UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 2007
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
vFinance, Inc.
(Exact Name of Registrant 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, FLORIDA 33431
(Address of Principal Executive Offices) (Zip Code)
(561) 981-1000
(Registrant's Telephone Number, Including Area Code)
(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 large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12-b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 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 14, 2007: 54,679,876 shares of Common Stock $0.01 par value
per share.
VFINANCE, INC.
FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2007
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Unaudited Condensed Consolidated Statements of Financial Condition
as of March 31, 2007 and December 31, 2006.......................... 4
Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2007 and 2006 ............................... 5
Unaudited Condensed Consolidated Statement of Shareholders' Equity and
Comprehensive Income for the three months ended March 31, 2007 ..... 6
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2007 and 2006 ............................... 7
Item 2 - Management's Discussion and Analysis or Plan of Operation ...... 15
Item 3 - Quantitative & Qualitative Disclosures About Market Risk ....... 19
Item 4 - Controls and Procedures ........................................ 19
PART II - OTHER INFORMATION
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds .... 20
Item 6 - Exhibits ....................................................... 21
Signatures .............................................................. 22
2
FORWARD-LOOKING STATEMENTS
The following information provides cautionary statements under the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 (the
Reform Act). We identify important factors that could cause our actual results
to differ materially from those projected in forward-looking statements we make
in this report or in other documents that reference this report. All statements
that express or involve discussions as to: expectations, beliefs, plans,
objectives, assumptions or future events or performance (often, but not always,
identified through the use of words or phrases such as we or our management
believes, expects, anticipates or hopes and words or phrases such as will
result, are expected to, will continue, is anticipated, estimated, projection
and outlook, and words of similar import) are not statements of historical facts
and may be forward-looking. These forward-looking statements are based largely
on our expectations and are subject to a number of risks and uncertainties
including, but not limited to, economic, competitive, regulatory, growth
strategies, available financing and other factors discussed elsewhere in this
report and in the documents filed by us with the Securities and Exchange
Commission ("SEC"). Many of these factors are beyond our control. Actual results
could differ materially from the forward-looking statements we make in this
report or in other documents that reference this report. In light of these risks
and uncertainties, there can be no assurance that the results anticipated in the
forward-looking information contained in this report or other documents that
reference this report will, in fact, occur.
These forward-looking statements involve estimates, assumptions and
uncertainties, and, accordingly, actual results could differ materially from
those expressed in the forward-looking statements. These uncertainties include,
among others, the following: (i), the inability of our broker-dealer operations
to operate profitably in the face of intense competition from larger full
service and discount brokers; (ii) a general decrease in merger and acquisition
activities and our potential inability to receive success fees as a result of
transactions not being completed; (iii) increased competition from business
development portals; (iv) technological changes; (v) our potential inability to
implement our growth strategy through acquisitions or joint ventures; and (vi)
our potential inability to secure additional debt or equity financing.
Any forward-looking statement speaks only as of the date on which such
statement is made, and we undertake no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for our
management to predict all of such factors, nor can our management assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share and per share data)
March 31, 2007 December 31, 2006
---------------- ------------------
Assets:
Current assets:
Cash and cash equivalents $ 5,248.4 $ 4,205.2
Due from clearing broker 607.2 299.9
Marketable investment securities:
Trading securities 1,691.2 1,009.4
Available-for-sale securities 493.0 414.6
Accounts receivable 118.9 123.8
Forgivable loans - employees, current portion 64.2 58.8
Notes receivable - employees 100.8 128.1
Prepaid expenses and other current assets 164.1 184.0
---------------- ------------------
Total current assets 8,487.8 6,423.8
---------------- ------------------
Property and equipment, net 619.7 661.0
Customer relationships, net 3,908.5 4,115.4
Other assets 476.1 443.0
---------------- ------------------
Total assets $ 13,492.1 $ 11,643.2
================ ==================
Liabilities and shareholders' equity:
Current liabilities:
Accounts payable $ 689.3 $ 821.7
Accrued compensation 3,241.7 2,394.6
Other accrued liabilities 897.7 800.7
Securities sold, not yet purchased 904.4 41.6
Capital lease obligations, current portion 218.4 210.8
Other 335.8 348.5
---------------- ------------------
Total current liabilities 6,287.3 4,617.9
---------------- ------------------
Capital lease obligations, long term 102.5 125.6
Shareholders' Equity:
Common stock $0.01 par value, 100,000,000 shares authorized
54,679,876 and 54,429,876 shares issued and outstanding 546.8 544.3
Additional paid-in capital 31,308.0 31,147.4
Accumulated deficit (24,111.7) (24,149.5)
Accumulated other comprehensive loss (640.8) (642.5)
---------------- ------------------
Total shareholders' equity 7,102.3 6,899.7
---------------- ------------------
Total liabilities and shareholders' equity $ 13,492.1 $ 11,643.2
================ ==================
See accompanying notes to unaudited condensed consolidated financial statements.
