UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period _____________ to _________________
Commission File Number 1-11454-03
vFINANCE, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 58-1974423
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3010 North Military Trail, Suite 300, Boca Raton, FL 33431
(Address of principal executive offices)
(561) 981-1000
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Actof 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ( x ) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b of the Exchange Act). Yes ( ) No ( x )
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of August 13, 2004:
33,295,868 shares of Common Stock $0.01 par value
INDEX
VFINANCE, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - June 30,2004 (Unaudited)................4
Consolidated Statements of Operations for the three months and
six months ended June 30, 2004 and 2003(Unaudited)...............5
Consolidated Statements of Cash Flows for the six months ended
June 30, 2004 and 2003 (Unaudited) ..............................6
Notes to Consolidated Financial Statements (Unaudited) ............7-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................11-13
Item 3. Controls and Procedures .............................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................15
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities................................................15
Item 6. Exhibits and Reports on Form 8-K ....................................16
Signatures ...................................................................17
2
FORWARD-LOOKING STATEMENTS
This Form 10-QSB for vFinance, Inc. (the "Company") includes statements that may
constitute "forward-looking" statements, usually containing the words "believe",
"estimate", "intend", "expect", or similar expressions. These statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward looking statements inherently involve risks and
uncertainties that could cause actual results to differ materially from the
forward-looking statements. Factors that would cause or contribute to such
differences include, but are not limited to, the inability of our broker-dealer
operations to operate profitably in the face of intense competition from larger
full service and discount brokers, a general decrease in merger and acquisition
activities as well as our potential inability to receive success fees as a
result of transactions not being completed, our potential inability to implement
our growth strategy through acquisitions or joint ventures, our potential
inability to secure additional debt or equity financing to support our growth
strategies and other risks detailed in the Company's periodic report filings
with the Securities and Exchange Commission. By making these forward-looking
statements, the Company undertakes no obligation to update these statements for
revisions or changes after the date of this Form 10-QSB.
3
vFINANCE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2004
---------------------
Assets:
Current Assest:
Cash and cash equivalents $ 2,171,025
Due from clearing broker 614,849
Investments in trading securities 3,684,519
Accounts receivable, net of allowance
for doubtful accounts 133,002
Forgivable loans-employees, current portion 44,259
Notes receivable-employees, net of allowance
for doubtful accounts 212,964
Prepaid expenses and other current assets 77,163
---------------------
Total current assets 6,937,781
Furniture and equipment, at cost:
Furniture and equipment 559,429
Internal use software 158,500
---------------------
717,929
Less accumulated depreciation (476,063)
---------------------
Net furniture and equipment 241,866
Goodwill 420,000
Other assets 614,298
--------------------
Total Assets $ 8,213,945
====================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 1,207,848
Accrued payroll 1,443,026
Other accrued liabilities 476,165
Securities sold, not yet purchased 846,989
Other 8,023
--------------------
Total current liabilities 3,982,051
Shareholders' Equity:
Series A Convertible Preferred Stock $0.01
par value, 122,500 shares authorized, 0 shares
issued and outstanding -
Series B Convertible Preferred Stock $0.01 par
value, 50,000 shares authorized, 0 shares issued
and outstanding -
Common stock $0.01 par value, 75,000,000 shares
authorized, 33,295,868 shares issued and outstanding 332,959
Additional paid-in-capital on common stock 25,195,546
Deferred compensation (22,059)
Accumulated deficit (21,274,552)
------------------
Total Shareholders' Equity 4,231,894
------------------
Total Liabilities and Shareholders' Equity $ 8,213,945
==================
See accompanying notes.
