the balance of the net proceeds for working capital and general corporate purposes.

In connection with the underwritten public offering, on October 29, 2007 we entered into an agreement with Canaccord Adams Inc. and Morgan Keegan & Company, Inc., as underwriters, who were paid aggregate fees of $1.41 million.

Clients
 
We have completed engagements for clients globally, including foreign, federal, state and local government entities, domestic and foreign Fortune 1,000 corporations, and high net-worth and high-profile individuals. We frequently work with clients on multiple assignments. As required by the highly confidential nature of our work, we keep the identities of our clients strictly confidential.
 
For the years ended December 31, 2009, 2008 and 2007, a limited number of clients accounted for a substantial percentage of our total revenues. For the year ended December 31, 2009, our two largest clients accounted for approximately 24% and 8% of our revenues. For the year ended December 31, 2008, our two largest clients accounted for approximately 26% and 8% of our revenues. For the year ended December 31, 2007, our two largest clients accounted for approximately 29% and 9% of our revenues.  Revenues from our largest client, the State of Louisiana,. accounted for 63%, 68%, and 83%, of the revenues generated by our Preparedness Services unit during the years ended December 31, 2009, 2008 and 2007, respectively.
 
Sales and Marketing
 
Our business is intensely personal due to the highly confidential nature of the engagements and the critical nature of the brands, reputations, competitive positions and overall market perceptions that our services support. We believe our ability to provide services and retain clients is driven largely by reputation and personal relationships. Our senior management team and advisory boards have exceptional backgrounds and include former generals in the military, top government officials and corporate officers, intelligence and law enforcement officers, professional investigators and legal and crisis communications specialists, each of whom can leverage relationships with leaders in both the corporate and government markets.

 
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We believe these relationships give us the opportunity to bring in high-margin, well-known clients and our operational experience allows us to successfully complete these critical engagements. The success of this strategy is demonstrated by the recurring nature of our business with established clients. New opportunities typically arise from the ongoing relationships that our management personnel have with their client counterparts. As executives move to different companies or agencies, they often call upon us in their new environment.
 
Our sales and marketing strategy is to maintain and expand our reputation and track record, the quality of the services we deliver and the skills and character of the people we deploy on client engagements. In doing so, we intend to provide the high level of investigative, litigation support, crisis management, risk management and protective services demanded by our clients.
 
Competition
 
The market for risk mitigation services is very competitive, highly fragmented and subject to rapid change. We operate in a number of geographic and service markets, all of which are highly competitive. We believe the principal competitive factors and key differentiators in this market are reputation, relationships, expertise, quality and scope of service and size of institution. Therefore, new market entrants as well as existing competitors that have strong brand recognition or highly recognized principals in the risk mitigation industry likely pose the greatest threat to our business. We believe, however, our reputation and the breadth and depth of our services provide us with key competitive strengths and differentiate us from our competitors.
 
Competitors in the risk management and security market include Control Risks Group Limited, G4S Risk Management, Kroll Inc., Toribos GmbH, and Olive Group. Additionally, many of the national and international accounting and consulting firms, along with other companies such as FTI Consulting, Inc., Securitas AB and its subsidiary, Pinkerton Consulting & Investigations, Inc., Alvarez & Marsal, LLC, AlixPartners LLC, Xroads Solutions Group, and LexisNexis Applied Discovery, provide investigative, consulting and other services that are similar to services we provide.
 
Employees
 
As of January 31, 2010 the Company had 681 full-time and 83 part-time employees. We enjoy good employee relations. None of our employees are members of any labor union, and we are not a party to any collective bargaining agreement.
 
Government Regulation
 
Due to our participation in government contracts, we are subject to audit from time to time for our compliance with government regulations by various agencies. Government agencies may also periodically conduct inquiries or investigations that may cover a broad range of our activities. We believe we operate our business in material compliance with all applicable federal, state and local government regulations and contracts.
 
We hold a number of General Services Administration (“GSA”) Federal Schedules, which enable federal and state agencies to buy services and products from us. We are required to be in compliance with the Federal Acquisition Regulations (“FAR”) in providing these services and products to our federal and state government clients. We are subject to audit by the GSA to assure we maintain compliance with these requirements.

In addition to maintaining our compliance with the FAR and the GSA, some contracts we have with state agencies contain additional requirements. While most states follow the FAR, in each contract, the state may require additional rules and regulations to maintain compliance with each contract. In providing services under each contract, we must be in compliance with contract rules and regulations before we can invoice under the contract. Before making any payments under a contract, a state will review our compliance.
 
Our investigation and surveillance business must be in compliance with each state’s licensing requirements for providing these services. In each state that we operate our investigation and surveillance business, we maintain the necessary licensing requirements to do business.

 
9

 

Item 1A. Risk Factors

Any investment in our common stock involves a high degree of risk. You should consider carefully the specific risk factors described below in addition to the other information contained in this Annual Report on Form 10-K,, including our consolidated financial statements and related notes included elsewhere in this Annual report on Form 10-K, before making a decision to invest in our common stock. If any of these risks actually occurs, our business, financial condition, results of operations or prospects could be materially and adversely affected. This could cause the trading price of our common stock to decline and a loss of all or part of your investment.
 
Risks Related to Our Business and Industry
 
We are an emerging company with a history of operating losses and may not become profitable.
 
We were founded in 1998 and are still in the process of developing our four business units: Preparedness Services; Fraud and SIU Services; Security Consulting and Investigations; and International Strategies. We have incurred significant operating losses since inception, including net losses available to common stockholders of approximately $5.3 million, $7.9 million, and $27.9 million for the years ended December 31, 2009, 2008 and 2007, respectively. We cannot anticipate when or if we will achieve profitability in the future. We may not generate sufficient revenues to meet our expenses, operate profitably or utilize our net operating losses in the future.
 
Our arrangements with members of our senior management team, or our failure to retain or recruit key personnel, could negatively impact our ability to sell our products and services and grow our business.
 
Our success will depend to a significant extent upon the abilities, level of service, reputation and relationships of members of our senior management team, our Board of Directors and our advisory boards. Some members of our senior management team work on a part-time basis and some do not have non-competition agreements with us. These arrangements, or any reduction or loss of these individuals’ services, could have a material adverse effect upon our business, particularly if any of our key personnel sought to compete against us.
 
Our future success and growth also largely depends upon our ability to attract, motivate and retain additional highly competent technical, management, service and operations personnel. The marketplace for these qualified individuals is highly competitive in the risk mitigation industry, and we cannot guarantee that we will be successful in attracting and retaining this personnel. Departures and additions of key personnel may be disruptive to and detrimentally affect our business, operating results and financial condition.
 
Because a small number of clients account for a substantial portion of our revenues, the loss of any of these clients, or a decrease in their use of our services, could cause our revenues to decline and losses to increase substantially.
 
Revenues from our services to a limited number of clients have accounted for a substantial percentage of our total revenues.  For the year ended December 31, 2009, our largest client accounted for approximately 24% of revenues For the year ended December 31, 2008, our largest client accounted for approximately 26% of revenues.  For the year ended December 31, 2007, our largest client accounted for approximately 29% of revenues. Revenues from our largest client, the State of Louisiana, accounted for 63%, 68%, and 83% of the revenues generated by our Preparedness Services unit during the years ended December 31, 2009, 2008 and 2007, respectively.  Our contract with the State of Louisiana, which expires on August 31, 2010, is a time and materials contract under which the State is not required to purchase a minimum amount of our services. Therefore, this contract could cease producing revenues at any time with little or no notice.
 