4
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended March 31,
-------------------------------
2007 2006
(Restated and
Revised)
-------------- ---------------
Revenues:
Commissions - agency $ 5,629.2 $ 4,755.4
Trading profits 3,596.3 1,501.0
Success fees 1,598.2 1,636.2
Other brokerage related income 1,152.9 792.4
Consulting fees 18.5 151.4
Other 24.1 171.2
-------------- ---------------
Total revenues 12,019.2 9,007.6
-------------- ---------------
Compensation, commissions and benefits 9,662.6 6,784.8
Clearing and transaction costs 1,104.1 937.3
General and administrative costs 656.7 571.5
Occupancy and equipment costs 240.7 203.6
Depreciation and amortization 318.4 122.0
-------------- ---------------
Total operating costs 11,982.5 8,619.2
-------------- ---------------
Income from operations 36.7 388.4
-------------- ---------------
Other income (expenses):
Interest income 14.6 27.3
Interest expense (18.3) (12.2)
Dividend income 3.4 4.1
Other income (expense), net 1.4 4.0
-------------- ---------------
Total other income (expense) 1.1 23.2
-------------- ---------------
Income before income taxes 37.8 411.6
Income tax benefit (provision) - -
-------------- ---------------
Net income $ 37.8 $ 411.6
============== ===============
Net income per share: basic $ 0.00 $ 0.01
============== ===============
Weighted average number of shares
outstanding: basic 54,579.9 40,126.1
============== ===============
Net income per share: diluted $ 0.00 $ 0.01
============== ===============
Weighted average number of shares
outstanding: diluted 56,125.1 42,231.2
============== ================
See accompanying notes to unaudited condensed consolidated
financial statements.
5
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands.)
Accumulated
Other
Common Common Additional Comprehen- Compre- Total Share
Stock Stock Paid-In Accumulated sive Income hensive holders'
Shares Amount Capital Deficit (Loss) Income Equity
------------------------------------------------------------------------------------------------
Balance at December 31, 2006 54,429.9 $ 544.3 $ 31,147.4 $ (24,149.5) $ (642.5) $ 6,899.7
Net income - - - 37.8 - $ 37.8 37.8
Other comprehensive income:
Unrealized gain on
available-for-sale
marketable securities - - - - 1.7 1.7 1.7
---------
Comprehensive income $ 39.5
=========
Stock-based compensation expense - - 113.1 - - 113.1
Issuance of shares for
future services 250.0 2.5 47.5 - - 50.0
------------ -------------- -------------- ------------- --------------- ------------
Balance at March 31, 2007 54,679.9 546.8 31,308.0 (24,111.7) (640.8) 7,102.3
============ ============== ============== ============= =============== ============
See accompanying notes to unaudited condensed consolidated financial statements.
6
VFINANCE, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands.)
