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 MARCH 31, 2005
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)
Check whether the issuer (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 )
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 16, 2005:
40,126,134 shares of Common Stock $0.01 par value
INDEX
VFINANCE, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - March 31,2005 (Unaudited)................4
Consolidated Statements of Operations for the three
months ended March 31, 2005 and 2004 (Unaudited)......................5
Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (Unaudited) ..............................6
Notes to Consolidated Financial Statements (Unaudited) ............7-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................11-14
Item 3. Controls and Procedures .............................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .........15
Item 6. Exhibits ......... ...... ...........................................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 and 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)
March 31, 2005
-------------------------
Assets:
Current Assets:
Cash and cash equivalents $ 4,788,490
Due from clearing broker 503,928
Investments in trading securities 1,232,243
Accounts receivable, net of allowance
for doubtful accounts of $20,500 289,153
Forgivable loans-employees 347
Notes receivable-employees 84,112
Prepaid expenses and other current assets 74,699
-------------------------
Total current assets 6,972,972
Furniture and equipment, at cost:
Furniture and equipment 1,036,270
Internal use software 161,443
-------------------------
1,197,713
Less accumulated depreciation (626,232)
-------------------------
Furniture and equipment, net 571,481
Goodwill 1,866,848
Other assets 201,756
-------------------------
Total Assets $ 9,613,057
=========================
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable $ 807,485
Accrued payroll 1,520,131
Other accrued liabilities 432,506
Securities sold, not yet purchased 293,010
Capital lease obligations 102,537
Other 41,952
-------------------------
Total current liabilities 3,197,621
Capital lease obligations, long term 181,034
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, 40,126,134 issued and outstanding 401,265
Additional paid-in-capital 26,821,557
Deferred compensation (18,088)
Accumulated deficit (20,970,332)
-------------------------
Total Shareholders' Equity 6,234,402
-------------------------
Total Liabilities and Shareholders' Equity $ 9,613,057
=========================
See accompanying notes.
4
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
2005 2004
------------------------ ---------------------
Revenues:
Commissions - agency $ 3,811,391 $ 4,100,189
Trading profits 1,368,765 1,572,753
Success Fees 343,941 1,280,888
Consulting and retainers 243,294 70,327
Other brokerage related income 638,398 680,381
Other 85,368 108,033
------------------------ ---------------------
Total revenues 6,491,157 7,812,571
------------------------ ---------------------
Cost of revenues:
Commissions 3,766,211 4,325,680
Clearing and transaction costs 476,834 145,409
Success 71,254 620,591
Consulting and retainers 221,551 50,545
Other - 4,087
------------------------ ---------------------
Total cost of revenues 4,535,850 5,146,312
------------------------ ---------------------
Gross profit 1,955,307 2,666,259
------------------------ ---------------------
Other expenses:
General and administrative 1,904,991 1,820,065
Professional fees 74,555 56,587
Bad debt expense 31,890 75,446
Legal litigation 49,178 156,098
Depreciation and amortization 60,707 29,175
Amounts forgiven under forgivable loans 6,250 21,250
Stock based compensation 1,324 1,324
------------------------ ---------------------
Total other expenses 2,128,895 2,159,945
------------------------ ---------------------
Income/(Loss) from operations (173,588) 506,314
Gain on forgiveness of debt - 1,500,000
Interest and dividend income (expense) 19,060 (262,520)
------------------------ ---------------------
Pre-tax Net Income/(Loss) (154,528) 1,743,794
Income tax benefit - 400,000
------------------------ ---------------------
Net Income/(Loss) available to common shareholders $ (154,528) $ 2,143,794
======================== =====================
Net Income/(Loss) per share:
Basic $ (0.00) $ 0.07
======================== =====================
Weighted average number of common shares used in
computing basic net income/(loss) per share 39,815,966 31,160,844
======================== =====================
Diluted $ (0.00) $ 0.06
======================== =====================
Weighted average number of common shares used in
computing diluted net income/(loss) per share 39,815,966 35,434,387
======================== =====================
See accompanying notes.