The concentration of our clients can cause our revenues and earnings to fluctuate from quarter-to-quarter and year-to-year, based on the requirements of our clients and the timing of delivery of services. Although the particular clients are likely to change from period to period, we believe that large engagements by a limited number of clients will continue to account for a substantial portion of our revenues in any period or year. In any period or year, the unexpected loss of or decline in business from a major client, or the failure to generate significant revenues from other clients, could have a material adverse effect on our consolidated financial results.
 
The integration of acquired companies may be difficult and may result in a failure to realize some of their anticipated potential benefits.
 
We may not be able to integrate or manage businesses that we have acquired or may acquire. Any difficulty in successfully integrating or managing the operations of acquired businesses could have a material adverse effect on our business, financial condition, results of operations or liquidity, and could lead to a failure to realize any anticipated synergies. Our management team also will be required to dedicate substantial time and effort to the integration of any acquisitions. These efforts could divert management’s focus and resources from other strategic opportunities and operational matters.

 
10

 
 
We may have difficulty pursuing our acquisition strategy
 
           A key part of our growth strategy is to acquire complementary businesses. However, we may not be able to identify suitable acquisition candidates, obtain the capital necessary to pursue our acquisition strategy or complete acquisitions on satisfactory terms or at all. A number of competitors have also adopted a strategy of expanding and diversifying through acquisitions, including National Security Solutions Inc., blank check company of which Howard Safir, our Chief Executive Officer of our Security Consulting and Investigations Unit, and Adam Safir, our Chief Operating Officer of our Security Consulting and Investigations Unit, are the Chairman of the Board and a director, respectively.  Such persons may have conflicting interests in presenting acquisition opportunities to National Security Solutions Inc. and us.  In addition, we will likely experience significant competition in our effort to execute our acquisition strategy. As a result, we may be unable to continue to make acquisitions or may be forced to complete acquisitions on less favorable terms.
 
Our business is vulnerable to fluctuations in government spending and subject to additional risks as a result of the government contracting process, which often involves risks not present in the commercial contracting process.
 
Because many of our contracts are with government entities, our business is subject to a number of risks, including global economic developments, wars, political and economic instability, election results, changes in the tax and regulatory environments, foreign exchange rate volatility and fluctuations in government spending. Because many clients are federal, state or municipal government agencies with variable and uncertain budgets, the amount of business that we might receive from them may vary from year to year, regardless of the perceived quality of our business.
 
Moreover, competitive bidding for government contracts presents a number of risks that are not typically present in the commercial contracting process, including:
 
 
the need to devote substantial time and attention of our management team and key personnel to the preparation of bids and proposals for contracts that may not be awarded to us; and
 
 
the expenses that we might incur and the delays and revenue loss that we might suffer if our competitors protest or challenge contract awards made to us pursuant to competitive bidding. Such a protest or challenge could result in the resubmission of bids based on modified specifications, or in the termination, reduction or modification of the awarded contract.
 
If we are unable to consistently win new government contract awards over an extended period, or if we fail to anticipate all of the costs and resources that will be required to secure such contract awards, our growth strategy and our business, financial condition and operating results could be materially adversely affected.

Our professional reputation, which is critical to our business, is especially vulnerable to circumstances outside our control.

We depend upon our reputation and the individual reputations of our senior management team and advisory boards to obtain new client engagements. We also obtain a substantial number of new engagements from existing clients or through referrals from existing clients. Anything that diminishes our reputation or the reputations of our senior management team and advisory boards may make it more difficult to compete for new engagements or to retain existing clients and, therefore, could materially adversely affect our business. For example, a national television news story in 2007 that contained allegations regarding JLWA’s performance and billing practices under our contract with the State of Louisiana prompted a State auditor to review these allegations. Although we were awarded and subsequently executed a renewal contract with the State, the State may terminate this new contract without penalty upon limited notice. Any circumstances, including those where we are not at fault, and including any repercussions from the above events, that might publicly damage our goodwill, injure our reputation or damage our business relationships may lead to a broader material adverse effect on our business or prospects through loss of business, goodwill, clients, agents or employees. In particular, if the State of Louisiana were to terminate our contract, it may have a material adverse effect on our business.

Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and operating results. In addition, current and potential stockholders could lose confidence in our financial reporting, which could cause our stock price to decline.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our business could be harmed.

 
11

 

As a public company, we are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting. Furthermore, our registered independent public accounting firm will be required to report on our assessment of the effectiveness of our internal control over financial reporting and separately report on the effectiveness of our internal control over financial reporting beginning with our fiscal year ending December 31, 2010.

Failure to maintain an effective internal control environment could cause us to face regulatory action, result in delays or inaccuracies in reporting financial information or cause investors to lose confidence in our reported financial information, any of which could cause our stock price to decline.

In order to comply with public reporting requirements, we may need to strengthen the financial systems and controls of any business we acquire, and the failure to do so could adversely affect our ability to provide timely and accurate financial statements.
 
Immediately upon the acquisition of any company, we will be responsible for ensuring that the disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) of any acquired company are effectively designed, operated and integrated with our disclosure controls and procedures. Our management and our independent registered public accounting firm may be required to test any acquired business’s internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing of internal control by our independent registered public accounting firm, may reveal deficiencies in an acquired company’s financial systems that are deemed to be material weaknesses with respect to our financial systems. The existence of these material weaknesses or any failure to improve an acquired company’s financial systems could result in delays or inaccuracies in reporting financial information, or non-compliance with SEC reporting and other regulatory requirements, any of which could subject us to sanctions from the SEC and The NASDAQ Stock Market LLC and adversely affect our business and stock price.
 
Our business depends, in part, on the occurrence of unpredictable events.
 
Our Preparedness Services unit assists governments, corporations and individuals in connection with, among other things, emergency management issues and natural and other disaster preparedness and recovery efforts. Our revenues may fluctuate significantly depending upon the occurrence, or anticipated occurrence, of events of this nature. For example, for the years ended December 31, 2009, 2008 and 2007, 24%, 26% and 29% of the Company’s revenues, or 45%, 52% and 61% of the Company’s revenues from government contracts, respectively, were generated by one contract with the State of Louisiana. Accordingly, any decrease in demand for our services in this area could materially adversely affect our results of operations.
 
We may not be able to manage our growth or meet marketplace demands effectively.
 
We have expanded significantly in the past few years and intend to maintain our focus on growth. However, our growth will place additional demands on our resources and we cannot be sure that we will be able to manage our growth effectively. In order to successfully manage our growth, we will need to:
 
 
expand and enhance our administrative infrastructure;

 
continue to improve our management, financial and information systems and controls; and

 
recruit, train, manage and retain our employees effectively.
 
Continued growth could place a strain on our management, operations and financial resources. In addition, this growth may adversely affect our ability to service the demands of our clients or the quality of services we provide. If we are unable to meet these demands or our clients’ expectations, our competitors may be able to gain a greater market share in the risk mitigation markets generally, as well as gain a greater share of our clients’ business. We cannot assure you that our infrastructure, operational, financial and management controls, reporting systems and procedures, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth. Our expected addition of personnel and capital investments will increase our fixed costs, which will make it more difficult for us to offset any future revenue shortfalls with short-term expense reductions. If we cannot manage our growth effectively, our business and results of operations may be adversely affected.

 
12

 

We may not be able to realize the entire book value of goodwill from acquisitions.
 
