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 September 30, 2005
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____________ to _________________
1-11454-03
----------------------
Commission File Number
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 Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ( x ) No ( )
Indicate by check mark whether the registrant is a a shell company (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 November 21, 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 - September 30,2005
(Unaudited).................................................... 4
Consolidated Statements of Operations for the three
& nine months ended September 30, 2005 and 2004
(Unaudited).................................................... 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2005 and 2004
(Unaudited).................................................... 6
Notes to Consolidated Financial Statements (Unaudited)............. 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 12-15
Item 3. Controls and Procedures ........................................... 16
PART II. OTHER INFORMATION
Item 6. Exhibits .......................................................... 17
Signatures ................................................................ 18
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. and Subsidiaries
CONSOLIDATED BALANCE SHEET
September 30, 2005
(UNAUDITED)
Assets:
Current Assets:
Cash and cash equivalents $ 4,754,968
Due from clearing broker 766,386
Investments in trading securities 593,875
Accounts receivable, net of allowance
for doubtful accounts of $49,100 319,446
Notes receivable 218,014
Prepaid expenses and other current assets 108,793
-------------
Total current assets 6,761,482
Furniture and equipment, at cost:
Furniture and equipment 1,347,885
Internal use software 167,814
-------------
1,515,699
Less accumulated depreciation (782,936)
-------------
Furniture and equipment, net 732,763
Goodwill 1,866,848
Due from related parties 50,362
Other assets 111,616
-------------
Total Assets $ 9,523,071
=============
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 536,645
Accrued payroll 1,606,016
Other accrued liabilities 670,024
Securities sold, not yet purchased 7,378
Capital lease obligations 184,040
Other 195,249
-------------
Total current liabilities 3,199,352
Capital lease obligations, long term 273,438
Stockholders' 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
Accumulated deficit (21,172,541)
-------------
Total Stockholders' Equity 6,050,281
-------------
Total Liabilities and Stockholders' Equity $ 9,523,071
=============
See accompanying notes to unaudited consolidated financial statements.
4
vFINANCE, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- --------------
2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenues:
Commissions - agency $ 4,037,698 $ 2,765,752 $ 11,439,286 $ 10,700,404
Trading Profits 938,700 721,712 3,362,562 3,229,400
Success Fees 741,683 423,248 1,747,084 2,263,050
Consulting and retainers 85,500 84,291 492,644 222,291
Other brokerage related income 686,639 532,105 2,084,409 1,846,364
Other 62,450 101,915 219,062 325,736
------------- ------------- ------------- -------------
Total revenues 6,552,670 4,629,023 19,345,047 18,587,245
------------- ------------- ------------- -------------
Cost of revenues:
Commissions 3,492,307 2,621,890 10,331,314 10,641,255
Clearing and transaction costs 456,506 177,804 1,414,813 592,782
Success 378,470 288,637 901,448 1,275,951
Consulting and retainers 92,571 45,386 428,869 133,281
Other - (349) - 3,838
------------- ------------- ------------- -------------
Total cost of revenues 4,419,854 3,133,368 13,076,444 12,647,107
------------- ------------- ------------- -------------
Gross profit 2,132,816 1,495,655 6,268,603 5,940,138
------------- ------------- ------------- -------------
Other expenses:
General and administrative 2,070,620 1,317,584 6,023,645 4,546,336
Professional fees 27,065 38,744 140,325 139,231
Provision for bad debt 16,100 10,121 60,490 85,567
Legal litigation 70,478 60,170 205,469 327,811
Depreciation and amortization 82,611 36,058 217,410 94,400
Amounts forgiven under forgivable loans - 21,250 6,597 63,750
Stock based compensation 16,765 1,324 19,412 3,971
------------- ------------- ------------- -------------
Total other expenses 2,283,639 1,485,251 6,673,348 5,261,066
------------- ------------- ------------- -------------
Income/(Loss) from operations (150,823) 10,404 (404,745) 679,072
Other Income (Expense)
Gain on forgiveness of debt - - - 1,500,000
Interest and dividend income (expense) 18,080 9,338 48,010 (243,641)
------------- ------------- ------------- -------------
Total Other Income (Expense),net 18,080 9,338 48,010 1,256,359
------------- ------------- ------------- -------------
Pre-tax Net Income/(Loss) (132,743) 19,742 (356,735) 1,935,431
Income tax benefit - - - 400,000
------------- ------------- ------------- -------------
Net Income/(Loss) available to common shareholders $ (132,743) $ 19,742 $ (356,735) $ 2,335,431
============= ============= ============= ==============
Net Income/(Loss) per share:
Basic $ 0.00 $ 0.00 $ (0.01) $ 0.07
============= ============= ============= ==============
Weighted average number of common shares used in
computing basic net income/(loss) per share 40,123,134 33,295,868 40,023,880 32,582,411
============= ============= ============= ==============
Diluted $ 0.00 $ 0.00 $ 0.00 $ 0.07
============= ============= ============= ==============
Weighted average number of common shares used in
computing diluted net income/(loss) per share 40,123,134 33,528,105 40,023,880 32,814,648
============= ============= ============= ==============
See accompanying notes to unaudited consolidated financial statements.