4
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED JUNE ENDED JUNE ENDED JUNE ENDED JUNE
30, 30, 30, 30,
---------------- ---------------- -------------------- -------------------
2003 2004 2003 2004
---------------- ---------------- -------------------- -------------------
Revenues:
Commissions - agency $ 3,427,594 $ 3,834,463 $ 5,682,357 $ 7,934,652
Trading profits 992,457 934,934 1,756,318 2,507,687
Success Fees 763,490 558,913 972,040 1,839,802
Consulting and retainers 137,502 67,673 285,774 138,000
Other brokerage related income 666,726 633,878 954,709 1,314,258
Other 117,533 115,789 229,985 223,821
---------------- ---------------- -------------------- -------------------
Total revenues 6,105,302 6,145,650 9,881,183 13,958,220
---------------- ---------------- -------------------- -------------------
Cost of revenues:
Commissions 3,371,337 3,693,684 5,286,770 8,019,365
Clearing and transaction costs 217,718 258,879 391,725 404,289
Success 444,677 366,723 510,728 987,314
Consulting and retainers 79,542 37,350 128,749 87,896
Other 5,279 100 10,038 4,187
---------------- ---------------- -------------------- -------------------
Total cost of revenues 4,118,553 4,356,736 6,328,010 9,503,051
---------------- ---------------- -------------------- -------------------
Gross profit 1,986,749 1,788,914 3,553,173 4,455,169
---------------- ---------------- -------------------- -------------------
Other expenses:
General and administrative 1,587,585 1,419,376 3,193,134 3,239,441
Professional fees 113,714 43,900 175,142 100,487
Provision for bad debt 25,867 - 25,867 75,446
Legal litigation 94,015 111,543 159,257 267,641
Depreciation and amortization 29,176 29,167 58,222 58,342
Amounts forgiven under forgivable loans 27,500 21,250 55,000 42,500
Stock based compensation 2,647 1,324 15,067 2,647
---------------- ---------------- -------------------- -------------------
Total other expenses 1,880,504 1,626,560 3,681,689 3,786,504
---------------- ---------------- -------------------- -------------------
Income/(Loss) from operations 106,245 162,354 (128,516) 668,665
Gain on forgiveness of debt - - - 1,500,000
Interest and dividend income (expense) (23,618) 9,541 (50,820) (252,979)
---------------- ---------------- -------------------- -------------------
Pre-tax Net Income/(Loss) 82,627 171,895 (179,336) 1,915,686
Income tax benefit - - - 400,000
---------------- ---------------- -------------------- -------------------
Net Income/(Loss) available to common
shareholders $ 82,627 $ 171,895 $ (179,336) $ 2,315,686
================ ================ ==================== ===================
Net Income/(Loss) per share:
Basic $ 0.00 $ 0.01 $ (0.01) $ 0.07
================ ================ ==================== ===================
Weighted average number of common shares
used in computing basic net income/(loss)
per share 31,160,844 33,283,646 28,868,237 32,221,763
================ ================ ==================== ===================
Diluted $ 0.00 $ 0.00 $ (0.01) $ 0.06
================ ================ ==================== ===================
Weighted average number of common shares
used in computing diluted net income/(loss)
per share 35,434,387 37,557,189 28,868,237 36,495,306
================ ================ ==================== ===================
See accompanying notes.
5
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
2004 2003
---------------------- ----------------------
OPERATING ACTIVITIES
Net income/(loss) $ 2,315,686 $ (179,336)
Adjustments to reconcile net income/(loss) to
net cash used in operating activities:
Non-cash fees received (408,417) (219,817)
Gain on forgiveness of debt (1,500,000) -
Income tax benefit (400,000) -
Depreciation and amortization 58,342 58,221
Provision for doubtful accounts 73,696 25,866
Non-cash compensation 280,014 40,797
Conversion premium expense 231,625 -
Accretion of debt discount 18,348 36,697
Unrealized loss (gain) on investments, net 123,741 (116,419)
Unrealized loss (gain) on warrants 10,382 156,574
Amount forgiven under forgivable loans 21,250 55,000
Stock based compensation 1,324 15,067
Changes in operating assets and liabilities:
Accounts receivable (17,921) (19,181)
Forgivable Loans 21,250
Due from clearing broker (445,220) 134,955
Notes receivable - employees (31,005) 44,946
Investments in trading securities (2,595,393) 351,584
Other current assets - 14,228
Other assets and liabilities (5,818) (29,072)
Accounts payable and accrued liabilities (23,608) 390,920
Securities, sold not yet purchased 763,210 5,575
---------------------- ----------------------
Net cash provided by (used in) operating activities (1,508,514) 766,605
INVESTING ACTIVITIES
Purchase of equipment (104,275) (6,529)
---------------------- ----------------------
Net cash used in investing activities (104,275) (6,529)
FINANCING ACTIVITIES
Proceeds from issuance of common stock
related to private placement - 130,000
---------------------- ----------------------
Net cash provided by financing activities - 130,000
Increase (decrease) in cash and cash equivalents (1,612,789) 890,076
Cash and cash equivalents at beginning of year 3,783,814 2,227,161
---------------------- ----------------------
Cash and cash equivalents at end of period $ 2,171,025 $ 3,117,237
====================== ======================
See accompanying notes.
6
vFinance, Inc.