Three Months Ended March 31,
-------------------------------
2007 2006
(Restated and
Revised)
--------------- ---------------
CASH PROVIDED BY OPERATING ACTIVITIES:
Net income $ 37.8 $ 411.6
Adjustments to reconcile net income to
net cash provided by operating activities:
Non-cash fees received (237.0) (576.3)
Non-cash compensation paid 147.6 444.7
Depreciation and amortization 318.3 121.9
Provision for doubtful accounts - 3.5
Stock-based compensation 113.1 113.1
Amounts forgiven under forgivable loans 18.0 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 4.9 (50.2)
Forgivable loans (23.4) -
Due from clearing broker (307.3) (179.6)
Notes receivable - employees 27.3 1.7
Investments in trading securities (681.8) 269.4
Other current assets 69.9 (13.5)
Other assets and liabilities, net (45.8) (12.2)
Increase (decrease) in:
Accounts payable and accrued liabilities 811.7 54.4
Securities sold, not yet purchased 862.8 (9.9)
--------------- ---------------
Cash provided by operating activities 1,116.1 578.6
--------------- ---------------
CASH USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (22.9) (51.6)
Proceeds from sales of investments in securities
available-for-sale 12.7 36.0
--------------- ---------------
Cash used in investing activities (10.2) (15.6)
--------------- ---------------
CASH USED IN FINANCING ACTIVTIES:
Repayments of capital lease obligations (62.7) (45.6)
--------------- ---------------
Cash used in financing activities (62.7) (45.6)
--------------- ---------------
Increase in cash and cash equivalents 1,043.2 517.4
Cash and cash equivalents at beginning of period 4,205.2 4,427.4
--------------- ---------------
Cash and cash equivalents at end of period $ 5,248.4 $ 4,944.8
=============== ===============
See accompanying notes to unaudited condensed consolidated
financial statements.
7
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data.)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
vFinance, Inc. (the "Company") is a global financial services company which
specializes in high growth opportunities. The Company's expertise into this
marketplace flows from three principal lines of business: providing investment
banking and advisory services to micro, small and mid-cap high growth companies;
making markets in over 3,000 micro and small cap stocks; and, offering
information services on its website, a leading destination for emerging
companies seeking capital and investors seeking opportunities. Due to its focus,
the Company believes it is uniquely positioned to offer alternative investments
to institutional and high net worth investors seeking to outperform market
indices in addition to offering a full range of investment options. With over 40
offices in the U.S. and other parts of the world, the Company serves more than
12,000 corporate, institutional and high net worth clients. vFinance
Investments, Inc. ("vFinance Investments") and EquityStation, Inc.
("EquityStation"), both subsidiaries of vFinance, Inc., are broker-dealers
registered with the Securities and Exchange Commission ("SEC"), and members of
National Association of Securities Dealers ("NASD") and Securities Investor
Protection Corporation ("SIPC"). vFinance Investments is also a member of the
National Futures Association ("NFA").
The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts have been eliminated in consolidation.
The unaudited condensed 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 three month period ended March
31, 2007 is not necessarily indicative of the results to be expected for the
year ended December 31, 2007. 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-K for the year ended December 31, 2006.
Reclassifications
Certain items in the 2006 Unaudited Condensed Consolidated Financial
Statements have been reclassified to conform to the presentation in the 2007
Unaudited Condensed Consolidated Financial Statements. Such reclassifications
did not have a material impact on the presentation of the overall financial
statements.
8
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued.)
Restatement and Revision
The Company has restated certain amounts in the Unaudited Condensed
Consolidated Financial Statements as of and for the three months ended March 31,
2006 as a result of comments to the Company from the staff of the Securities and
Exchange Commission ("SEC"), as previously disclosed in the Company's Annual
Report on Form 10-K for the year ended December 31, 2006.
A summary of the effects of the restatement and revision for the three
months ended March 31, 2006 is as follows:
Effect of Restatements
--------------------------------------------------------
As
Reported Reclass-
Three ification of Net
Months Securities Amortiz- Amortiz- Effect
Ended from Trading ation of ation of of Restated
March 31, Reclass to Available- Intagible Transition Restate- and
2006 ifications As Revised for-Sale Asset Payment ments Revised
---------------------------------------------------------------------------------------------
Statement of Operations:
Total revenues $ 8,754.8 141.1 $ 8,895.9 111.7 - - 111.7 $ 9,007.6
Clearing and transaction costs $ 793.3 154.0 $ 947.3 - - (10.0) (10.0) $ 937.3
Depreciation and amortization $ 158.6 0.1 $ 158.7 - (36.7) - (36.7) $ 122.0
Total operating costs $ 8,520.9 145.0 $ 8,665.9 - (36.7) (10.0) (46.7) $ 8,619.2
Income (loss) from operations $ 234.0 (4.0) $ 230.0 111.7 36.7 10.0 158.4 $ 388.4
Net income $ 253.2 $ 253.2 111.7 36.7 10.0 158.4 $ 411.6
Net income per share - basic $ 0.01 $ - $ 0.01
============ ========== ===========
Wt. avg. shares outstanding - basic 40,126.1 40,126.1
============ ===========
Net income per share - diluted $ 0.01 $ - $ 0.01
============ ========== ===========
Wt. avg. shares outstanding - diluted 42,231.2 42,231.2
============ ===========
Use of Estimates
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
9
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued.)
New Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Financial Instruments", which amends SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. SFAS
No. 155 also clarifies and amends certain other provisions of SFAS No.133 and
SFAS No.140. SFAS No. 155 is effective for all financial instruments acquired,
issued or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. The adoption of SFAS No. 155 did not have a material
impact on the Company's Consolidated Financial Statements.
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48,
"Accounting for Uncertainty in Income Taxes". This interpretation applies to all
tax positions accounted for in accordance with SFAS No. 109, Accounting for
Income Taxes. FIN 48 clarifies the application of FASB Statement No. 109 by
defining the criteria that an individual tax position must meet in order for the
position to be recognized within the financial statements. It also provides
guidance on measurement, de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition for tax positions. This
interpretation is effective for fiscal years beginning after December 15, 2006,
with earlier adoption permitted. The adoption of FIN 48 did not have a material
impact on the Company's Consolidated Financial Statements.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value
Measurements". SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The adoption of SFAS No. 157 is
not expected to have a material impact on the Company's Consolidated Financial
Statements.
In December 2006, the FASB issued FASB Staff Position ("FSP") EITF 00-19-2,
"Accounting for Registration Payment Arrangements." FSP EITF 00-19-2 specifies
that the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, "Accounting for
Contingencies." This FSP further clarifies that a financial instrument subject
to a registration payment arrangement should be accounted for in accordance with
other applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement, and provides disclosure requirements for registration
statement arrangements. The adoption of FSP EITF 00-19-2 did not have a material
impact on the Company's Consolidated Financial Statements, since the Company has
not typically enter into registration payment arrangements, as defined by FSP
EITF 00-19-2.
10
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued.)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities - Including an Amendment of FASB Statement No.
115". SFAS No. 159 permits entities to choose to measure certain financial
assets and liabilities at fair value. Unrealized gains and losses, arising
subsequent to adoption, are reported in earnings. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact of adopting SFAS No. 159, if elected, on its Consolidated
Financial Statements.
2. PROPERTY AND EQUIPMENT
At March 31, 2007 and December 31, 2006, property and equipment, net
consisted of the following:
March 31, December 31,
2007 2006
------------- --------------
Furniture and fixtures $ 90.8 $ 90.8
Equipment 744.3 727.5
Capital leases - computer
equipment 751.7 704.5
Leasehold improvements 174.8 174.8
Software 221.0 214.8
------------- --------------
1,982.6 1,912.4
Less: accumulated depreciation (1,362.9) (1,251.4)
------------- --------------
Property and equipment, net $ 619.7 $ 661.0
============= ==============
The Company acquired $47.2 thousand of computer equipment under capital
leases in the three months ended March 31, 2007.
The Company recorded depreciation expense of $111.4 thousand and $85.3
thousand in the three months ended March 31, 2007 and 2006, respectively.
11
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued.)
3. STERLING FINANCIAL ACQUISITION
On May 11, 2006, vFinance Investments purchased certain assets of Sterling
Financial Investment Group, Inc. ("SFIG") and Sterling Financial Group of
Companies, Inc. ("SFGC" and together with SFIG, "Sterling Financial"). The
assets acquired from Sterling Financial consisted primarily of client accounts
from Sterling Financial's Institutional Fixed Income and Latin American
businesses. These transactions were approved by the National Association of
Securities Dealers, Inc. on April 28, 2006.