5
vFINANCE, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2005 2004
-------------- --------------
Cash Flows from Operating Activities:
Net income (Loss) $ (356,735) $ 2,335,431
Adjustments to reconcile net income/(loss) to
net cash provided /(used)in operating activities:
Non-cash fees received (434,011) (419,365)
Gain on forgiveness of debt - (1,500,000)
Income tax benefit - (400,000)
Depreciation and amortization 217,410 94,400
Provision for doubtful accounts 59,490 84,052
Non-cash compensation 158,060 300,625
Conversion Premium Expense - 231,625
Impairment Expense 80,000 -
Accretion of debt discount - 18,349
Unrealized loss (gain) on investments, net (14,342) 183,367
Unrealized loss (gain) on warrants 118,768 30,988
Amount forgiven under forgivable loans 6,597 63,750
Stock based compensation 19,413 3,971
Changes in operating assets and liabilities:
(Increase) Decrease
Accounts receivable (220,653) (44,870)
Due from clearing broker 24,137 (46,463)
Notes receivable - employees (49,312) 139,136
Investments in trading securities 600,455 361,705
Other current assets 12,795 -
Other assets and liabilities 85,176 78,514
Increase (Decrease)
Accounts payable and accrued liabilities (453,945) (900,992)
Securities, sold not yet purchased (285,632) (13,263)
-------------- --------------
Net cash provided by /(used in)operating activities (432,329) 600,960
Cash Flows from Investing Activities:
Purchase of capital lease equipment (367,952) (22,336)
Purchase of equipment (83,783) (146,292)
-------------- --------------
Net cash used in investing activities (451,735) (168,628)
Cash Flows from Financing Activities:
Proceeds from capital leases 367,951 22,336
Repayments on capital leases (98,777) (502)
Proceeds from exercise of common stock options 113,550 -
-------------- --------------
Net cash provided by financing activities 382,724 21,834
Increase/(decrease) in cash and cash equivalents (501,340) 454,166
Cash and cash equivalents at beginning of year 5,256,308 3,783,814
-------------- --------------
Cash and cash equivalents at end of period $ 4,754,968 $ 4,237,980
============== ==============
See accompanying notes to unaudited consolidated financial statements.
6
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
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.
2. SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Basis of Presentation
The unaudited consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All intercompany accounts have been
eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. 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 nine-month period ended
September 30, 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 connection 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 $8,860,000 at September 30,
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 carry-forwards are limited based
on changes in ownership as defined in Internal Revenue Code Section 382.
3. GOODWILL
Management determined that there was no impairment of goodwill during the three
and nine months ended September 30, 2005 and 2004, respectively. Goodwill
carried on the balance sheet was $1,866,848 as of September 30, 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.
7
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
4. STOCKHOLDER'S EQUITY
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.
A summary of the stock option activity for the nine months ended September 30,
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................................. $0.23 4,071,250 $0.17 - $0.35
Exercised .............................. $0.20 (555,000) $0.20 - $0.21
Cancelled .............................. $0.21 (1,801,250) $0.15 - $0.63
----------
Outstanding options at September 30, 2005 $0.28 12,253,213 $0.15 - $2.25
----------
A summary of the stock purchase warrant activity for the nine months ended
September 30, 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 ............................... $2.80 (316,833) $2.50 - $6.00
---------
Outstanding warrants at September 30, 2005. $1.11 7,779,589 $0.15 - $7.20
=========
8
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
The following table summarizes information concerning stock options outstanding
at September 30, 2005.