As of December 31, 2009, we had approximately $19,968 of goodwill, which represented approximately 34% of our total assets as of December 31, 2009. All of this goodwill resulted from previous acquisitions, and it is possible that future acquisitions will result in additional goodwill. We have implemented accounting guidance for acquisitions which requires that existing goodwill not be amortized, but instead be assessed annually for impairment or sooner if circumstances indicate a possible impairment.  In the event that we determine the book value of goodwill is impaired, any such impairment would be charged to earnings in the period of impairment. Any such future impairment of goodwill could have a material adverse effect on our results of operations.
 
Competitive conditions could adversely affect our business.
 
We operate in a number of geographic and service markets, all of which are highly competitive. There are relatively few barriers preventing companies from competing with us and we do not own any patents or other technology that, by itself, precludes or inhibits others from entering our markets. As a result, new market entrants, particularly those who already have recognizable names in the risk mitigation industry, will likely pose a threat to our business. If we are unable to respond effectively to our competitors, some of which have greater financial resources or name recognition, our business and results of operations will be materially adversely affected. Competitors in the risk management and security market include Control Risks Group Limited, G4S Risk Management, Kroll Inc., Toribos GmbH and Olive Group. Additionally, many of the national and international accounting and consulting firms, along with other companies such as FTI Consulting, Inc., Securitas AB and its subsidiary, Pinkerton Consulting & Investigations, Inc., Alvarez & Marsal, LLC, AlixPartners LLC, Xroads Solutions Group, and LexisNexis Applied Discovery, provide investigative, consulting and other services that are similar to services we provide.
 
Some of these firms have indicated an interest in providing services on a broader scale similar to ours and may prove to be formidable competitors if they elect to devote the necessary resources to these competitive businesses. The national and international accounting, consulting and risk management firms have significantly larger financial and other resources than we have, greater name recognition and long-established relationships with their clients, which also are likely to be clients or prospective clients of our company.
 
We are a worldwide business and are therefore influenced by factors and regulations in many countries.
 
We undertake our business worldwide. The occurrence of any of the following risks relating to the conduct of our business in foreign countries could have a material adverse effect on the market for our services, their value to our clients or our ability to provide them:

 
changes in, and difficulty in complying with, laws and regulations of the different countries, including authority to trade or perform our existing and future services;

 
nullification, modification and renegotiation of contracts;

 
reversal of current policies, including favorable tax policies, encouraging foreign investment or foreign trade, or relating to the use of local agents;

 
restrictive actions by local governments, including tariffs and limitations on imports and exports;

 
adverse economic conditions which might impact the generation and flow of capital; and

 
difficulty in collecting accounts receivable and longer collection times.
 
The occurrence of any of these risks could materially adversely affect our results of operations or financial condition.

 
13

 
 
Clients can terminate engagements with us on short notice or with no notice.
 
A majority of our engagements are project-based and are generally terminable by either party on short-term notice. As a result, our clients, including the State of Louisiana under the three year contract that it awarded to us in September 2007, are not obligated to continue using our services at historical levels or at all, and may cancel their arrangements with us without penalty. Identifying and engaging new clients can be a lengthy and difficult process. If a significant amount of our clients cease using our services around the same time, we could experience an adverse effect on our results of operations.
 
Our inability to accurately forecast costs of fixed price contracts could result in lower than expected margins and profitability.
 
The profitability of fixed price projects is primarily determined by our success in correctly estimating and thereafter controlling project costs. Costs may in fact vary substantially as a result of various factors, including underestimating costs, need for unforeseen specialized subcontractors, difficulties with new technologies and economic, regulatory and other changes that may occur during the term of the contract. If for any reason the costs are substantially higher than expected, we may incur losses on fixed price contracts and our profitability could be adversely affected.
 
We may need to raise additional funds to consummate an acquisition or continue our operations.
 
An unforeseen reduction in our revenues or cash flows, an increase in operating expenses or the consummation of an acquisition may require us to raise additional funds. To the extent we identify additional opportunities to raise cash, we may sell additional equity or convertible debt securities, which would result in further dilution of our stockholders. Stockholders may experience substantial dilution due to our current stock price and the amount of financing we may need to raise, and any securities we issue may have rights senior to our common stock. Any future indebtedness may contain covenants that restrict our operating flexibility.
 
We have limited access to the capital markets. The capital markets have been unpredictable in the past, especially for smaller companies or for unprofitable companies such as ours, and recent contractions in the capital markets have generally made financing more difficult to obtain.  In addition, the amount of capital that a company such as ours is able to raise often depends on variables that are beyond our control, such as the share price of our stock and its trading volume. As a result, efforts to secure financing on terms attractive to us may not be successful, and we may not be able to secure additional financing on any terms.
 
If we are able to consummate a financing arrangement, the amount raised may not be sufficient to meet our future needs. If adequate funds are not available on acceptable terms, or at all, our business, results of operations and financial condition may be materially adversely affected.
 
Compliance with changing corporate governance and public disclosure regulations may result in additional expenses.
 
Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and The NASDAQ Stock Market LLC’s marketplace rules, require a substantial amount of management attention and financial and other resources. We intend to continue to invest all reasonably necessary resources to comply with evolving standards, which may result in increased general and administrative expenses and divert management from revenue-generating activities.

We may become subject to significant legal proceedings.
 
We are subject from time to time to litigation and other adverse claims related to our businesses, some of which may be substantial.  These claims have in the past been, and may in the future be, asserted by persons who are screened by us, regulatory agencies, clients or other third parties. Matters such as these, in which we may become defendants, may negatively impact our results of operations or cash flows, as well as our reputation.
 
 
14

 

Our exposure in a future liability action could exceed our insurance coverage.
 
Some of our service offerings involve high risk activities. We may not be able to maintain insurance at levels of risk coverage or policy limits that we deem adequate for any of our activities and cannot guarantee that every contract contains or will contain limitations on our liability below these policy limits. Because of the increasing cost of liability insurance, purchasing sufficient amounts of insurance coverage, or additional insurance when needed, could be prohibitively expensive. If we are sued for any injury caused by our business offerings, our liability could exceed our total assets. Any claims against us, regardless of their merit or eventual outcome, could have a detrimental effect upon our business, operating results and financial condition.

We may be subject to increased regulation regarding the use of personal information.
 
Some of the data and services that we provide, including DNA testing conducted by Bode, are subject to regulation by various federal, state and local regulatory authorities, which may become more stringent in the future. Federal, state and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace, and adverse publicity or potential litigation concerning the commercial use of such information, may negatively affect our operations and could result in substantial regulatory compliance expense, litigation expense or revenue loss.
 
If we are unable to manage successfully our relationships with our information suppliers, the quality and availability of our services may be harmed.
 
We obtain some of the data used in our services from third-party information suppliers, some of which are government entities. If a supplier is no longer able or willing to provide us with data, we may need to find alternative sources. There is no assurance that we will obtain new agreements with third-party suppliers on favorable terms, if at all. If we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, we could experience service disruptions, increased costs and reduced quality of our services. Loss of such access or the availability of data in the future due to increased government regulation or otherwise could have a material adverse effect on our business, financial condition or results of operations.
 
Risks Related to Our Common Stock
 
Our common stock price has fluctuated considerably and stockholders may not be able to resell their shares at or above the price at which their shares were purchased.
 
Since our reverse merger in June 2005, the high and low bid price for our common stock has been $32.00 and $1.14 per share, respectively. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including the following:
 
 
factors affecting demand for risk mitigation services such as the domestic and global security environment, competition and general economic conditions;
 
 
 
fluctuation in government spending that affects our contracts with government entities; and
 
 
 
changes in the laws and regulations of different countries that affect our ability to perform the services of a  risk mitigation and management services company.
 