The following unaudited Pro Forma Combined Financial Statements of Sterling
and vFinance gives effect to the acquisition of certain assets of Sterling
Financial, as though the transactions occurred as of January 1, 2006. This
unaudited pro forma information is presented for informational purposes, based
upon available data and assumptions that management believes are reasonable, and
is not necessarily indicative of future results:
Three Months Ended March 31, 2006
-------------------------------------------------------------
vFinance Sterling Adjustments Pro Forma
-------------- ------------- -------------- -------------
Total revenue $ 9,007.6 $ 1,750.1 $ - $ 10,757.7
Income from operations 388.4 143.5 (170.0) 361.9
Net income 411.6 143.5 (170.0) 385.1
-------------- -------------- -------------
Earnings per share - diluted $ 0.01 $ (0.01) $ 0.01
============== ============== =============
Wt. avg. shares outstanding - diluted 40,126.1 13,000.0 53,126.1
============== ============== =============
Earnings per share - diluted $ 0.01 $ (0.01) $ 0.01
============== ============== =============
Wt. avg. shares outstanding - diluted 42,231.2 13,000.0 55,231.2
============== ============== =============
4. CUSTOMER RELATIONSHIPS
At March 31, 2007, customer relationships totaled $3.9 million, net of
accumulated amortization of $944.4 thousand. At December 31, 2006 customer
relationships totaled $4.1 million, net of accumulated amortization $737.4
thousand.
Acquired customer relationships are amortized using the straight-line
method over their estimated useful lives, which coincide with their expected
revenue-generating lives, which range from five to ten years. The Company
recorded amortization expense of $207.0 thousand and $36.7 thousand in the three
months ended March 31, 2007 and 2006, respectively.
12
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued.)
5. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share". In accordance with SFAS No. 128, basic earnings per share
is computed using the weighted average number of shares of common stock
outstanding and diluted earnings per share is computed using the weighted
average number of shares of common stock and the dilutive effect of options and
warrants outstanding, using the "treasury stock" method, as follows:
Three Months Ended March 31,
-------------------------
2007 2006
------------ ------------
Weighted average shares outstanding - basic 54,579.9 40,126.1
Effect of dilutive stock options and warrants 1,545.2 2,105.1
------------ ------------
Weighted average shares outstanding - diluted 56,125.1 42,231.2
============ ============
As of March 31, 2007, the Company had 18.5 million stock options and
warrants outstanding, of which 8.8 million have been excluded from the
computation of diluted earnings per share because they were anti-dilutive. As of
March 31, 2006, the Company had 21.4 million stock options and warrants
outstanding, of which 8.4 million have been excluded from the computation of
diluted earnings per share because they were anti-dilutive.
6. COMMITMENTS AND CONTINGENCIES
Clearing Agreement
As consideration for certain incentives received at the inception of the
Clearing Agreement, the Company is required to pay a termination fee of $1.7
million in the event vFinance Investments terminates the Clearing Agreement.
This fee is reduced annually on a pro rata basis over the five year term of the
Clearing Agreement. As of March 31, 2007, the contingent obligation of the
Company associated with this Clearing Agreement was $680.0 thousand.
Litigation
The business of vFinance Investments and EquityStation involve 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 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.
13
VFINANCE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued.)
The following is a brief summary of certain matters pending against or
involving the Company and its subsidiaries.
On or about February 28, 2005, Knight Equity Markets, LP ("Knight") filed
an arbitration action (NASD Case No. 05-01069) against vFinance Investments,
Inc. ("vFinance Investments"), claiming that vFinance Investments received
roughly $6.5 million in dividends that rightfully belong to Knight. vFinance
Investments asserts that the dividends actually went to two of its clients,
Pearl Securities LLC ("Pearl Securities") and Michael Balog, and that vFinance
Investments has no liability. vFinance Investments filed third party claims
against Pearl Securities and Michael Balog to bring all of the parties into the
action. Knight is seeking approximately $6.5 million in damages plus costs,
attorney fees and punitive damages. vFinance Investments denies any liability to
Knight and intends to vigorously defend against Knight's claims.