5
vFINANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
---------------------------------
2005 2004
--------------- ----------------
OPERATING ACTIVITIES
Net (loss) income $ (154,528) $ 2,143,794
Adjustments to reconcile net income/(loss) to
net cash used in operating activities:
Non-cash fees received - (300,417)
Gain on forgiveness of debt - (1,500,000)
Income tax benefit - (400,000)
Depreciation and amortization 60,707 29,176
Provision for doubtful accounts 30,890 75,446
Non-cash compensation - 215,585
Conversion premium expense - 231,625
Accretion of debt discount - 18,348
Unrealized loss (gain) on investments, net 7,666 (57,063)
Unrealized loss on warrants 112,113 115,550
Amount forgiven under forgivable loans 6,250 21,250
Stock based compensation 1,324 1,324
Changes in operating assets and liabilities:
Accounts receivable (230,372) (126,474)
Due from clearing broker 148,318 58,486
Notes receivable - employees 84,590 109,494
Investments in trading securities (210,117) 87,180
Other assets and liabilities 107,653 (4,012)
Accounts payable and accrued liabilities (507,382) 402,122
Securities, sold not yet purchased - 87,008
--------------- ----------------
Net cash provided by (used in) operating activities (542,888) 1,208,422
INVESTING ACTIVITIES
Purchase of capital lease equipment (117,020) -
Purchase of equipment (16,728) (31,424)
--------------- ----------------
Net cash used in investing activities (133,748) (31,424)
FINANCING ACTIVITIES
Proceeds from capital lease 117,020 -
Payments of capital lease (21,752) -
Proceeds from issuance of common stock
related to stock option exercise 113,550 -
--------------- ----------------
Net cash provided by financing activities 208,818 -
Increase (decrease) in cash and cash equivalents (467,818) 1,176,998
Cash and cash equivalents at beginning of year 5,256,308 3,783,814
--------------- ----------------
Cash and cash equivalents at end of period $ 4,788,490 $ 4,960,812
=============== ================
See accompanying notes.
6
vFinance, Inc.
Notes to Consolidated Financial Statements
March 31, 2005
(Unaudited)
1. DESCRIPTION OF BUSINESS
vFinance, Inc. is a holding company engaged in the financial services business
where our strategic focus is on servicing the needs of high net-worth and
institutional investors and high growth companies. Through our principal
operating subsidiary, vFinance Investments, Inc., a licensed broker-dealer, we
provide investment banking, retail and institutional brokerage services in all
50 states and the District of Columbia. The Company also operates a second
broker-dealer, EquityStation, Inc. ("EquityStation") which offers institutional
traders, hedge funds and professional traders a suite of services designed to
enhance their trading capabilities by offering services such as trading and
routing software, hedge fund incubation, capital introduction and custodial
services. The Company, through its website www.vfinance.com, provides financial
information services to entrepreneurs and venture investors. The information on
the Company's website is not incorporated into this Form 10-QSB.
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 three-month
period ended March 31, 2005 are not necessarily indicative of the results to be
expected for the year ended December 31, 2005. 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, 2004.
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 carry forwards totaled approximately $8,730,000 at March 31,
2005. Each quarter the Company weighs the available positive and negative
evidence and determines the extent to which the net operating loss carry
forwards is realizable.
Utilization of the Company's net operating loss carryforwards are limited based
on changes in ownership as defined in Internal Revenue Code Section 382.
3. IMPAIRMENT OF GOODWILL
Management determined that there was no impairment of goodwill during the
quarters ended March 31, 2005 and 2004. Goodwill carried on the balance sheet
was $1,866,848 as of March 31, 2005. The Company evaluates the recoverability
and carrying value of its Goodwill and long-lived assets at each balance sheet
date. 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.
The Company believes that there has not been an impairment of its Goodwill or
long-lived assets as of March 31, 2005.