The stock market in general has experienced extreme price fluctuations. The market prices of shares of companies in the security industry have experienced fluctuations that often have been unrelated or disproportionate to the operating results of these companies. Continued market fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our common stock. Price volatility might be worse if the trading volume of our common stock continues to be low.

 
15

 
 
Our common stock has historically been sporadically or thinly traded.  While our common stock became listed on the NASDAQ Capital Market on September 26, 2007, there is no guarantee that our trading volume will increase. As a result, the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume may be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our common stock until we demonstrate that we can consistently operate profitably. As a consequence, there may be periods of several days or more when trading activity in our shares is low and a stockholder may be unable to sell his shares of common stock at an acceptable price, or at all. We cannot give stockholders any assurance that a broader or more active public trading market for our common stock will develop or be sustained, that current trading levels will be sustained or that we will continue to meet the requirements for listing on the NASDAQ Capital Market.

Our executive officers, directors and 10% stockholders have significant voting power and may vote their shares in a manner that is not in the best interest of other stockholders.
 
Our executive officers, directors and 10% stockholders control approximately 41% of the voting power represented by our outstanding.  If these stockholders act together, they may be able to exert significant control over our management and affairs requiring stockholder approval, including approval of significant corporate transactions.  This concentration of ownership may have the effect of delaying or preventing a change in control and might adversely affect the market price of our common stock. This concentration of ownership may not be in the best interests of all our stockholders.
 
We do not anticipate paying cash dividends for the foreseeable future, and the lack of dividends may have a negative effect on our stock price.
 
We have never declared or paid any cash dividends or distributions on our common stock and our senior credit facility prohibits us from paying dividends. We currently intend to retain our future earnings, if any, to support operations and to finance our growth strategy and therefore we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
 
Provisions in our certificate of incorporation and by-laws may deter third parties from acquiring us and could lead to the entrenchment of our Board of Directors.
 
Our certificate of incorporation and by-laws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors, including the following:
 
 
we have authorized undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval;

 
stockholder action by written consent must be unanimous;

 
stockholders may only remove directors for cause;

 
vacancies on the Board of Directors may be filled only by the directors; and

 
we require advance notice for stockholder proposals.
 
These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions that you desire. The anti-takeover defenses in our certificate of incorporation and by-laws could discourage, delay or prevent a transaction involving a change in control of our company.

Item 1B. Unresolved Staff Comments

Not applicable

 
16

 

Item 2.    Properties
 
Our operational headquarters is located in Washington, D.C. and our administrative headquarters is located in New York, New York. We have additional offices in Arkansas, California, Florida, Illinois, Tennessee, Texas and Virginia. All of our offices are leased and we do not consider any specified leased facility to be material to our operations. We believe that equally suited facilities are available in several other areas throughout the U.S. The following table summarizes information with respect to our material facilities:
 
Business Unit
 
Location
 
Area
(sq.feet)
 
Year of Lease
Expiration
Corporate Headquarters:
 
New York, New York
 
4,525
 
      (1)
             
Preparedness Services:
 
Washington, D.C.
 
15,294
 
2015
   
Little Rock, Arkansas
 
4,000
 
2012
   
Sacramento, California
 
3,322
 
2011
             
Fraud and SIU Services:
 
Orlando, Florida
 
7,872
 
2011
   
Nashville, Tennessee
 
2,942
 
2012
             
Security Consulting and
Investigations:
 
Lorton, Virginia
 
38,505
 
2016
   
New York, New York
 
9,179
 
2015
   
Dallas, Texas
 
5,500
 
2012
 
 (1) The Company’s leases its Corporate Headquarters on a month to month basis.

Item 3.    Legal Proceedings
 
From time to time, we are involved in litigation arising in the ordinary course of business. We do not believe that we are involved in any litigation that is likely, individually or in the aggregate, to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 4.    (Removed and Reserved)

 
17

 

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market for Common Equity

Our common stock is quoted on the NASDAQ Capital Market under the symbol “GLOI”. Based upon information furnished by our transfer agent, as of March 6, 2010, we had 207 holders of record of our common stock.
 
The following table sets forth the high and low sales prices for our common stock for the periods indicated as reported by NASDAQ:

Fiscal Year 2008
 
High
   
Low
 
First Quarter
  $ 4.02     $ 1.47  
Second Quarter
    2.99       1.90  
Third Quarter
    2.36       1.25  
Fourth Quarter
    2.45       1.25  
                 
Fiscal Year 2009
 
High
   
Low
 
First Quarter
  $ 2.15     $ 1.14  
Second Quarter
    2.15       1.25  
Third Quarter
    2.10       1.55  
Fourth Quarter
    2.08       1.30  
                 
Fiscal Year 2010
 
High
   
Low
 
First Quarter (1)
  $ 1.92     $ 1.38  

            We have not declared or paid any cash dividends on our common stock and do not anticipate declaring or paying any cash dividends in the foreseeable future. Our senior credit facility prohibits us from paying dividends.  We currently expect to retain future earnings, if any, for the development of our business.

(1)  From January 1, 2010 through March 12, 2010.

 
18

 

Securities Authorized for Issuance Under Equity Compensation Plans
 
The following table contains information about our common stock that may be issued upon the exercise of options and upon the vesting of restricted stock units (“RSUs”) under all of our equity compensation plans as of December 31, 2009. See “Executive Compensation—Benefit Plans” for a description of our stock option and incentive plans.
 
Plan Category
 
Number of securities
to be issued upon
exercise of
outstanding options
and upon vesting of
RSUs
(a)
  
Weighted average
exercise price of
outstanding
options
(does not include
RSUs)
(b)
  
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in
column (a)) 
(c) 
               
Equity compensation plans approved by security holders(1)
 
1,196,600
  
$
2.57
  
2,971,976 (2)
Equity compensation plans not approved by security holders
 
  
 
  
Total
 
1,196,600
  
$
2.57
  
2,971,976
 

(1)Our 2005 Stock Option Plan and 2006 Stock Option Plan were adopted by our stockholders on August 8, 2005 and June 12, 2006, respectively. On October 17, 2006, our Board of Directors approved, and stockholders later ratified, that the remaining shares reserved, but unissued, with respect to any awards under the 2005 Stock Option Plan and 2006 Stock Option Plan were unreserved and that no new awards were to be issued under these plans. Our Amended and Restated 2006 Long-Term Incentive Plan and Amended and Restated 2006 Employee Stock Purchase Plan were adopted by our stockholders on July 24, 2008.
 
(2)The number of securities remaining available for future issuances includes 1,063,075 under the Amended and Restated 2006 Long-Term Incentive Plan and 1,908,901 under the Amended and Restated 2006 Employee Stock Purchase Plan.

 
19

 

Item 6.  Selected Financial Data
 
Not applicable.

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion of results of operations and financial condition is based upon, and should be read in conjunction with, our consolidated financial statements and accompanying notes thereto included elsewhere in this Form 10-K. This discussion contains forward-looking statements. Actual results could differ materially from the results discussed in the forward-looking statements. Please see “Forward-Looking Statements” and “Risk Factors” for a discussion of some of the uncertainties, risks and assumptions associated with these statements.
 