On or about April 2005 Gregory F. and Ruth A. Whitten filed an arbitration
action (NASD Case No. 05-02103) with NASD naming vFinance Investments as a
Co-Respondent. The Statement of Claim filed in this action alleges negligent and
intentional misrepresentations, breach of fiduciary duty, violation of
Washington State Securities Act, and violation of the Washington Consumer
Protection Act, in connection with the handling of claimants' brokerage accounts
by Robert Agriogianis. The Statement of Claim alleges compensatory damages in
excess of $445.0 thousand plus interest, costs, and attorney's fees. vFinance
Investments has filed an Answer and Affirmative Defenses with the NASD. The
Final Hearing occurred on May 2, 3, 4, 2007, and we are awaiting the final
outcome. vFinance Investments denies any liability to Gregory F. and Ruth A.
Whitten and intends to vigorously defend against their claim.
On or about September 27, 2005, John S. Matthews filed an arbitration
action (NASD Case No. 05-014991) against the Company, claiming that the Company
wrongfully terminated his independent contact with the Company and that the
Company "stole" his clients and brokers. Mr. Matthews has obtained a temporary
restraining order and an agreed upon injunction was issued by the NASD panel.
Mr. Matthews and JMS Capital Holding Corp., a plaintiff in the arbitration
action also request unspecified damages resulting from the Company's alleged
improper activity. The full hearing on the merits was postponed and is
rescheduled for July 23 - 25, 2007. The Company intends to vigorously defend
this matter. In addition to contesting and defending against JSM's and Mr.
Matthews claims, the Company filed a counterclaim for indemnity based upon the
contractual agreement between the parties.
The Company engaged in a number of other legal proceedings incidental to
the conduct of its business. These claims aggregate a range of $50.0 thousand to
$260.0 thousand.
As of March 31, 2007 and December 31, 2006, the Company had accrued
approximately $100.0 thousand and $70.0 thousand, respectively, to provide for
these matters. In 2005 the Company acquired an errors and omissions policy for
certain future claims in excess of the policy's $75.0 thousand per claim
deductible, up to an aggregate of $1.0 million. While the Company will
vigorously defend itself in these matters, and will assert insurance coverage
and indemnification to the maximum extent possible, there can be no assurance
that these lawsuits and arbitrations will not have a material adverse impact on
its financial position.
7. SUBSEQUENT EVENTS
On May 9, 2007 EquityStation received notification from Merrill Lynch
Pierce Fenner & Smith, Broadcort Division that effective September 22, 2007 it
will be terminating its clearing agreement with EquityStation, as provided for
in the clearing agreement. The Company does not expect this termination to
result in a material impact to its Consolidated Financial Statements, as it
expects to replace the agreement by September 2007.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Condensed Consolidated Financial Statements and notes thereto included under
Item 1. In addition, reference should be made to our audited consolidated
financial statements and notes thereto and related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our most
recent Annual Report on Form 10-K.
Certain amounts have been reclassified from the previously reported
financial statements to conform to the income statement presentation of the
current period.
We have restated certain amounts in the Unaudited Condensed Consolidated
Statements of Income for the three months ended March 31, 2006 as a result of
comments to us from the Securities and Exchange Commission, as previously
disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2006.
The following table and discussion summarizes the changes in major revenue
and expense categories for the three months ended March 31, 2007 and 2006.
Three Months Ended March 31,
----------------------------------
2007 2006 Change % Chg.