4. SHAREHOLDER'S EQUITY
On January 31, 2005, the Company issued 300,000 common shares in connection with
the exercise of options by a former executive of the Company. The Company
received $60,000. The exercise price of these options was $0.20.
On March 14, 2005, the Company issued 255,000 common shares in connection with
the exercise of options by an independent contractor of the Company. The Company
received $53,550. The exercise price of these options was $0.21.
7
A summary of the stock option activity for the three months ended March 31, 2005
is as follows:
Weighted
Average
Exercise Number Exercise Price
Price of Shares Per Option
-------- --------- -------------
Outstanding options at December 31, 2004 $0.20 10,538,213 $0.15 - $2.25
Granted................................. $0.26 1,277,500 $0.25 - $0.35
Exercised .............................. $0.20 (555,000) $0.20 - $0.21
Cancelled .............................. $0.23 (306,250) $0.20 - $0.35
-----------
Outstanding options at March 31, 2005.... $0.28 10,954,463 $0.15 - $2.25
-----------
A summary of the stock purchase warrant activity for the three months ended
March 31, 2005 is as follows:
Weighted
Average
Exercise Number of Exercise Price
Price Warrants Per Option
-------- --------- -------------
Outstanding warrants at December 31, 2004 $1.18 8,096,422 $0.15 - $7.20
Granted ................................. - -
Cancelled ............................... $2.50 (290,000) $2.50
----------
Outstanding options at March 31, 2005.... $1.13 7,806,422 $0.15 - $7.20
==========
The following table summarizes information concerning stock options outstanding
at March 31, 2005.
Exercise Options
Price Outstanding
-------------------------
0.15 350,000
0.19 1,860,002
0.20 780,000
0.21 3,389,247
0.22 50,000
0.23 2,500
0.25 760,000
0.27 5,000
0.28 712,500
0.32 890,000
0.35 1,509,215
0.36 120,000
0.50 100,000
0.55 69,000
0.63 142,500
0.70 39,000
1.00 18,000
2.25 157,499
-----------
10,954,463
===========
8
The following table summarizes information concerning warrants outstanding at
March 31, 2005.
Exercise Warrants
Price Outstanding
-----------------------
0.15 750,000
0.16 2,427,923
0.20 1,000,000
0.35 1,773,500
0.63 400,000
2.25 625,000
6.00 129,999
7.20 700,000
--------------
7,806,422
==============
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 2005 risk free interest rates of 3.31%; no dividend yields; volatility
factor of the expected market price of the Company's common stock of 0.85 for
options and warrants and an expected life of the options and warrants of 4-5
years. The Company's pro forma net loss for the period ended March 31, 2005 was
$252,781. The Company's pro forma basic and diluted net loss per share for the
period ended March 31, 2004 was $0.02 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.
5. MATERIAL AGREEMENTS
In November 2004, the Company agreed to be a major sponsor of the Center for
Innovative Entrepreneurship ("CIE"). CIE, a nonprofit corporation, was
established to advance understanding and knowledge of the value of innovative
entrepreneurship to the global economy through Education, Research and
Communications initiatives. CIE, in conjunction with leading researchers,
universities and grant-giving institution, is developing the full research
potential of vfinance.com and its real-time access to a broad audience of
entrepreneurs and investors to track the innovation economy and to measure the
impact innovative entrepreneurs have on the U.S. and global economy.
In January 2005, the Company entered into a verbal agreement with CIE to develop
the www.vfinance.com website as a platform for research on innovation and
entrepreneurial activity. Pursuant to the agreement, CIE receives all associated
online revenues and pays all expenses associated with the vfinance.com website.
Concurrently, the Company entered into a management services agreement with CIE,
wherein vFinance agreed to provide certain services such as management,
administrative, technical, marketing, public relations, and web site operations
and development. For the period ended March 31, 2005, the Company earned $85,368
as consideration for providing management services. CIE also separately
contracted with the Company to provide economic and research services such as
the production of general economic and sector research reports and to produce
the Company's proprietary entrepreneurial confidence index as well as to provide
certain other educational and informational services to entrepreneurs, investors
and high growth firms seeking investment capital.