(Dollar amounts in thousands, except per share amounts)
 
Overview
 
GlobalOptions is an integrated provider of risk mitigation and management services to government entities, Fortune 1,000 corporations and high net-worth and high-profile individuals. We enable clients to identify, assess and prevent natural and man-made threats to the well-being of individuals and the operations of governments and corporations. In addition, we assist our clients in recovering from the damages or losses resulting from the occurrence of acts of terror, natural disasters, fraud and other risks. Our strategy is to continue to develop a comprehensive risk mitigation solutions company.  In pursuit of our strategy, we have acquired and integrated nine complementary risk mitigation businesses since August 2005 that contributed an aggregate of approximately $102,900, $103,000, and $84,800 in revenues to our business during the years ended December 31, 2009, 2008 and 2007, respectively.
 
We believe our reputation, credentials and personal relationships provide us with a competitive advantage in securing new business. Our senior management team and advisory boards have extensive industry backgrounds and include former generals in the military, top government officials and corporate officers, intelligence and law enforcement officers, professional investigators and legal and crisis communications specialists.
 
We deliver risk mitigation and management services through the following four business units:
 
 
Preparedness Services develops and implements crisis management and emergency response plans for disaster mitigation, continuity of operations and other emergency management issues for governments, corporations and individuals. This unit is comprised of  JLWA.

 
Fraud and SIU Services provides investigative surveillance, anti-fraud solutions and business intelligence services to the insurance industry, law firms and multinational organizations. This unit is comprised of the following acquired companies: CBR; Hyperion Risk; Secure Source; Facticon and FAIS.

 
Security Consulting and Investigations delivers specialized security and investigative services, such as security assessments, threat analyses and forensic DNA analysis and casework, to governments, corporations and individuals. This unit is comprised of the following acquired companies: Safir; Bode; and On Line Consulting.

 
International Strategies provides a range of security and risk management services, such as global business intelligence, investigations and litigation support to foreign and domestic governments, corporations and individuals. Our International Strategies unit was our original core business.
 
Our Preparedness Services, Fraud and SIU Services, and Security Consulting and Investigations units represent our three financial reporting segments. Our International Strategies business unit, on the basis of its relative materiality, is included in our Fraud and SIU Services segment.

 
20

 

The following table represents the revenue contribution by each of these three reporting segments as a percentage of our total revenues:
 
   
For the Years Ended
December 31,
 
Segment
 
2009
   
2008
   
2007
 
          
  
       
Preparedness Services
    38.2 %     37.6 %     35.4 %
Fraud and SIU Services
    29.0       30.1       28.1  
Security Consulting and Investigations
    32.8       32.3       36.5  
Total
    100.0 %     100.0 %     100.0 %
 
Strategic Alternatives
 
We have retained the services of Needham & Company to explore strategic alternatives.  The exploration of strategic alternatives is consistent with our overall strategy to maximize stockholder value.  While we have not made any determination to pursue any transaction involving the sale of our entire business or any of our individual business units, pursuant to the retention of Needham we have had and continue to have discussions with various third parties with respect to potential transactions.  No assurance can be given that any such transaction will be effected and upon what terms such a transaction would be effected.
 
Revenues
 
Principally, we generate our revenues through providing risk mitigation solutions to our clients. For our Preparedness Services and Security Consulting and Investigations engagements, we typically invoice on a time and materials basis. For most of our Fraud and SIU Services engagements, we invoice on a fixed fee basis. We enter into contractual arrangements with most of our clients, on both an exclusive and non-exclusive basis. The duration of our engagements ranges from one week to two or more years. Over half of our revenues are generated from repeat client relationships that we have had for more than one year. In addition to our services, we also generate revenues from the sale of kits and supplies principally used by law enforcement to collect DNA materials. Generally, we must compete in the market for our clients based upon our reputation, service history and relationships. There are limited cases within all of our business segments that we are considered by our clients to be the sole source provider, based principally upon the experience of our personnel or, in the case of Bode and certain DNA investigations, our technical expertise. Our clients consist of government entities, corporations and high net-worth and high-profile individuals. We provide our services domestically through our own employees and through a network of approved subcontractors to achieve scale, geographic coverage or a specialized expertise. Currently, a small portion of our revenues is generated by services provided outside the United States.
 
Gross Profit
 
Our gross profit represents our revenues less the costs of revenues incurred to provide services to our clients. The most significant components of our costs of revenues are the costs of our direct labor, our third-party consultants and our reimbursable costs, which principally consist of travel expenses. For the most part, our costs of revenues are variable and based upon the type of services performed or the amount of revenues generated. Where possible, we structure our personnel arrangements to compensate our employees and our consultants on the basis of work performed. This enables us to maintain a variable cost structure and relatively consistent gross margins in our business segments from year to year. The variability in our gross margins results primarily from changes in our client mix. For our DNA analysis business, we incur fixed costs for our equipment and dedicated personnel.
 
Operating Expenses
 
Our selling and marketing expenses primarily include salaries and commissions, as well as travel and other expenses, incurred by our employees who are involved in selling and promoting our services. The accrued earnout expenses related to the acquisition of JLWA are also reflected in our selling and marketing expenses. Our general and administrative expenses consist primarily of salaries, bonuses, depreciation and amortization, and stock-based compensation for our employees not performing work directly for our clients. Also included in general and administrative expenses are corporate support expenses such as legal and professional fees, investor relations, human resources, facilities, telecommunication support services, information technology, stock option expenses, salaries for members of our senior management team and impairment losses recognized on goodwill.

 
21

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

   
For the years ended December 31,
 
   
2009
   
2008
   
2007
 
                   
Revenues
    100 %     100 %     100 %
Cost of revenues
    56       58       56  
Gross profit
    44       42       44  
                         
Operating expenses:
                       
Selling and marketing
    12       11       17  
General and administrative
    36       39       52  
Impairment loss on goodwill and intangibles
    -       -       6  
Total operating expenses
    48       50       75  
                         
Loss from operations
    (4 )     (8 )     (31 )
Other income (expense), net
    -       -       (1 )
                         
Net loss before income taxes
    (4 )     (8 )     (32 )
Provision for income taxes
    (1 )     -       -  
                         
Net loss after taxes
    (5 )     (8 )     (32 )
Net loss applicable to common stockholders
    (5 )%     (8 )%     (32 )%

GlobalOptions’ Year Ended December 31, 2009 Compared to the Year Ended December 31, 2008
 
Revenues

We had overall revenues of $102,130 for the year ended December 31, 2009, as compared to revenues of $104,187 for the year ended December 31, 2008, for an overall decrease of $2,057 or 2%  The decrease in revenues for the year ended December 31, 2009 was principally attributable to a slowdown in investigations and security projects resulting from recessionary economic conditions, partially offset by increases in revenues related to DNA projects at our Bode division.
 
Preparedness Services revenues were $39,003 for the year ended December 31, 2009, as compared to $39,117 for the year ended December 31, 2008, representing a decrease of $114 or less than 1%.  The State of Louisiana, which retained JLWA to manage the state’s relief program related to Hurricanes Katrina, Rita, and Gustav, represented $24,478 of revenues for the year ended December 31, 2009, as compared to $26,647 of revenues for the year ended December 31, 2008.
 
Fraud and SIU Services revenues were $29,593 for the year ended December 31, 2009, as compared to $31,388 for the year ended December 31, 2008.  The decrease of $1,795 or 6% was attributable to the reduction in revenues of $1,000 from our International Strategies Unit and $795 was on account of a slowdown in the demand for our investigations with our Fraud and SIU Unit, principally due to softness in the insurance industry.

Security Consulting and Investigations revenues were $33,534 for the year ended December 31, 2009, as compared to $33,682 for the December 31, 2008, representing a decrease of $148 or less than 1%.