(Restated and
Revised)
---------------- ---------------- ------------- -------------
Revenues:
Commissions - agency $ 5,629.2 $ 4,755.4 873.8 18.4 %
Trading profits 3,596.3 1,501.0 2,095.3 139.6 %
Success fees 1,598.2 1,636.2 (38.0) (2.3)%
Other brokerage related income 1,152.9 792.4 360.5 45.5 %
Consulting fees 18.5 151.4 (132.9) (87.8)%
Other 24.1 171.2 (147.1) (85.9)%
---------------- ---------------- ------------- -------------
Total revenues 12,019.2 9,007.6 3,011.6 33.4 %
---------------- ---------------- ------------- -------------
Compensation, commissions and benefits 9,662.6 6,784.8 2,877.8 42.4 %
Clearing and transaction costs 1,104.1 937.3 166.8 17.8 %
General and administrative costs 656.7 571.5 85.2 14.9 %
Occupancy and equipment costs 240.7 203.6 37.1 18.2 %
Depreciation and amortization 318.4 122.0 196.4 161.0 %
---------------- ---------------- ------------- -------------
Total operating costs 11,982.5 8,619.2 3,363.3 39.0 %
---------------- ---------------- ------------- -------------
Income from operations 36.7 388.4 (351.7) (90.6)%
---------------- ---------------- ------------- -------------
Other income (expenses):
Interest income 14.6 27.3 (12.7) (46.5)%
Interest expense (18.3) (12.2) (6.1) 50.0 %
Dividend income 3.4 4.1 (0.7) (17.1)%
Other income (expense), net 1.4 4.0 (2.6) (65.0)%
---------------- ---------------- ------------- -------------
Total other income (expense) 1.1 23.2 (22.1) (95.3)%
---------------- ---------------- ------------- -------------
Income before income taxes 37.8 411.6 (373.8) (90.8)%
================ ================ ============= =============
15
THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2006
STATEMENT OF OPERATIONS
Revenues
Total revenues for the three months ended March 31, 2007 increased 33%, or
$3.0 million, compared to the three months ended March 31, 2006, primarily as a
result of the May 2006 acquisition of Sterling Financial Acquisition and
generally more favorable market conditions. Approximately 70% of the $3.0
million increase is attributable to increased trading profits, derived from new
brokers and the customer relationships acquired from Sterling Financial, as well
as generally more favorable trading conditions in our market making activities.
The majority of the remaining increase resulted from higher agency commissions,
attributable to the addition of new brokers in 2006 and 2007.
Success fees decreased 2%, or $38.0 thousand, in the three months ended
March 31, 2007 compared to the three months ended March 31, 2006. Non-cash
success fee revenues decreased $339.3 thousand to $237.0 thousand for the three
months ended March 31, 2007, while success fees received in cash increased by
$301.3 thousand to $1.4 million for the three months ended March 31, 2007.
Operating Expenses
Compensation, commissions and benefits.
Compensation, commissions and benefits for the three months ended March 31,
2007 increased 42%, or $2.9 million, compared to the three months ended March
31, 2006. Compensation, commissions and benefits are correlated with our
revenues, which increased 33% for the three months ended March 31, 2007,
primarily as a result of the May 2006 Sterling Financial Acquisition. Additional
increases in compensation, commissions and benefits are primarily attributable
to increased salaries.
Clearing and transaction costs.
Clearing and transaction costs for the three months ended March 31, 2007
increased $166.8 thousand, or 18%, compared to the three months ended March 31,
2006, primarily as a result of an increase in transaction volume attributable to
customer relationships acquired in the Sterling Financial Acquisition and the
addition of other independent brokers, partially offset by a shift in our
revenue mix to lower-cost institutional trading transactions as a result of the
Sterling Financial Acquisition.
General and administrative costs.
General and administrative expenses for the three months ended March 31,
2007 increased $85.2 thousand in 2006, or 15%, compared to the three months
ended March 31, 2006, primarily as a result of temporary labor and increased
professional fees to support the Company's growth.
Occupancy and equipment costs.
Occupancy and equipment expenses for the three months ended March 31, 2007
increased $37.1 thousand, or 18%, compared to the three months ended March 31,
2006, primarily as a result of the occupancy and equipment costs associated with
the May 2006 Sterling Financial Acquisition.
16
Depreciation and amortization.
Depreciation and amortization for the three months ended March 31, 2007
increased $196.4 thousand, or 161%, compared to the three months ended March 31,
2006, primarily as a result of the amortization expense associated with the
customer relationships from the Sterling Financial Acquisition.
Other Income (Expense)
Other income (expense), net decreased to $1.1 thousand for the three months
ended March 31, 2007 compared to $23.2 thousand for the three months ended March
31, 2007, primarily as a result of decreased interest income and increased
interest expense. Interest income decreased as a result of a decrease in free
cash balances during the three months ended March 31, 2007 compared to the three
months ended March 31, 2006. Interest expense increased primarily as a result of
increased interest rates applicable to margin balances with our clearing firms.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our liquidity and regulatory capital needs
through the issuance of equity and debt securities. As of March 31, 2007, liquid
assets consisted primarily of cash and cash equivalents of $5.2 million and
marketable securities of $2.2 million, for a total of $7.4 million, which is
approximately $2.0 million higher than $5.6 million in liquid assets as of
December 31, 2006. As of March 31, 2007, we had long-term capital lease
obligations of $102.5 thousand, net of current obligations of $218.4 thousand.