As of March 31, 2005, CIE owed the Company $138,013 in connection with these
agreements and certain reimbursable expenses paid by the Company on CIE's
behalf; this amount is included in accounts receivable in the consolidated
balance sheet.
6. ACQUISITIONS
The following Pro Forma Combined Financial Statements of Global, EquityStation
and vFinance gives effect to the acquisition of certain assets of Global and
100% of the issued and outstanding equity securities of EquityStation, under the
purchase method of accounting prescribed by Accounting Principles Board Opinion
No. 16, Business Combinations as if it had occurred on January 1, 2004. These
pro forma statements are presented for illustrative purposes only. The pro forma
adjustments are based upon available information and assumptions that management
believes are reasonable.
9
VFINANCE, INC
Pro Forma Combined Statement of Operations
For the Quarter Ended March 31, 2004
Global Pro Forma
vFinance Partners EquityStation Adjustments Pro Forma
REVENUE
Commissions $ 4,100,189 $ 44,285 $ 618,669 $ - $ 4,763,143
Trading Profits 1,572,753 1,059,190 1,689 - 2,633,632
Success Fees 1,280,888 - - - 1,280,888
Consulting and Retainers 70,327 - - - 70,327
Other Brokerage Related Income 680,381 - - - 680,381
Other Income 108,033 132,401 - - 240,434
----------- ------------ ----------- ---------- ------------
7,812,571 1,235,876 620,358 - 9,668,805
=========== ============ =========== ========== ============
COST OF REVENUES
Commissions 4,325,680 516,704 143,950 - 4,986,334
Clearing and Transaction Costs 145,409 236,615 235,293 - 617,317
Success 620,591 - - - 620,591
Consulting and Retainers 50,545 - - - 50,545
Other 4,087 2,206 836 - 7,129
----------- ------------ ----------- ---------- ------------
5,146,312 755,525 380,079 - 6,281,916
=========== ============ =========== ========== ============
GROSS PROFIT 2,666,259 480,351 240,279 - 3,386,889
----------- ------------ ----------- ---------- ------------
EXPENSES
General and Administrative 1,820,065 492,196 244,952 - 2,557,213
Professional Fees 56,587 3,335 - - 59,922
Provision for Bad Debt 75,446 - - - 75,446
Legal Litigation 156,098 15,850 9,426 - 181,374
Depreciation and Amortization 29,175 5,661 - - 34,836
Amounts Forgiven under Forgivable
Loans 21,250 - - - 21,250
Stock Based Compensation 1,324 - - - 1,324
----------- ------------ ----------- ---------- ------------
2,159,945 517,042 254,378 - 2,931,365
----------- ------------ ----------- ---------- ------------
INCOME (LOSS) From Operations 506,314 (36,691) (14,099) - 455,524
----------- ------------ ----------- ---------- ------------
Gain on Forgiveness of Debt 1,500,000 - - - 1,500,000
Interest and Dividend
Income (Expense) (262,520) (23,345) 2,182 (283,683)
----------- ------------ ----------- ---------- ------------
PRE TAX NET INCOME (LOSS) 1,743,794 (60,036) (11,917) - 1,671,841
Federal Income Tax 400,000 - - - 400,000
----------- ------------ ----------- ---------- ------------
NET INCOME (LOSS) Available
to Shareholders $2,143,794 $ (60,036) $ (11,917) $ - $ 2,071,841
=========== ============ =========== ========== ============
7. SUBSEQUENT EVENTS
On November 2, 2004, the Company's wholly-owned subsidiary, vFinance Investments
Holdings, Inc. (the "vFinance Investments"), completed its acquisition of
certain assets of Global Partners Securities, Inc. ("Global") and 100% percent
of the issued and outstanding equity securities of EquityStation, Inc.