Exercise Options
Price Outstanding
------------ -------------
0.15 260,000
0.17 10,000
0.18 160,000
0.19 2,432,502
0.20 535,000
0.21 3,389,247
0.22 60,000
0.23 1,002,500
0.25 760,000
0.26 31,250
0.27 7,500
0.28 637,500
0.32 840,000
0.35 1,511,715
0.36 120,000
0.50 100,000
0.55 69,000
0.63 112,500
0.70 39,000
1.00 18,000
2.25 157,499
----------- ------------
12,253,213
============
The following table summarizes information concerning warrants outstanding at
September 30, 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
6.00 103,166
7.20 700,000
--------------
7,779,589
==============
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 3.77%; expected dividends of zero;
volatility factor of the expected market price of the Company's common stock of
0.82 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 September
30, 2005 was $413,586. The Company's pro forma basic and diluted net loss per
share for the nine month period ended September 30, 2005 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.
9
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
5. MATERIAL AGREEMENTS
On September 8, 2005, the Company entered into a license and website application
agreement ("Agreement") with 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 a 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.
On May 13, 2005, 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 September 30, 2005, the Company earned
$203,093 as consideration for providing management services. In its license
agreement with CIE, CIE has assumed the responsibility for maintaining the
Company's website and related operations.
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.
10
VFINANCE, INC
Pro Forma Combined Statement of Operations
For the Nine Months Ended September 30, 2004
vFinance Global Partners EquityStation Pro Forma ProtForma
Adjustments
REVENUE
Commissions $ 10,700,404 $ 159,762 $ 1,661,287 $ - $ 12,521,453
Trading Profits 3,229,400 2,772,633 3,739 - 6,005,772
Success Fees 2,263,050 - - - 2,263,050
Consulting and Retainers 222,291 - - - 222,291
Other Brokerage Related Income 1,846,364 - - - 1,846,364
Other Income 325,736 353,714 - - 679,450
-------------- --------------- ------------- ------------ --------------
18,587,245 3,286,109 1,665,026 - 23,538,380
============== =============== ============= ============ ==============
COST OF REVENUES
Commissions 10,641,255 1,543,109 421,893 - 12,606,257
Clearing and Transaction Costs 592,782 640,080 628,961 - 1,861,823
Success 1,275,951 - - - 1,275,951
Consulting and Retainers 133,281 - - - 133,281
Other 3,838 5,138 - 8,976
-------------- --------------- ------------- ------------ ---------------
12,647,107 2,188,327 1,050,854 - 15,886,288
============== =============== ============= ============ ===============
GROSS PROFIT 5,940,138 1,097,782 614,172 - 7,652,092
-------------- --------------- ------------- ------------ ---------------
EXPENSES
General and Administrative 4,546,336 1,571,015 693,356 - 6,810,707
Professional Fees 139,231 6,335 32,510 - 178,076
Provision for Bad Debt 85,567 - - - 85,567
Legal Litigation 327,811 83,151 18,414 - 429,376
Depreciation and Amortization 94,400 16,982 - - 111,382
Amounts Forgiven under Forgivable Loans 63,750 - - - 63,750
Stock Based Compensation 3,971 - - - 3,971
-------------- --------------- ------------- ------------ ---------------
5,261,066 1,677,483 744,280 - 7,682,829
-------------- --------------- ------------- ------------ ---------------
INCOME (LOSS) From Operations 679,072 (579,701) (130,108) - (30,737)
-------------- --------------- ------------- ------------ ---------------
Gain on Forgiveness of Debt 1,500,000 - - - 1,500,000
Interest and Dividend Income (Expense) (243,641) (67,081) 6,317 (304,405)
-------------- --------------- ------------- ------------ ---------------
PRE TAX NET INCOME (LOSS) 1,935,431 (646,782) (123,791) - 1,164,858
Federal Income Tax 400,000 - - - 400,000
-------------- --------------- ------------- ------------ ---------------
NET INCOME (LOSS) Available to Shareholders $ 2,335,431 $ (646,782) $ (123,791) $ - $ 1,564,858
============== =============== ============= ============ ===============
Net Income/(Loss) per share:
Basic 0.05
Weighted average number of common shares used in
computing basic net income/(loss) per share 32,582,411
===============
Diluted $ 0.05
===============
Weighted average number of common shares used in
computing diluted net income/(loss) per share 32,814,648
===============
11
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 September 30, 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.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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 September 30, 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.