 
22

 

Gross Profit

Our consolidated gross profit for the years ended December 31, 2009 and 2008 was $44,763 and $44,248, reflecting gross profit margins of 44% and 42%, respectively.  Preparedness Services gross profit was $17,933 or 46% of this segment’s revenues for the year ended December 31, 2009, as compared to $17,323 or 44% of this segment’s revenues for the year ended December 31, 2008, due to a decreased usage of outside consultants. Fraud and SIU Services gross profit was $12,066 or 41% of this segment’s revenues for the year ended December 31, 2009, as compared to $13,152 or 42% of this segment’s revenues for the year ended December 31, 2008.  Security Consulting and Investigations gross profit was $14,764 or 44% of this segment’s revenues for the year ended December 31, 2009, as compared to $13,773 or 41% of this segment’s revenues for the year ended December 31, 2008, due principally to measures taken to improve efficiency and greater utilization of labor and equipment on account of higher revenue levels at Bode.

Operating Expenses

Selling and marketing expenses were $12,455 or 12% of revenues for the year ended December 31, 2009, as compared to $11,504 or 11% of revenues for the year ended December 31, 2008, representing an increase of $949 or 8%.  During the years ended December 31, 2009 and December 31, 2008, we incurred earnout charges of $0 and $720 respectively, in connection with the May 11, 2007 JLWA Modification Agreement.  The $720 decrease in earnout is offset by an increased emphasis on selling and marketing activities during 2009, including additional personnel dedicated to these activities.

General and administrative expenses were $36,568 or 36% of revenues for the year ended December 31, 2009, as compared to $40,348 or 39% of revenues for the year ended December 31, 2008. The decrease of $3,780 or 9% is principally due to a decrease in headcount and professional fees.

Other Income (Expense), Net

Interest expense, net, was $540 for the year ended December 31 2009, as compared to $352 for the year ended December 31, 2008. The increase of $187 or 53% was attributable to an increase in the average balance outstanding under our line of credit.
 
Income Tax Provision
 
Income tax provision, to record deferred income taxes, was $511 for the year ended December 31, 2009.
 
GlobalOptions’ Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
 
Revenues

We had overall revenues of $104,187 for the year ended December 31, 2008, as compared to revenues of $87,131 for the year ended December 31, 2007, for an overall increase of $17,056 or 20%.  The increase in revenues for the year ended December 31, 2008 was principally attributable to a combination of organic growth and to our new client account relationships that we have obtained through the execution of our acquisition plan.
 
Preparedness Services revenues were $39,117 for the year ended December 31, 2008, as compared to $30,823 for the year ended December 31, 2007.  The increase of $8,294 or 27% was primarily attributable to an increase in revenues related to response and recovery efforts in Louisiana in connection with Hurricane Gustav as well as the flooding in Iowa and Indiana. The State of Louisiana, which retained JLWA to manage the state’s relief program related to Hurricanes Katrina, Rita, and Gustav, represented $26,647 of revenues for the year ended December 31, 2008, as compared to $25,536 of revenues for the year ended December 31, 2007.
 
Fraud and SIU Services revenues were $31,388 for the year ended December 31, 2008, as compared to $24,493 for the year ended December 31, 2007.  The increase of $6,895 or 28% was primarily attributable to the expansion of our client base through the acquisition of FAIS in April 2008 and benefitting from a full year of revenues from the Facticon acquisition, as well as through the addition of new program accounts.

Security Consulting and Investigations revenues were $33,682 for the year ended December 31, 2008, as compared to $31,815 for the December 31, 2007.  The increase of $1,867 or 6% was principally attributable to a full year of revenues from the acquisition of Bode, as well as through the expansion of our physical safety and security consulting practice.
 
 
23

 
 
Gross Profit

Our consolidated gross profit for the years ended December 31, 2008 and 2007 was $44,248 and $38,162, reflecting gross profit margins of 42% and 44%, respectively.  Preparedness Services gross profit was $17,323 or 44% of this segment’s revenues for the year ended December 31, 2008, as compared to $13,559 or 44% of this segment’s revenues for the year ended December 31, 2007. Fraud and SIU Services gross profit was $13,152 or 42% of this segment’s revenues for the year ended December 31, 2008, as compared to $11,117 or 45% of this segment’s revenues for the year ended December 31, 2007, due to changes in customer programs and product mix.  Security Consulting and Investigations gross profit was $13,773 or 41% of this segment’s revenues for the year ended December 31, 2008, as compared to $13,486 or 42% of this segment’s revenues for the year ended December 31, 2007, due primarily to changes in product mix at Bode.

Operating Expenses

Selling and marketing expenses were $11,504 or 11% of revenues for the year ended December 31, 2008, as compared to $14,821 or 17% of revenues for the year ended December 31, 2007, representing a decrease of $3,317 or 22%.  During the years ended December 31, 2008 and December 31, 2007, we incurred earnout charges of $720 and $6,330 respectively, in connection with the May 11, 2007 JLWA Modification Agreement.  The $5,610 decrease in earnout is offset by an increased emphasis on selling and marketing activities in 2008, including additional personnel dedicated to these activities.

General and administrative expenses were $40,348 or 39% of revenues for the year ended December 31, 2008, as compared to $44,908 or 52% of revenues for the year ended December 31, 2007. The decrease of $4,560 or 10% is principally due to personnel reductions implemented at the operating levels and corporate cost savings attributable to lower professional fees on account of reduced restructuring activities and fewer acquisitions in 2008.

Other Income (Expense), Net

Interest expense, net, was $352 for the year ended December 31 2008, as compared to $517 for the year ended December 31, 2007. The decrease of $165 or 32% was attributable to a net decrease in debt related to acquisitions.

Liquidity and Capital Resources

We had a cash and cash equivalent balance of $3,221 as of December 31, 2009.

Cash provided by (used in) operating activities was approximately $6,082 and ($839) for the years ended December 31, 2009 and 2008, respectively.  Cash provided by operating activities for the year ended December 31, 2009 resulted primarily from improvements in the collection of accounts receivable of $8,112 as well as  non-cash charges for depreciation and amortization $3,352 and for stock based compensation of $2,831, offset by our net loss of $5,311 as well as an increase in the use of funds to reduce accounts payable of $2,634.

Cash used in operating activities for the year ended December 31, 2008 resulted primarily from our net loss of $7,956 as well as an increase in the use of funds to finance accounts receivable of $1,219, offset by non-cash charges for depreciation and amortization of $4,366 and for stock based compensation of $4,258.

Cash used in investing activities during 2009 was $2,865 of which $2,797 related to the purchases of property and equipment, including the capitalization of internally developed software. Cash used in investing activities for the year ended December 31, 2008 was $4,430, of which $2,548 related to the Company’s acquisition of FAIS in April 2008.

Financing activities used net funds of $5,272 during the year ended December 31, 2009 and provided net funds 6,119 for the year ended December 31, 2008. Cash used during the year ended December 31, 2009 was primarily to the paydown the line of credit. Cash provided for the year ended December 31, 2008 was primarily due to draws upon our line of credit of $7,093, less repayment of notes payable of approximately $800, and the repurchase of common stock of approximately $208.

 
24

 

We have an arrangement with a financial institution that provides a line of credit for us and our wholly owned subsidiaries.  The applicable interest rate with respect to the amount outstanding under the line of credit ranges from 1.00% to 1.75%, based upon our liquidity, plus the greater of 6.25% or the lender’s most recently announced “prime rate.”  As of December 31, 2009, our net borrowings were $2,163 under the line of credit and based upon the amount of qualifying accounts receivable, we were eligible to draw up an additional $7,837 for up to a total of $10,000 under the line of credit.  The line of credit and all obligations outstanding thereunder are due and payable not later than March 30, 2010.  We are currently in discussions with respect to the renewal or replacement of this line of credit.  We anticipate that any renewal or replacement would be in an aggregate amount sufficient for our current working capital requirements.  There can be no assurance that we will successfully renew or replace this line of credit.
 