Both vFinance Investments and EquityStation are subject to the SEC Uniform
Net Capital Rule (rule 15c3-1), which requires the maintenance of minimum net
capital. Both vFinance Investments and EquityStation have elected to use the
alternative standard method permitted by the rule. This method requires that
vFinance Investments maintain minimum net capital equal to the greater of
$250,000 or a specified amount per security based on the bid price of each
security for which vFinance Investments is a market maker and requires
EquityStation to maintain minimum capital equal to $100,000. As of March 31,
2007, vFinance Investments and EquityStation net capital exceeded the
requirement by $808.0 thousand and $235.0 thousand, respectively.
Advances, dividend payments and other equity withdrawals from the Company's
broker-dealer subsidiary are restricted by the regulations of the SEC and other
regulatory agencies. These regulatory restrictions may limit the amounts that a
broker-dealer subsidiary may dividend or advance to the Company.
Cash and cash equivalents increased by $1.0 million and $517.4 thousand
during the three months ended March 31, 2007 and 2006, respectively. The major
components of these changes are discussed below.
Cash provided by operating activities for the three months ended March 31,
2007 was $1.1 million compared to $578.6 thousand for the three months ended
March 31, 2006. Cash provided by operating activities includes net income
adjusted for non-cash items and the effects of changes in working capital
including changes in trading securities. Cash provided by operating activities
increased primarily as a result of increases in accrued compensation and
securities sold, not yet purchased. We expect our cash and cash equivalents to
decrease during the quarter ended June 30, 2006, as accrued commissions are paid
and our securities sold, not yet purchased positions change with market
conditions.
17
Cash used in investing activities for the three months ended March 31, 2007
was $10.2 thousand compared to $15.6 thousand for the three months ended March
31, 2006. Cash used in financing activities for the three months ended March 31,
2007 was $62.7 thousand compared to $45.6 thousand for the three months ended
March 31, 2006, primarily as a result of increase capital lease payments.
We believe cash on hand is sufficient to meet our working capital
requirements over the next twelve months. However, we may seek additional debt
or equity financing in order to carry out our 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 thereof. We cannot be certain
that additional debt or equity financing will be available when required or, if
available, that we can secure it on terms satisfactory to us.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 1 to our Unaudited Condensed Consolidated Financial Statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has exposure to market risk, and does periodically hedge
against that risk. The Company does not hold or issue any derivative financial
instruments for trading or other speculative purposes. The Company is exposed to
market risk associated with changes in the fair market value of the marketable
securities that it holds. The Company's revenue and profitability may be
adversely affected by declines in the volume of securities transactions and in
market liquidity, which generally result in lower revenues from trading
activities and commissions. Lower securities price levels may also result in a
reduced volume of transactions, as well as losses from declines in the market
value of securities held by the Company in trading and investment positions.
Sudden sharp declines in market values of securities and the failure of issuers
and counterparts to perform their obligations can result in illiquid markets in
which the Company may incur losses in its principal trading activities.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer
and principal financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this quarterly report
(the "Evaluation Date"). Based on such evaluation, our principal executive
officer and principal financial officer have concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective.
Changes in Internal Controls
There was no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in
connection with the evaluation of our internal controls that occurred during our
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, such controls.
19
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 5, 2007, we issued 250,000 shares of our common stock and
warrants to purchase 100,000 shares of our common stock at $0.30 per share to a
public relations firm, as compensation for certain consulting services to be
provided to the Company. The closing price of our common stock on the date prior
to the date of issuance was $0.20 per share. The aggregate value of the shares
issued was $50,000. Such securities were issued pursuant to an exemption
provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated thereunder.
20
ITEM 6. EXHIBITS
Number of
Exhibit Exhibit Description
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.
** Filed herewith.
21
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
Chairman of the Board and Chief
/s/ Leonard J. Sokolow Executive Officer
------------------------- (Principal Executive Officer) May 15, 2007
Leonard J. Sokolow
/s/ Alan B. Levin Chief Financial Officer and
------------------------- (Principal Financial and May 15, 2007
Alan B. Levin Accounting Officer)
22