("EquityStation") all of which were owned by Level2.com, Inc. ("Level2"), a
subsidiary of Global.
In accordance with the terms of the acquisition agreements, the Company
delivered into escrow 8,324,694 restricted shares of the Company's common stock
and warrants to purchase 3,299,728 shares of the Company's common stock at a
price of $0.11 per share. Subject to (a) any indemnification claims under the
acquisition agreements and (b) the financial performance of EquityStation and
the business of Global acquired by vFinance Investments over the periods
specified in the escrow agreement, all or a portion of the shares and the
warrants held in escrow were required to be distributed to Global and Level2.
On April 19, 2005, vFinance Investments instructed the escrow agent to release
from escrow to Global 2,682,903 shares of the Company's common stock and
warrants to purchase 1,063,445 shares of common stock. The escrow agent was also
instructed by vFinance Investments to release from escrow to Level2 3,607,350
shares of the Company's common stock and warrants to purchase 1,429,876 shares.
vFinance Investments further instructed the escrow agent to reserve from the
share amounts to be released to Global 1,302,580 shares of the Company's common
stock and warrants to purchase 516,315 shares of the Company's common stock,
pending the outcome of certain litigation. Global has disputed the instructions
given to the escrow agent by vFinance Investments and representatives of Global
and vFinance Investments are in discussions relating to this matter.
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 audited
consolidated financial statements dated December 31, 2004 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 that are classified as investments in trading
securities on the balance sheet if still held at the financial reporting date.
These instruments 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 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 warrant or other
equity instrument is 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, 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 March 31, 2005, 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.
NET CAPITAL REQUIREMENT. As of March 31, 2005, the minimum amount of net capital
required to be maintained by vFinance Investments was $1,000,000 and the minimum
amount of net capital required to be maintained by EquityStation was $100,000.
However, EquityStation has agreed to maintain a minimum of $250,000 in net
capital pursuant to its agreement with it clearing agent, Merrill Lynch.
11
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
March 31, 2005 and 2004, 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.
12
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2004
STATEMENTS OF OPERATIONS
Operating revenues were $6,491,157 for the three months ended March 31, 2005 as
compared to $7,812,571 for the three months ended March 31, 2004, a decrease of
$1,321,414 or 17%. The primary reason for the decline was the unfavorable market
conditions, which impacted all our business segments. Retail brokerage revenues,
which comprised 69% of total revenues decreased by $288,798 or 7%, Trading
Profits, which comprised 21% of total revenues decreased by $203,988 or 13% and
Investment Banking, which comprised 9% of total revenues, decreased by $763,980
or 56%.
Cost of revenues were $4,535,850 for the three months ended March 31, 2005 as
compared to $5,146,312 for the three months ended March 31, 2004, a decrease of
$610,462, or 12%. The decrease was primarily due to decreased revenues and the
corresponding decrease to commissions. The corresponding gross margin was 30%
for the three months ended March 31, 2005 as compared to 34% for the three
months ended March 31, 2004. The decrease in gross profit margin was primarily
due to a one time $200,000 contribution provided by the Company's clearing firm
National Financial Services, LLC ("NFS"), a wholly owned subsidiary of Fidelity
Investments, in the first quarter of 2004 to assist the Company with transition
costs related to conversion from its former clearing firm, Correspondent
Services Corporation to NFS. This amount was recorded as a reduction to clearing
and transaction costs.
General and administrative expenses were $1,905,340 for the three months ended
March 31, 2005 as compared to $1,820,065 for the three months ended March 31,
2004, an increase of $85,275, or 5%. This increase is primarily related to the
Company's investment in hiring senior executive staff and higher rent expense
due to entering into a new lease in the New York office, the expansion of our
Boca Raton headquarters space and the new lease for the Company's disaster
recovery center in Mt. Laurel, New Jersey. These increases were partially offset
by a decrease in the reserve for customer settlements.