In connection with exploring our strategic alternatives, during the year ended December 31, 2009, we have spent approximately $669.  We believe that as we pursue these efforts in 2010, we may need to spend additional funds towards these strategic alternatives.
 
For the year 2009, we have met our cash needs through operating cash flows and through borrowings under our line of credit.  At December 31, 2009, we had working capital of $15,356.   We believe that a combination of cost reductions that we have implemented during 2009 and will continue to implement in 2010, along with our targeted improvements in revenues in 2010, will allow us to generate improvements in 2010 cash flows from operations, as compared to 2009.  Furthermore, we believe that these improved operating cash flows, along with the proceeds from our line of credit arrangement, will be sufficient to finance our operations through December 31, 2010.

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

Critical Accounting Policies

Our significant accounting policies, including the assumptions and judgments underlying them, are more fully described in our “Notes to Consolidated Financial Statements” included elsewhere within this Annual Report on Form 10-K. Some of our accounting policies require the application of significant judgment by management in the preparation of the consolidated financial statements and, as a result, they are subject to a greater degree of uncertainty. In applying these policies, management uses its judgment to determine the appropriate assumptions to be used in calculating estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. We have identified certain of our accounting policies as the ones that are most important to the portrayal of our consolidated financial condition and results of operations and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our critical accounting policies include the following:
 
Revenue Recognition and Related Costs
 
For investigation, crisis management and non-DNA related security, revenue is recognized on a time and materials or fixed price arrangement and is recognized as the services are performed pursuant to the applicable contractual arrangements. Revenue related to time and materials arrangements is recognized in the period in which the services are performed. Revenue related to fixed price arrangements is recognized based upon the achievement of certain milestones or progress points within the project plan. The impact of any revisions in estimated total revenue and direct contract costs is recognized in the period in which they become known. Expenses incurred by professional staff in the generation of revenue are billed to the client and recorded as revenue when incurred.
 
For DNA related revenues, revenue is recognized when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence that an agreement exists, prices are fixed or determinable, services and products are provided to the client, and collectability is reasonably assured. The Company reduces revenue for estimated discounts and other allowances.

 
25

 

Revenues earned on DNA related services are derived from the following sources: (1) forensic DNA analysis; (2) research and development projects; and (3) sales of DNA collection products. The Company recognizes revenues from forensic DNA analysis at the time tests are completed and the results are reported to the client. Revenues from research and development projects are recognized as the related research is completed and when the Company has satisfied specific obligations under the terms of the respective agreements. Revenues from the sales of DNA collection products are recognized upon delivery of the products to the client.
 
Forensic DNA analysis is billed on a per sample fixed fee arrangement. Research and development projects are billed on a cost plus fixed fee arrangement.
 
Costs incurred in the performance of forensic DNA analysis are recorded as inventories and charged to cost of revenues upon the completion of the project, which generally ranges from one to three months. Costs related to research and development projects are expensed as incurred and costs related to DNA collection products are maintained as inventory and charged to operations when the products are delivered.

        Intangible Assets, Goodwill and Impairment
 
In accordance with accounting standards, we recognize certain intangible assets acquired in acquisitions, primarily goodwill, trade names, covenants not to compete and client relationships.  On a regular basis, we perform impairment analysis of the carrying value of goodwill and certain other intangible assets by assessing the recoverability when there are indications of potential impairment based on estimates of undiscounted future cash flows.
 
Allowance for Doubtful Accounts
 
The number of clients that comprise our client base, along with the different industries, governmental entities and geographic regions, including foreign countries, in which our clients operate, limits concentrations of credit risk with respect to accounts receivable. We do not generally require collateral or other security to support client receivables, although we do require retainers, up-front deposits or irrevocable letters of credit in certain situations. We have established an allowance for doubtful accounts based upon facts surrounding the credit risk of specific clients and past collections history. Credit losses have been within management’s expectations.
 
Stock-Based Compensation

The Company utilizes the fair value method for stock-based awards and the related stock-based compensation is based upon the estimated grant-date fair value. The Company recognizes these compensation costs over the requisite service period of the award, which is generally the vesting term of the options associated with the underlying employment agreement, where applicable.

Accounting guidance requires forfeitures to be estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.
 
We account for equity instruments issued to non-employees in accordance with accounting standards which require that such equity instruments be recorded at their fair value on the measurement date, which is typically the date the services are performed. Stock-based compensation for non-employees is reflected within general and administrative expenses.
 
Recent Accounting Pronouncements
 
In June 2009, the FASB issued new accounting guidance that established the FASB Accounting Standards Codification, ("Codification" or “ASC”) as the single source of authoritative GAAP to be applied by nongovernmental entities, except for the rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants.  The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. This new guidance became effective for interim and annual periods ending after September 15, 2009.  Other than the manner in which new accounting guidance is referenced, the adoption of these changes did not have a material effect on our consolidated financial statements.

 
26

 

In February 2007, the FASB issued new accounting guidance, under ASC Topic 825 on financial instruments, which permits entities to choose to measure many financial instruments and certain other items at fair value. The fair value option established by this statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Adoption is required for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of ASC Topic 820 on fair value measurements and disclosures. We did not elect the fair value reporting option for any assets and liabilities not previously recorded at fair value.

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

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

In March 2008, the FASB issued new accounting guidance under ASC Topic 815 on derivatives and hedging, which changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flow.  The guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  This accounting guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The adoption of this guidance did not have a material effect on our consolidated financial statements.

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

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

 
27

 

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

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

Item 8. Financial Statements and Supplementary Data.

           Our consolidated financial statements and the related notes to the financial statements called for by this item appear under the caption “Index to Consolidated Financial Statements” beginning on Page F-1 attached hereto of this Annual Report on Form 10-K.

 
28

 
 
GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Table of Contents to Consolidated Financial Statements

 
Page(s)
Report of Independent Registered Public Accounting Firm
F-2
   
Consolidated Balance Sheets as of December 31, 2009 and 2008
F-3
   
Consolidated Statements of Operations for the Years Ended December 31, 2009,  2008 and 2007
F-4
   
Consolidated Statements of Stockholders' Equity for the Years Ended December 2009, 2008 and 2007
F-5
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
F-8
   
Notes to Consolidated Financial Statements
F-12
 
 
F-1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors and Shareholders
Of GlobalOptions Group, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of GlobalOptions Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2009, 2008 and 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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 audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of GlobalOptions Group, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years ended December 31, 2009, 2008 and 2007 in conformity accounting principles generally accepted in the United States of America.