Notes to Consolidated Financial Statements June 30, 2004
(Unaudited)
1. DESCRIPTION OF BUSINESS
vFinance, Inc. is a holding company engaged in the financial information
services business through our web site www.vfinance.com, and through our
principal operating subsidiary, vFinance Investments, Inc. which is a
broker-dealer licensed to conduct business in all 50 states and the District of
Columbia. We provide retail and institutional securities brokerage, investment
banking and research services with a strategic focus on servicing the needs of
high net-worth investors, institutional investors and high growth companies.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany accounts have been eliminated in
consolidation.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for the six-month
period ended June 30, 2004 are not necessarily indicative of the results to be
expected for the year ended December 31, 2004. The interim financial statements
should be read in conjunction with the audited financial statements and notes
contained in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2003.
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES. Under this method, deferred income tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. Net
operating loss carryforwards totaled approximately $11,000,000 at December 31,
2003. Each quarter the Company weighs the available positive and negative
evidence and determines the extent to which the net operating loss carryforwards
is realizable. As of June 30, 2004, the Company determined that $400,000 was
realizable and recorded a deferred tax asset in that amount.
RECLASSIFICATIONS. Certain prior period balances have been reclassified to
conform to the current period's financial statement presentation. These
reclassifications had no impact on previously reported results of operations or
stockholders' equity.
3. IMPAIRMENT OF GOODWILL
Management determined that there was no impairment of goodwill during the
quarters ended June 30, 2003 and 2004. Goodwill carried on the balance sheet as
of June 30, 2004 was $420,000. The Company evaluates the recoverability and
carrying value of its Goodwill and long-lived assets at each balance sheet date,
based on guidance issued in SFAS no. 144, "Accounting for the impairment or
Disposal of Long-Lived Assets." Among other factors considered in such
evaluation is the historical and projected operating performance of business
operations, the operating environment and business strategy, competitive
information and market trends.
4. SHAREHOLDERS' EQUITY
During February and March of 2004, $721,500 of the Company's indebtedness to
SBI, as evidenced by a convertible note, was converted into 3,344,298 shares of
the Company's common stock. Of this amount, $545,000 was converted into
2,725,000 shares of the Company's common stock at a discounted rate of $0.20 per
share under a special arrangement offered by the Company to encourage further
equity participation by SBI, which resulted in a $231,625 conversion premium
expense during the first quarter of 2004. The remainder, $176,500, was converted
into 619,298 shares at the stated conversion rate of $0.285 per share.
As of March 31, 2004, the imputed interest had been fully amortized and the
remaining note payable to SBI was $28,500. In April of 2004, the remaining
balance was converted into 100,000 shares of common stock of the Company at the
original stated conversion rate of $.285 per share.
7
A summary of the stock option activity for the six months ended June 30, 2004 is
as follows:
Weighted
Average
Exercise Number Exercise Price
Price of Shares Per Option
-------- --------- -------------
Outstanding options at December 31, 2003 $0.20 10,346,211 $0.15 - $6.00
Granted................................. $0.21 1,730,000 $0.20 - $0.35
Cancelled .............................. $0.23 (135,000) $0.15 - $0.32
----------
Outstanding options at June 30, 2004.. $0.28 11,941,211 $0.15 - $6.00
----------
A summary of the stock purchase warrant activity for the six months ended June
30, 2004 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Warrants Per Option
-------- --------- -------------
Outstanding warrants at December 31, 2003 $1.70 5,398,499 $0.15 - $7.20
Granted ................................. - - -
Cancelled ............................... - - -
Outstanding options at June 30, 2004.... $1.70 5,398,499 $0.15 - $7.20
=========
The following table summarizes information concerning stock options outstanding
at June 30, 2004.
Option Options
Price Outstanding
----- -----------
0.15 1,415,000
0.20 2,455,000
0.21 4,765,997
0.22 50,000
0.25 5,000
0.28 70,000
0.32 1,130,000
0.35 1,494,215
0.50 100,000
0.55 69,000
0.63 142,500
0.70 39,000
1.00 18,000
2.25 157,499
4.00 10,000
5.00 10,000
6.00 10,000
----------
11,941,211
==========
8
The following table summarizes information concerning warrants outstanding at
June 30, 2004.
Exercise Warrants
Price Outstanding
----- ------------
0.15 250,000
0.20 1,000,000
0.35 1,993,500
0.63 400,000
2.25 625,000
2.50 300,000
6.00 129,999
7.20 700,000
---- ---------
5,398,499
=========
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options under the fair value method. The fair value for
options and warrants granted was estimated at the date of grant using the Black
Scholes option pricing model with the following weighted-average assumptions:
for 2004 risk free interest rates of 3.80%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 1.322 for
options and warrants and an expected life of the options and warrants of 4-5
years. The Company's pro forma net income for the period ended June 30, 2004 was
$2,019,583. The Company's pro forma basic and diluted net income per share for
the period ended June 30, 2004 was $0.06 The impact of the Company's pro forma
net loss and loss per share of the SFAS 123 pro forma requirements are not
likely to be representative of future pro forma results.