Professional fees were $74,555 for the three months ended March 31, 2005 as
compared to $56,587 for the three months ended March 31, 2004, an increase of
$17,968, or 32%. This increase was primarily attributable to tax return
preparation fees and consulting fees related to the build out of the Company's
information technology platform.
Bad debt expense was $31,890 for the three months ended March 31, 2005 as
compared to $75,446 for the three months ended March 31, 2004. The decrease was
primarily due to the recognition of bad debt expense related to former
employees' receivables in the first quarter of 2004 that was completely provided
for by the end of that year.
Litigation expense was $49,178 for the three months ended March 31, 2005 as
compared to $156,098 for the three months ended March 31, 2005, a decrease of
$106,920, 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 $60,707 for the three months ended March 31,
2005 as compared to $29,175 for the three months ended March 31, 2004, an
increase of $31,532, or 108%. The increase in depreciation and amortization was
primarily attributable to the Company's investment in its technological
infrastructure and facilities.
The amount forgiven under forgivable loans was $6,250 for the three months ended
March 31, 2005 as compared to $21,250 for the three months ended March 31, 2004,
a decrease of $15,000, or 71%. The decrease is attributable to the Company's
decision several years ago to discontinue the 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 $1,324 for both the three months ended March 31,
2005 and the three months ended March 31, 2004. 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 $4,788,490 of unrestricted cash at March 31, 2005.
Net cash used in operating activities for the three months ending March 31,
2005, was $542,888 as opposed to net cash provided by operating activities of
$1,208,422 for the three months ending March 31, 2004. The decrease in cash
provided by operating activities is primarily attributable to lower net income
and working capital changes. The Company's accounts payable and accrued
liabilities decreased significantly from the prior year as a result of lower
cost of revenues and payments on settlements and other liabilities. Accounts
receivable increased as a result of revenues related to the CIE management
services agreement. The Company also increased its investment in trading
securities.
13
Net cash used in investing activities for the three months ending March 31,
2005, was $133,748 as opposed to $31,424 for the three months ending March 31,
2004. The primary reason for the increase is our strategy to introduce new
services to our existing clients and affiliates which has required the
investment in new systems and technologies. In addition, the Company invested in
its disaster recovery plan by implementing communication redundancy systems that
would enable us to continuously service our clients. In order to finance these
capital expenditures, the Company entered into lease agreements (discussed below
under cash provided by financing).
Net cash provided by financing activities for the three months ending March 31,
2005, was $208,818 as opposed to $0 for the three months ending March 31, 2004.
The increase is due to the Company entering into certain capital lease
agreements to finance its investment in information technology equipment and the
proceeds from the issuance of common stock related to stock option exercises.
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.
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 such officers' evaluation of these controls and procedures as of the end of
the period covered by this report) that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
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 systems 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.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 31, 2005, the Company issued 300,000 shares of common stock in
connection with the exercise of options by a former executive of the Company.
The Company received $60,000. The exercise price of these options was $0.20.
On March 14, 2005, the Company issued 255,000 shares of common stock in
connection with the exercise of options by an independent contractor of the
Company. The Company received $53,550. The exercise price of these options was
$0.21.
The issuance of the shares of common stock in the two transactions described in
this Item 2 was exempt from registration under Section 4(2) of the Securities
Act of 1933 because the two persons who exercised options are sophisticated
investors who had knowledge of all material information relating to the Company.
All proceeds from the transactions will be used for general corporate purposes.
15
ITEM 6. EXHIBITS.
(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.
10.1 - CIE Master Services Agreement.
10.2 - vFinance Management Services Agreement.
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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 May 16, 2005
---------------------- and President
Leonard J. Sokolow (Principal Executive Officer)
By: /s/ Sheila C. Reinken Chief Financial Officer and May 16, 2005
----------------------------- (Principal Financial and
Sheila C. Reinken Accounting Officer)
17