/s/ Marcum LLP

New York, New York
 
March 16, 2010

 
F-2

 
 
GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands, except per share amount)

   
December 31,
 
   
2009
   
2008
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 3,221     $ 5,276  
Accounts receivable, net
    19,632       27,485  
Inventories, net
    3,354       2,522  
Prepaid expenses and other current assets
    840       862  
                 
Total current assets
    27,047       36,145  
                 
                 
Property and equipment, net
    6,994       5,834  
Intangible assets, net
    4,268       5,981  
Goodwill
    19,968       19,968  
Security deposits and other assets
    537       553  
                 
Total assets
  $ 58,814     $ 68,481  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Line of credit
  $ 2,163     $ 7,093  
Notes payable
    -       400  
Accounts payable
    3,565       6,199  
Deferred revenues
    590       585  
Accrued compensation and related benefits
    3,643       3,155  
Other current liabilities
    1,730       1,966  
                 
Total current liabilities
    11,691       19,398  
                 
Long-term liabilities:
               
Deferred tax obligation
    511       -  
Other long-term obligations
    789       838  
Total long-term liabilities
    1,300       838  
                 
Total liabilities
    12,991       20,236  
                 
Commitments and contingencies
               
                 
Stockholders'  equity:
               
Preferred stock, $0.001 par value, 14,900,000 shares authorized, no shares issued or outstanding Series D convertible preferred stock, non-voting, $0.001 par value, 100,000 shares authorized, dividends do not accrue,  no anti-dilution protection,  0 and 55,388.37 shares  issued and outstanding, convertible into 0 and 3,692,743  shares of common stock  at December 31, 2009 and 2008, respectively, liquidation preference   of $0.001 per share or $0.
    -       -  
Common stock, $0.001 par value; 100,000,000 shares authorized; 14,472,363 shares issued and 14,348,469  shares outstanding at December 31, 2009,  and   10,486,935 shares issued and 10,379,868 shares outstanding at December 31, 2008,  and
    14       10  
Additional paid-in capital
    111,909       108,989  
Accumulated deficit
    (65,857 )     (60,546 )
Treasury stock; at cost, 123,894 and 107,067 shares at December 31, 2009 and December 31, 2008, respectively
    (243 )     (208 )
Total stockholders' equity
    45,823       48,245  
Total liabilities and stockholders' equity
  $ 58,814     $ 68,481  
 
See notes to these consolidated financial statements.

 
F-3

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)

   
For the Years Ended December 31,
 
   
2009
   
2008
   
2007
 
                   
Revenues
  $ 102,130     $ 104,187     $ 87,131  
                         
Cost of revenues
    57,367       59,939       48,969  
Gross profit
    44,763       44,248       38,162  
                         
Operating expenses:
                       
                         
Selling and marketing
    12,455       11,504       14,821  
                         
General and administrative
    36,568       40,348       44,908  
                         
Impairment loss on goodwill and intangibles
    -       -       5,144  
                         
Total operating expenses
    49,023       51,852       64,873  
                         
Loss from operations
    (4,260 )     (7,604 )     (26,711 )
                         
Other income (expense):
                       
                         
Interest income
    12       27       297  
                         
Interest expense
    (552 )     (379 )     (814 )
                         
Other income
    -       -       100  
                         
Prepayment premium
    -       -       (800 )
                         
Other expense, net
    (540 )     (352 )     (1,217 )
                         
Loss before income taxes
    (4,800 )     (7,956 )     (27,928 )
                         
Income tax provision
    511       -       -  
                         
Net loss
  $ (5,311 )   $ (7,956 )   $ (27,928 )
                         
Basic and diluted net loss per share
  $ (0.41 )   $ (0.81 )   $ (6.69 )
                         
Weighted average number of common shares outstanding - basic and diluted
    12,870,729       9,834,069       4,177,435  
 
See notes to these consolidated financial statements.

 
F-4

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
 Consolidated Statement of Stockholders' Equity
For the Year Ended December 31, 2009
(dollars in thousands)

                           
Series D
                   
                           
Convertible
   
Additional
             
   
Common Stock
   
Treasury Shares
   
Preferred Stock
   
Paid-in
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance, January 1, 2009
    10,486,935     $ 10       107,067     $ (208 )     55,388.37     $ -     $ 108,989     $ (60,546 )   $ 48,245  
                                                                         
Stock issued to consultants for services
    89,577       -       -       -       -       -       165       -       165  
                                                                         
Shares issued upon the exercise of stock options
    44       -       -       -       -       -       -       -       -  
                                                                         
Shares issued in connection with the vesting of RSUs
    134,274       -       -       -       -       -       -       -       -  
                                                                         
Treasury shares acquired in satisfaction of income tax withoholding
    -       -       16,827       (35 )     -       -       -       -       (35 )
                                                                         
Issuance of common stock in connection with the conversion of Series D Convertible Preferred Stock
    3,692,552       4       -       -       (55,388.37 )     -       (4 )     -       -  
                                                                         
Issuance of common stock under employee stock purchase plan
    68,981       -       -       -       -       -       93       -       93  
                                                                         
Stock based compensation - restricted stock vested
    -       -       -       -       -       -       1,041       -       1,041  
                                                                         
Stock based compensation - employee stock purchase plan
    -       -       -       -       -       -       31       -       31  
                                                                         
Amortization of consultant stock option costs
    -       -       -       -       -       -       96       -       96  
                                                                         
Amortization of employee stock options costs
    -       -       -       -       -       -       394       -       394  
                                                                         
Amortization of consultant restricted stock unit costs
    -       -       -       -       -       -       4       -       4  
                                                                         
Amortization of employee restricted stock unit costs
    -       -       -       -       -       -       1,100       -       1,100  
                                                                         
Net loss
    -       -       -       -       -       -       -       (5,311 )     (5,311 )
                                                                         
Balance, December 31, 2009
    14,472,363     $ 14       123,894     $ (243 )     -     $ -     $ 111,909     $ (65,857 )   $ 45,823  

See notes to these consolidated financial statements.
 
F-5

 

GLOBALOPTIONS GROUP, INC. AND SUBSIDIARIES
 Consolidated Statement of Stockholders' Equity
For the Year Ended December 31, 2008
(dollars in thousands)

                           
Series D
                   
                           
Convertible
   
Additional
             
   
Common Stock
   
Treasury Shares
   
Preferred Stock
   
Paid-in
   
Accumulated
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Total
 
Balance, January 1, 2008
    9,660,269     $ 10       -     $ -       55,989.32     $ -     $ 102,537     $ (52,590 )   $ 49,957  
                                                                         
Stock issued to consultants for services
    26,984       -       -       -       -       -       167       -       167  
                                                                         
Treasury shares acquired in satisfaction of income tax withoholding
    -       -       19,567       (50 )     -       -       -       -       (50 )
                                                                         
Treasury shares acquired in connection with settlement of Facticon matters
    -       -       87,500       (158 )     -       -       -       -       (158 )
                                                                         
Issuance of common stock to sellers of JLWA in satisfaction of $2,160 obligation to issue common stock
    225,000       -       -       -       -       -       2,160       -       2,160  
                                                                         
Issuance of common stock to sellers of JLWA
    75,000       -       -       -       -       -       720       -       720  
                                                                         
Issuance of common stock in connection with the conversion of Series D Convertible Preferred Stock
    40,064       -       -       -       (600.95 )     -       -       -       -  
                                                                         
Issuance of common stock to executive employees for future services
    437,500       -       -       -       -       -       -       -       -  
                                                                         
Issuance of common stock under employee stock purchase plan
    22,118       -       -       -       -       -       34       -       34  
                                                                         
Stock based compensation - restricted stock vested
    -       -       -       -       -       -       1,058       -       1,058  
                                                                         
Stock based compensation - employee stock purchase plan
    -       -       -       -       -       -       11       -       11  
                                                                         
Amortization of consultant stock option costs
    -       -       -       -       -       -       122       -       122  
                                                                         
Amortization of employee stock options costs
    -       -       -       -       -       -       1,650       -       1,650  
                                                                         
Amortization of consultant restricted stock unit costs
    -       -       -       -       -       -       4       -       4