6. DEBT
On January 25, 2002, the Company entered into a Credit Agreement with UBS
Americas, Inc. ("UBS"). Under the terms of the Credit Agreement, UBS provided a
revolving credit facility of up to $3,000,000 to the Company for the purpose of
supporting the expansion of its brokerage business or investments in
infrastructure to expand its operations or its broker-dealer operations. The
loan had a term of 3 years, was required to be repaid in full by January 2005,
and accrued interest at LIBOR plus a LIBOR margin of 2% if the loan was repaid
within a month or 5% if it was outstanding more than a month. The Company
borrowed $1,500,000 under the credit facility on January 28, 2002 leaving an
additional $1,500,000 available. In June 2003, Fidelity Investments, on behalf
of its clearing division, National Financial Services LLC, Member NYSE/SIPC, a
Fidelity Investments company ("NFS"), announced that it had acquired
Correspondent Services Clearing ("CSC"), an affiliate of UBS and vFinance
Investments' clearing firm at the time. The credit facility stayed with UBS
subsequent to the acquisition giving rise to potential breaches under such
credit facility as well as precluding the Company from drawing an additional
$1,500,000 there under. During March 2004, NFS agreed to directly pay down the
UBS credit facility in the amount of $1,500,000 pursuant to a guaranty Fidelity
Investments made to UBS as part of their original acquisition of the CSC
clearing division. As a result, the Company was relieved from $1,500,000 in debt
but no longer had the ability to obtain an additional $1,500,000 under the
credit facility.
During March 2004, the Company entered into a clearing agreement with NFS. The
new clearing agreement required NFS to pay to vFinance, over a five year period
beginning January 2004, a monthly incentive bonus not to exceed $25,000 per
month up to $1,500,000 in aggregate, based on a formula that the Company
believes is very achievable. Accordingly, NFS has been paying $25,000 per month
related to this incentive calculation and such cumulative amount, $150,000
through June 30, 2004, has been included in the attached statements of
operations as "other brokerage related income". The new clearing agreement also
required NFS to provide the Company with $200,000 to assist the company with
transition costs related to the conversion from CSC to NFS. This amount was paid
to vFinance in March 2004 and was included in the first quarter's statements of
operations as a reduction to clearing and transaction costs. In consideration
for these incentives, NFS required a termination fee of $1,700,000 should
vFinance discontinue using NFS' services. This fee is reduced, pro rata,
annually over the five year term of the agreement. The Company began clearing
through NFS during May 2004.
9
7. CONTINGENCIES
On February 06, 2002, vFinance Investments, Inc. and vFinance Capital, L.C.
filed an action with the American Arbitration Association against Endovasc,
LTD., Inc. (Endovasc). The complaint alleges breach of contract and requests an
order of specific performance in connection with the failure of Endovasc, to pay
investment banking fees of $22,500.00 and to issue 3 million warrants to
purchase shares of Endovasc's common stock. Endovasc filed a counterclaim on May
26th, 2004. The Counterclaim alleges breach of duties and obligations by
vFinance and claims that Endovasc has suffered damages in excess of $5 million.
Mediation is scheduled to take place on September 27, 2004. The Company is
continuing to pursue these claims against Endovasc and to vigorously defend the
counterclaim, which it believes is without merit.
On November 13, 2003, UBUY Holdings, Inc., f/k/a/ E-PAWN.COM, Inc., and Steven
Bazuly, and for and on behalf of all of the shareholders of UBUY Holdings, Inc.
filed an amended complaint for damages and consequential damages against
vFinance Investments, Inc. and approximately 60 other defendants in the United
States District Court for the Southern District of Florida stating, among other
things, that there were violations of certain securities rules and regulations.
The Company was not served with this complaint until April 20, 2004. The Company
believes that their claim is without merit and will vigorously defend this
action.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the SEC, requires all
companies to include a discussion of critical accounting policies or methods
used in the preparation of financial statements. Note 2 to our consolidated
financial statements dated December 31, 2003 includes a summary of the
significant accounting policies and methods used in the preparation of our
consolidated financial statements. The following is a brief discussion of the
more significant accounting policies and methods used by us.
GENERAL. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
REVENUE RECOGNITION. We earn revenue from brokerage and trading which are
recognized on the day of the trade. We also earn revenue from investment banking
and consulting. Monthly retainer fees for investment banking and consulting are
recognized as earned. Investment banking success fees are generally based on a
percentage of the total value of a transaction and are recognized upon
successful completion.