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
September 30, 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 September 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.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
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.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
STATEMENTS OF OPERATIONS
Operating revenues were $19,345,047 for the nine months ended September 30, 2005
as compared to $18,587,245 for the nine months ended September 30, 2004, an
increase of $757,802 or 4%. The primary reason for the increase was the
incremental revenue generated from the EquityStation business and the emerging
markets fixed income trading business that was acquired in November 2004. These
businesses generated $1,268,289 in retail brokerage revenue and $732,657 in
trading profits, respectively which offset decreases in the base retail and
trading businesses resulting from unfavorable market conditions. Retail
brokerage revenues, which comprised 70% of total revenues increased by $976,928
or 20%, Trading Profits, which comprised 17% of total revenues increased by
$133,162 or 4% and Investment Banking, which comprised 12% of total revenues,
decreased by $245,613 or 11%.
Cost of revenues were $13,076,044 for the nine months ended September 30, 2005
as compared to $12,647,107 for the nine months ended September 30, 2004, an
increase of $429,337 or 3%. The increase was primarily due to increased revenues
and the corresponding increase to commission expense. The corresponding gross
margin was 32% for the nine months ended September 30, 2005 and for the nine
months ended September 30, 2004.
General and administrative expenses were $6,023,645 for the nine months ended
September 30, 2005 as compared to $4,546,336 for the nine months ended September
30, 2004, an increase of $1,477,309, or 32%. 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 The company also reserved for
the impairment of an asset in the amount of $80,000, an expense that did not
occur in 2004. Professional fees were $140,325 for the nine months ended
September 30, 2005 as compared to $139,231 for the nine months ended September
30, 2004, an increase of $1,094, or 1%.
Bad debt expense was $60,490 for the nine months ended September 30, 2005 as
compared to $85,567 for the nine months ended September 30, 2004, a decrease of
$25,077 or 29%. 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 $205,469 for the nine months ended September 30, 2005 as
compared to $327,811 for the nine months ended September 30, 2004, a decrease of
$122,342, or 37%. The decrease in litigation expense resulted from having fewer
open claims in the current period versus the prior period. Litigation expense is
primarily a function of the number of customer claims in any given period. The
Company's cost of defending itself varies depending on the volume of claims
which are in process at any given time.
Depreciation and amortization was $217,410 for the nine months ended September
30, 2005 as compared to $94,400 for the nine months ended September 30, 2004, an
increase of $123,010, or 130%. 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 $6,597 for the nine months ended
September 30, 2005 as compared to $63,750 for the nine months ended September
30, 2004, a decrease of $57,153, or 90%. 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 has been fully amortized.
Stock based compensation was $19,412 for the nine months ended September 30,
2005 as compared to $3,971 for the nine months ended September 30, 2004. The
Company granted warrants to its landlord related to the renegotiation of its
lease which were being amortized over the life of the lease but were fully
amortized in the quarter ended September 30, 2005 due to a change in ownership
of the leased property.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
(continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company had $4,754,968 of unrestricted cash at September 30, 2005 as
compared to $4,237,980 of unrestricted cash as of September 30, 2004.
Net cash used in operating activities for the nine months ending September 30,
2005, was $432,329 as compared to net cash provided of $600,960 for the nine
months ending September 30, 2004. The increase in cash used by operating
activities is primarily attributable to the net loss for the period offset by a
lower investment in trading securities and higher depreciation and amortization
expense.
Net cash used in investing activities for the nine months ending September 30,
2005, was $451,735 as opposed to $168,628 for the nine months ending September
30, 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 nine months ending September
30, 2005, was $382,725 as opposed to $21,834 for the nine months ending
September 30, 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.
15
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.
16
Part II. OTHER INFORMATION
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.
17
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 November 21, 2005
------------------------ and President
Leonard J. Sokolow (Principal Executive Officer)
By: /s/ Sheila C. Reinken Chief Financial Officer and November 21, 2005
------------------------ (Principal Financial and
Sheila C. Reinken Accounting Officer)
18