We do not require collateral from our customers. Revenues are not concentrated
in any particular region of the country or with any individual or group.
We periodically receive equity instruments, which include stock purchase
warrants and common and preferred stock, from companies as part of our
compensation for investment-banking services. Such instruments are classified as
investments in trading securities on the balance sheet if still held at the
financial reporting date and are stated at fair value in accordance with SFAS
#11 "Accounting for certain investments in debt and equity securities" and EITF
00-8 "Accounting by a grantee for an equity instrument to be received in
conjunction with providing goods or services." Primarily all of the equity
instruments are received from small public companies. The stock and stock
purchase warrants received are typically restricted as to resale, though the
Company generally receives a registration right within one year. Company policy
is to sell these securities, as their restrictions are removed, in anticipation
of short-term market movements. We recognize revenue for these stock purchase
warrants when received based on the Black Scholes valuation model. The revenue
recognized related to other equity instruments is determined based on available
market information, discounted by a factor reflective of the expected holding
period for those particular equity instruments. On a monthly basis, we recognize
unrealized gains or losses in the statement of operations based on the changes
in value in the stock purchase warrants and other equity instruments. Realized
gains or losses are recognized in the statement of operations when the related
stock purchase warrants or other equity instruments are sold.
Occasionally, we receive equity instruments in private companies with no readily
available market value. Equity interests and warrants for which there is not a
public market are valued based on factors such as significant equity financing
by sophisticated and unrelated new investors, history of positive cash flow from
operations, the market value of comparable publicly traded companies (discounted
for liquidity) and other pertinent factors. Management also considers recent
offers to purchase a portfolio company's securities and the filings of
registration statements in connection with a portfolio company's initial public
offering when valuing warrants.
On occasion, we distribute equity instruments or proceeds from the sale of
equity instruments to our employees as compensation for their investment banking
successes. These distributions comply with compensation agreements which vary on
a "banker by banker" basis. Accordingly, unrealized gains or losses recorded in
the statement of operations related to securities held by us at each period end
may also impact compensation expense and accrued compensation.
As of June 30, 2004, certain transactions in process may result in us receiving
equity instruments or stock purchase warrants in subsequent periods as discussed
above. In this event, we will recognize revenue related to the receipt of such
equity instruments consistent with the aforementioned policies. In addition, we
would also record compensation expense at fair value related to the distribution
of some or all of such equity instruments to employees or independent
contractors involved with the related transaction.
CLEARING ARRANGEMENT. We do not carry accounts for customers or perform
custodial functions related to customers' securities. We introduce all of their
customer transactions, which are not reflected in these financial statements, to
their respective clearing brokers, which maintain the customers' accounts and
clear such transactions. Additionally, our clearing firm provides the clearing
and depository operations for our proprietary securities transactions. These
activities may expose our broker dealer to off-balance-sheet risk in the event
that customers do not fulfill their obligations with the clearing broker, as our
broker dealer has agreed to indemnify our clearing firm.
11
NET CAPITAL REQUIREMENT. As of June 30, 2004, the minimum amount of net capital
required to be maintained by vFinance Investments was $1,000,000.
CUSTOMER CLAIMS. In the normal course of business, our operating subsidiaries
have been and continue to be the subject of numerous civil actions and
arbitrations arising out of customer complaints relating to our activities as a
broker-dealer, as an employer and as a result of other business activities. In
general, the cases involve various allegations that our employees had mishandled
customer accounts. Based on our historical experience and consultation with
counsel, we typically reserve an amount we believe will be sufficient to cover
any damages assessed against us. However, we have in the past been assessed
damages that exceeded our reserves. If we misjudged the amount of damages that
may be assessed against us from pending or threatened claims or if we are unable
to adequately estimate the amount of damages that will be assessed against us
from claims that arise in the future and reserve accordingly, our operating
income would be reduced.
STOCK BASED COMPENSATION. Upon the consummation of an advisory, consulting,
capital or other similar transactions the Company may distribute equity
instruments or proceeds from the sale of equity instruments to its employees.
These distributions are made at the Company's discretion on a case by case basis
as determined by the role of the employee and the nature of the transaction. At
June 30, 2004 and 2003, no amounts were owed to employees of the Company in
connection with equity investments received as compensation.
FAIR VALUE. "Investments in trading securities" and "Securities sold, not yet
purchased" on our consolidated balance sheet are carried at fair value or
amounts that approximate fair value, with related unrealized gains and losses
recognized in our results of operations. The determination of fair value is
fundamental to our financial condition and results of operations and, in certain
circumstances, it requires management to make complex judgments.
Fair values are based on listed market prices, where possible, discounted by a
factor reflective of the expected holding period for a particular equity
instrument. If listed market prices are not available, or if the liquidation of
our positions would reasonably be expected to impact market prices, fair value
is determined based on other relevant factors including dealer price quotations.
Fair values for certain derivative contracts are derived from pricing models
that consider current market and contractual prices for the underlying financial
instruments or commodities, as well as time value and yield curve or volatility
factors underlying the positions.
Pricing models and their underlying assumptions impact the amount and timing of
unrealized gains and losses recognized, and the use of different pricing models
or assumptions could produce different financial results. Changes in the fixed
income and equity markets will impact our estimates of fair value in the future,
potentially affecting principal trading revenues. The illiquid nature of certain
securities or debt instruments also requires a high degree of judgment in
determining fair value due to the lack of listed market prices and the potential
impact of the liquidation of our position on market prices, among other factors.
INVESTMENTS. Investments are classified as trading securities and are held for
resale in anticipation of short-term market movements or until such securities
are registered or are otherwise unrestricted. Any unregistered securities
received generally contain a registration right within one year. Trading account
assets, consisting of marketable equity securities and stock purchase warrants,
are stated at fair value. Realized gains or losses are recognized in the
statement of operations when the related underlying shares of a stock purchase
warrant or other equity instruments are sold. Unrealized gains or losses are
recognized in the statement of operations on a monthly basis based on changes in
the fair value of the security as quoted on national or inter-dealer stock
exchange, discounted by a factor reflective of the expected holding period for
the particular equity instrument.
GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS 142"). The provisions of FAS 141
eliminated the pooling-of-interests method of accounting for business
combinations consummated after June 30, 2001. We adopted FAS 141 on July 1, 2001
and it did not have a significant impact on our financial position or results of
operations. Under the provisions of FAS 142, goodwill and indefinite lived
intangible assets are no longer amortized, but are reviewed annually for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives. The
Company adopted the new accounting rules, as required, effective January 1,
2002.
The value of the Company's goodwill is exposed to future adverse changes if the
Company experiences declines in operating results or experiences significant
negative industry or economic trends or if future performance is below
historical trends. The Company periodically reviews intangible assets and
goodwill for impairment using the guidance of applicable accounting literature.
We are subject to financial statement risk to the extent that the goodwill and
other intangible assets become impaired.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2003
STATEMENTS OF OPERATIONS
Operating revenues were $13,958,220 for the six months ended June 30, 2004 as
compared to $9,881,183 for the six months ended June 30, 2003, an increase of
$4,077,037 or 41%. The primary reason for this improvement was a significant
increase in retail brokerage revenues (39%), classified as Commissions-agency
and Other brokerage related income, as well as increases in Trading Profits
(43%) and Investment Banking revenues (57%), classified as Success fees and
Consulting and retainers. Overall, the Company believes that the increase in its
operating revenues was a result of its successful recruiting strategies combined
with a comparatively favorable market environment. Recently, it appears that
market conditions may be less favorable which could have a negative impact on
future revenues.
12
Cost of revenues were $9,503,051 for the six months ended June 30, 2004 as
compared to $6,328,010 for the six months ended June 30, 2003, an increase of
$3,175,041, or 50%. The increase was primarily due to increased revenues and the
corresponding increase to commissions as well as the Company's transition to an
Independent Contractor (I/C) based retail sales model, as opposed to an employee
based model. I/Cs require higher payouts than employees as they are relatively
self supporting, independent businesses. The move to the I/C business model had
a corresponding benefit as it reduced the firm's general and administrative
expenses, as a percentage of revenues (see below). As a consequence, gross
profit was $4,455,169 for the six months ended June 30, 2004 as compared to
$3,553,173 for the six months ended June 30, 2003, an increase of $901,996. The
corresponding gross margin was 32% for the six months ended June 30, 2004 as
compared to 36% for the six months ended June 30, 2003.
General and administrative expenses were $3,239,441 for the six months ended
June 30, 2004 as compared to $3,193,134 for the six months ended June 30, 2003,
an increase of $46,307, or 1.5%. Although general and administrative expenses
increased, they decreased significantly as a percentage of revenues, 23% at June
30, 2004 as compared to 32% at June 30, 2003. This decrease as a percentage of
revenues is primarily related to the Company's transition to an I/C based retail
sales model, as opposed to an employee based model. This transition resulted in
reduced general and administrative expenses including headcount reductions and
dramatically reduced facility requirements.
Professional fees were $100,487 for the six months ended June 30, 2004 as
compared to $175,142 for the six months ended June 30, 2003, a decrease of
$74,655, or 43%. This decrease was primarily attributable to better utilization
of the Company's internal professional staff thereby reducing its reliance on
outside consultants.
The provision for bad debt was $75,446 for the six months ended June 30, 2004 as
compared to $25,867 for the six months ended June 30, 2003, an increase of
$49,579, or 192%. The increase in the provision for bad debt is primarily
related to a reserve for approximately $60,000 related to receivables from
former employees. While collection is uncertain, the Company is vigorously
pursuing these matters.
Litigation expense was $267,641 for the six months ended June 30, 2004 as
compared to $159,257 for the six months ended June 30, 2003, an increase of
$108,384, or 68%. As is typical in the industry, customers make claims regarding
the Company's actions and the Company defends itself vigorously against such
claims. The Company's cost of defending itself varies quarter-to-quarter
depending on the volume of claims which are in process at any given time.
Depreciation and amortization was $58,342 for the six months ended June 30, 2004
as compared to $58,222 for the six months ended June 30, 2003, an increase of
$120, or 0%. Although the Company has been growing, its facilities were
consolidated and the number of its employees was reduced. As a result, its fixed
asset requirements did not increase significantly and its depreciation and
amortization remained consistent.
The amount forgiven under forgivable loans was $42,500 for the six months ended
June 30, 2004 as compared to $55,000 for the six months ended June 30, 2003, a
decrease of $12,500, or 23%. The decrease is attributable to the fact that the
Company, several years ago, discontinued its practice of providing forgivable
loans to brokers as part of its recruitment efforts. Accordingly, there have
been no additions to the outstanding balance and the remaining balance is being
reduced over time.
Stock based compensation was $2,647 for the six months ended June 30, 2004 as
compared to $15,067 for the six months ended June 30, 2003, a decrease of
$12,420, or 82%. This amount primarily represents the amortization of deferred
compensation to an outside consultant who was granted options from the Company
in return for his services in the third quarter of 2002. The amount of deferred
compensation related to that consultant was fully recognized as of March 31,
2003. In addition, during the second quarter of 2003, the Company granted
warrants to its landlord related to the renegotiation of its lease and this
amount is being amortized over the life of the lease.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $2,171,025 of unrestricted cash at June 30, 2004.
Net cash used in operating activities for the six months ending June 30, 2004,
was $1,508,514 as compared to net cash provided by operating activities of
$766,605 for the six months ending June 30, 2003. Although the Company's net
income as well as its Securities sold, not yet purchased increased significantly
and the Company realized a gain on the forgiveness of debt, cash from its
operating activities decreased primarily due to an increase in its Investments
in trading securities, which consist primarily of municipal bonds. The Company
generally sells these highly liquid municipal bond investments on a monthly
basis as part of its normal trading activities. The Company liquidated its
municipal bond investments during the last week of June 2004 but elected to
purchase new municipal bonds prior to the end of such month to take advantage of
market opportunities.
13
Net cash used in investing activities for the six months ending June 30, 2004,
was $104,275 as opposed to $6,529 for the six months ending June 30, 2003. This
increase was a result of the Company's recent enhancements to its computer
systems.
The Company believes that its cash on hand is sufficient to meet its working
capital requirements over the next 12 months. However, the Company anticipates
that it may need additional debt or equity financing in order to carry out its
long-term business strategy. Such funding may be a result of bank borrowings,
public offerings, private placements of equity or debt securities, or a
combination of the foregoing.
We do not have any material commitments for capital expenditures over the course
of the next fiscal year however we are planning to continue to enhance our
computer systems to provide improved back-up capabilities as well as improved
customer service.
The Company's operations are not affected by seasonal fluctuations however they
are affected by the overall performance of the U.S. economy and to some extent
reliant on the continued execution of the Company's mergers and acquisitions
strategy and related financings.
ITEM 3. CONTROLS AND PROCEDURES.
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Such officers have concluded (based
upon their evaluation of these controls and procedures as of the end of the
period covered by this Quarterly Report) that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in this Quarterly Report is accumulated and communicated to management,
including our principal executive officers as appropriate, to allow timely
decisions regarding required disclosure.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Because of these inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
14
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From time to time the Company, and/or one of its subsidiaries, is named as a
party to a lawsuit that has arisen in the ordinary course of business. Although
it is possible that losses exceeding amounts already recorded may be incurred
upon ultimate resolution of these existing legal proceedings, we believe that
such losses, if any, will not have a material adverse effect on our business,
results of operations or financial position; however, unfavorable resolution of
each matter individually or in the aggregate could affect the consolidated
results of operations for the quarterly and annual periods in which they are
resolved.
The business of vFinance Investments involves substantial risks of liability,
including exposure to liability under federal and state securities laws in
connection with the underwriting or distribution of securities and claims by
dissatisfied customers for fraud, unauthorized trading, churning, mismanagement
and breach of fiduciary duty. In recent years, there has been an increasing
incidence of litigation involving the securities industry, including class
actions that generally seek rescission and substantial damages.
In the ordinary course of business, the Company and/or its subsidiaries may be
parties to other legal proceedings and regulatory inquiries, the outcome of
which, either singularly or in the aggregate, is not expected to be material.
There can be no assurance however that any sanctions will not have a material
adverse effect on the financial condition or results of operations of the
Company and/or its subsidiaries.
On February 06, 2002, vFinance Investments, Inc. and vFinance Capital, L.C.
filed an action with the American Arbitration Association against Endovasc,
LTD., Inc. (Endovasc). The complaint alleges breach of contract and requests an
order of specific performance in connection with the failure of Endovasc, to pay
investment banking fees of $22,500.00 and to issue 3 million warrants to
purchase shares of Endovasc's common stock. Endovasc filed a counterclaim on May
26th, 2004. The Counterclaim alleges breach of duties and obligations by
vFinance and claims that Endovasc has suffered damages in excess of $5 million.
Mediation is scheduled to take place on September 27, 2004. The Company is
continuing to pursue these claims against Endovasc and to vigorously defend the
counterclaim, which it believes is without merit.
On November 13, 2003, UBUY Holdings, Inc., f/k/a/ E-PAWN.COM, Inc., and Steven
Bazuly, and for and on behalf of all of the shareholders of UBUY Holdings, Inc.
filed an amended complaint for damages and consequential damages against
vFinance Investments, Inc. and approximately 60 other defendants in the United
States District Court for the Southern District of Florida stating, among other
things, that there were violations of certain securities rules and regulations.
The Company was not served with this complaint until April 20, 2004. The Company
believes that their claim is without merit and will vigorously defend this
action.
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On November 28, 2001, the Company entered into a Note Purchase Agreement, as
amended by subsequent letter agreements dated November 30, 2001, December 14,
2001, and December 28, 2001, February 13, 2002 and March 4, 2002 (collectively,
the "Note Purchase Agreement"), with SBI Investments (USA) Inc. ("SBI"). Under
the terms of the Note Purchase Agreement, SBI had the option to provide a
subordinated loan to the Company of up to $1,500,000 in the form of a 48-month
non-bearing, convertible note. As of December 31, 2002, the Company had received
$975,000 under the Note Purchase Agreement and could have received, at SBI's
option, an additional $525,000 no later than June 30, 2002. The additional
$525,000 was not funded. The note was convertible, at SBI's option, into as many
as 3,421,053 shares of the Company's common stock at $0.285 per share. The
Company, at any time during the first three years of the Note Purchase
Agreement, could call for redemption of the note at a price equal to 116.67% of
the then outstanding principal amount of the note, in whole (but not in part),
or force the conversion of the note into shares of the Company's common stock.
During February and March of 2004, $721,500 of the SBI note was converted into
3,344,298 shares of the Company's common stock. Of this amount, $545,000 was
converted into 2,725,000 shares of the Company's common stock at a discounted
rate of $0.20 per share under a special arrangement offered by the Company to
encourage further equity participation by SBI. The remainder was converted at
the stated conversion rate of $0.285 per share.. In April of 2004, the remaining
balance was converted into 100,000 shares of common stock of the Company at the
original stated conversion rate of $.285 per share. The issuance of the common
stock was exempt from registration pursuant to Section 4 (2) of the Securities
Act of 1933, as amended, because the common stock was acquired in a privately
negotiated transaction by sophisticated investors
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
31.1 - Certification by Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002..
31.2 - Certification by Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 - Certification by Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 - Certification by Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley act of 2002.
(b) REPORTS ON FORM 8-K
Form 8-K filed on May 19, 2004 pursuant to Item 12 thereof.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Signature Title Date
--------- ----- ----
By: /s/ Leonard J. Sokolow Chief Executive Officer August 16, 2004
---------------------- and President
Leonard J. Sokolow (Principal Executive
Officer)
By: /s/ Mark Kacer Chief Financial Officer and August 16, 2004
----------------------------- (Principal Financial and
Mark Kacer Accounting Officer)